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Oberoi Realty (OBER)
Property
Execution on track, best-placed in challenging times. Our visit to four key project
sites indicates execution and sales are on track and there is no visible impact on pricing
or demand (for now at least). Key risks remain uncertainty over the car park policy in
Mumbai which could potentially shave off 7% of our target NAV and a delay in launch/
construction of the Mulund project (one-year delay = 4% of NAV). We believe Oberoi is
relatively best-placed to manage a tough environment with net cash of Rs15 bn.
Site visits indicates progress on track
We visited Oberoi’s key projects in Mumbai: (1) Oasis at Worli, (2) Oberoi Garden City at Goregaon
(E), (3) Splendor at JVLR and (4) proposed residential developments at Mulund. Progress (execution
+ sales) seems on expected lines though we see a risk to the start of construction and launch at
Mulund. Launch of sale at Worli (expected 2QFY12E) and approvals for Mulund will be key to
monitor over the next two-three quarters.
FSI norms and Mulund approvals remain key risks
We see two key risks to our NAV estimates for Oberoi—(1) FSI norms (car park policy, free area/
counted for FSI) which could impact potential developable area in Exquisite III, Mulund projects,
commercial projects at JVLR and Commerz II and (2) a delay in the launch of the Mulund project
given the slower-than-anticipated regulatory clearances now. If Oberoi does not get any extra FSI
under the car-park policy (policy not decided as yet), we anticipate a 7% cut to our FY2012E NAV
estimate (worst case) while a one-year delay in launch or construction at Mulund leads to a 4%
cut.
Retain BUY with target price of Rs305/share
We reiterate our BUY recommendation and find Oberoi relatively better-placed in this environment
as (1) Oberoi is the only debt-free developer operating in the lucrative Mumbai region and could
actually take advantage of declining land prices by adding to its land bank, (2) NAV realization is
relatively more front-loaded than peers, and (3) RoE in the mid-20s is again higher than peers.
Key projects remain on track
Oberoi Garden City, Goregaon (E)—flagship project on track
` Construction is on at Exquisite I and South wing of Commerz II (rental property, 0.7 mn
sq. ft, expected completion by March 2012). We would expect construction to start on
the North wing only after there is clarity on applicable FSI norms.
` Oberoi is currently selling residential units at Exquisite II and I: 52% of Exquisite I was sold
until end-3QFY11E and with sales starting for Exquisite II, we think incremental sales
focus has moved to this project. For Exquisite II (1.3 mn sq. ft), we expect Oberoi to sell
10-15% (0.13-0.2 mn sq. ft) in 4QFY11E.
` Operational properties (Oberoi Mall, Commerz I and Westin hotel) continue to track well
with mall occupancy at 92-93% and Oberoi close to signing up leases for one more floor
out of two that are vacant at Commerz I.
Oasis, Worli—next big launch on the anvil
Excavation work is ongoing at Oberoi’s first project in South-Central Mumbai and it is
expected to be launched in 2QFY2012E. Key next step would be the award of the
construction contract and announcement of the operator/ brand for the hotel space.
Residential project at Mulund—could potentially face delays
Oberoi has two land parcels here and expects to launch in 1QFY12E but we find a risk of
delay here. While the Indian Supreme Court has allowed Oberoi to create third party interest
and has asked Oberoi to approach the Ministry of Environment and Forests (MoEF) for
approval, Oberoi has contended that they already have that approval. Given (1) current
regulatory environment which could potentially delay approvals, (2) existing structures are
still standing at Mulund and will need to be demolished and (3) Mulund is a new location for
Oberoi, we expect to see a delay here.
JVLR—Splendor almost ready for handover
` Splendor (1.3 mn sq. ft, residential) is almost ready for handover and is awaiting
“Occupancy Certificate” from the BMC.
` Construction work on two commercial properties (Prisma and Maxima, total 1 mn sq. ft)
and Splendor Grande (0.3 mn sq. ft, residential) is in early stages.
Key risks include FSI assumptions and launch of Mulund project
We believe the two key risks for our estimate of Oberoi’s NAV are (1) lower than anticipated
FSI due to withdrawal of car park policy (not announced as yet) and (2) delay in the launch
and execution of the Mulund property. We model these two risks for Oberoi to understand
the impact of (1) lower FSI (c20%) if the car park policy is withdrawn (Mulund, Splendor
commercial, Commerz II and Exquisite III are the projects that will be impacted) and (2) a 12-
month delay in the Mulund properties.
We note that while we have modeled the lower FSI for the duration of the project, it could
likely impact only towards the end of the project and hence make the NAV less sensitive.
Based on our calculations, (1) if the car park policy is withdrawn, Oberoi’s net NAV is
impacted by 7% (down to Rs282/share), (2) a 12-month delay in the Mulund project leads
to a 4% impact on our NAV and (3) assuming both these events occur, pro-forma NAV is
down 10% to Rs272/share.
Our NAV estimate is Rs304/share
We are valuing Oberoi’s stock at-par with our end-FY2012E NAV estimates assuming (1)
properties generating annuity income have been valued at a cap. rate of 11%, (2) WACC of
15% and (3) constant annual price and cost inflation of 5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oberoi Realty (OBER)
Property
Execution on track, best-placed in challenging times. Our visit to four key project
sites indicates execution and sales are on track and there is no visible impact on pricing
or demand (for now at least). Key risks remain uncertainty over the car park policy in
Mumbai which could potentially shave off 7% of our target NAV and a delay in launch/
construction of the Mulund project (one-year delay = 4% of NAV). We believe Oberoi is
relatively best-placed to manage a tough environment with net cash of Rs15 bn.
Site visits indicates progress on track
We visited Oberoi’s key projects in Mumbai: (1) Oasis at Worli, (2) Oberoi Garden City at Goregaon
(E), (3) Splendor at JVLR and (4) proposed residential developments at Mulund. Progress (execution
+ sales) seems on expected lines though we see a risk to the start of construction and launch at
Mulund. Launch of sale at Worli (expected 2QFY12E) and approvals for Mulund will be key to
monitor over the next two-three quarters.
FSI norms and Mulund approvals remain key risks
We see two key risks to our NAV estimates for Oberoi—(1) FSI norms (car park policy, free area/
counted for FSI) which could impact potential developable area in Exquisite III, Mulund projects,
commercial projects at JVLR and Commerz II and (2) a delay in the launch of the Mulund project
given the slower-than-anticipated regulatory clearances now. If Oberoi does not get any extra FSI
under the car-park policy (policy not decided as yet), we anticipate a 7% cut to our FY2012E NAV
estimate (worst case) while a one-year delay in launch or construction at Mulund leads to a 4%
cut.
Retain BUY with target price of Rs305/share
We reiterate our BUY recommendation and find Oberoi relatively better-placed in this environment
as (1) Oberoi is the only debt-free developer operating in the lucrative Mumbai region and could
actually take advantage of declining land prices by adding to its land bank, (2) NAV realization is
relatively more front-loaded than peers, and (3) RoE in the mid-20s is again higher than peers.
Key projects remain on track
Oberoi Garden City, Goregaon (E)—flagship project on track
` Construction is on at Exquisite I and South wing of Commerz II (rental property, 0.7 mn
sq. ft, expected completion by March 2012). We would expect construction to start on
the North wing only after there is clarity on applicable FSI norms.
` Oberoi is currently selling residential units at Exquisite II and I: 52% of Exquisite I was sold
until end-3QFY11E and with sales starting for Exquisite II, we think incremental sales
focus has moved to this project. For Exquisite II (1.3 mn sq. ft), we expect Oberoi to sell
10-15% (0.13-0.2 mn sq. ft) in 4QFY11E.
` Operational properties (Oberoi Mall, Commerz I and Westin hotel) continue to track well
with mall occupancy at 92-93% and Oberoi close to signing up leases for one more floor
out of two that are vacant at Commerz I.
Oasis, Worli—next big launch on the anvil
Excavation work is ongoing at Oberoi’s first project in South-Central Mumbai and it is
expected to be launched in 2QFY2012E. Key next step would be the award of the
construction contract and announcement of the operator/ brand for the hotel space.
Residential project at Mulund—could potentially face delays
Oberoi has two land parcels here and expects to launch in 1QFY12E but we find a risk of
delay here. While the Indian Supreme Court has allowed Oberoi to create third party interest
and has asked Oberoi to approach the Ministry of Environment and Forests (MoEF) for
approval, Oberoi has contended that they already have that approval. Given (1) current
regulatory environment which could potentially delay approvals, (2) existing structures are
still standing at Mulund and will need to be demolished and (3) Mulund is a new location for
Oberoi, we expect to see a delay here.
JVLR—Splendor almost ready for handover
` Splendor (1.3 mn sq. ft, residential) is almost ready for handover and is awaiting
“Occupancy Certificate” from the BMC.
` Construction work on two commercial properties (Prisma and Maxima, total 1 mn sq. ft)
and Splendor Grande (0.3 mn sq. ft, residential) is in early stages.
Key risks include FSI assumptions and launch of Mulund project
We believe the two key risks for our estimate of Oberoi’s NAV are (1) lower than anticipated
FSI due to withdrawal of car park policy (not announced as yet) and (2) delay in the launch
and execution of the Mulund property. We model these two risks for Oberoi to understand
the impact of (1) lower FSI (c20%) if the car park policy is withdrawn (Mulund, Splendor
commercial, Commerz II and Exquisite III are the projects that will be impacted) and (2) a 12-
month delay in the Mulund properties.
We note that while we have modeled the lower FSI for the duration of the project, it could
likely impact only towards the end of the project and hence make the NAV less sensitive.
Based on our calculations, (1) if the car park policy is withdrawn, Oberoi’s net NAV is
impacted by 7% (down to Rs282/share), (2) a 12-month delay in the Mulund project leads
to a 4% impact on our NAV and (3) assuming both these events occur, pro-forma NAV is
down 10% to Rs272/share.
Our NAV estimate is Rs304/share
We are valuing Oberoi’s stock at-par with our end-FY2012E NAV estimates assuming (1)
properties generating annuity income have been valued at a cap. rate of 11%, (2) WACC of
15% and (3) constant annual price and cost inflation of 5%.
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