Oberoi Realty ::UW(V): Sales volumes likely to disappoint HSBC research

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Oberoi Realty (OBER)
Initiate UW(V): Sales volumes likely to disappoint
 Volume growth could stagnate over FY12-14 as new
launches cannibalise old inventory. We estimate expensive
new land bank will carry 30% lower EBITDA margin
 We are very bearish relative to the street; our EPS forecasts
are 16% below consensus for FY12 and 30% lower for FY13
 Initiate UW(V) with target price of INR200
Volume growth concern for FY12-14. Oberoi Realty (ORL) is a leading developer in Mumbai,
where high property prices (30-40% over the peak of the previous cycle in 2008) have hurt
affordability and pulled down volumes c10% q-o-q during Q4 FY11. We anticipate this slowdown
will persist for another 8-12 months. While ORL has bucked the industry trend by rapidly launching
new inventory at only marginally lower prices despite having unsold stock in existing projects, this
is likely to cannibalise future sales volumes. Without significantly lower prices to entice customers,
volumes could stagnate over FY12-14 and lengthen development timelines.
Cost of replacing land bank very high. The majority of ORL’s existing land bank of c20 million
square feet was bought at historically low prices and has a short development duration of 7-9 years.
However, at current market rates, new land purchases could compress ORL’s incremental EBITDA
margin by c20-40% to c30-45%.
Strong non-consensus call. We have the only Underweight rating on the street as we believe the
market is too optimistic about ORL’s volume growth. We are 16% and 30% below consensus on
FY12 and FY13 EPS, respectively. ORL’s Net Asset Value (NAV) faces a downside risk of INR46
per share (15% of NAV) if the state government scraps a policy related to the development of public
car parks. We think consensus earnings downgrades and the potential risk of a huge new supply of
ORL stock (c45% of the free float) hitting the market in six months at the end of the IPO lock-in
period could act as downside price catalysts.
Valuation. Our TP factors in a 35% discount to FY12 NAV of INR282 (higher than DLF’ 30% but
lower than other peers at 40-55%) and a terminal value of INR17. We expect ORL, which is
currently trading at a steep premium to its peers (c18% discount to NAV vs peers’ 35-61%) to
narrow over the next 12 months.
Underweight (V)
Target price (INR) 200.00
Share price (INR) 230.85
Potential return (%) -13.4
Mar 2011a 2012e 2013 e
HSBC EPS 15.76 16.26 20.55
HSBC PE 14.7 14.2 11.2
Performance 1M 3M 12M
Absolute (%) -8.0  
Relative^ (%) -2.8  
Note: (V) = volatile (please see disclosure appendix)
20 May 2011
Ashutosh Narkar*
Analyst
HSBC Securities and Capital Markets
(India) Private Limited
+91 22 22681474
ashutoshnarkar@hsbc.co.in
Chirag Gupta*
Associate
Bangalore
View HSBC Global Research at:
http://www.research.hsbc.com
*Employed by a non-US affiliate of
HSBC Securities (USA) Inc, and is not
registered/qualified pursuant to FINRA
regulations
Issuer of report: HSBC Securities and
Capital Markets
(India) Private Limited
Disclaimer &
Disclosures
This report must be read
with the disclosures and
the analyst certifications in
the Disclosure appendix,
and with the Disclaimer,
which forms part of it
FIG
Real Estate
Equity – India
Company report
Enterprise value (INRm) 62014
Free float (%) 12
Market cap (USDm) 1,684
Market cap (INRm) 75,773
Source: HSBC
Index^ BOMBAY SE SENSITIVE INDEX
Index level 18,086
RIC OEBO.NS
Bloomberg OBER IN
Source: HSBC
Oberoi Realty (OBER)
Initiate UW(V): Sales volumes likely to disappoint
 Volume growth could stagnate over FY12-14 as new
launches cannibalise old inventory. We estimate expensive
new land bank will carry 30% lower EBITDA margin
 We are very bearish relative to the street; our EPS forecasts
are 16% below consensus for FY12 and 30% lower for FY13
 Initiate UW(V) with target price of INR200
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