Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Oberoi Realty
Well placed amid Mumbai headwinds
We initiate coverage with a Buy rating
Oberoi Realty (Oberoi) is a premium developer with diversified exposure to
Mumbai (residential, office, retail and hotel). We believe the company’s prime
landbank, core presence in Mumbai, net cash reserve of Rs15.6bn, growing rental
asset/income and premium brand positioning differentiates it from the competition.
Good proxy to Mumbai market; slow now, but long-term demand intact
While affordability issues after the sharp price hikes, FSI policy uncertainty and
construction approval delays amid tight liquidity have dampened near-term presales,
we believe the Mumbai market is resilient with long-term demand potential
(rising per capita income, and an increase in nuclear/dual-income families and
migrants). We think Oberoi is well placed to grow due to its balanced portfolio
(development and lease assets) and net cash reserve.
Potential triggers: efficient cash utilisation and strong Mumbai recovery
We expect the key catalysts to be: 1) net cash utilisation of Rs15.6bn for large land
acquisition/joint developments at distressed prices; 2) a strong residential recovery
in Mumbai; and 3) good corporate governance and benefits accruing to Oberoi
from the monetisation of the co-founder’s prime land holding (0.2msf) in Worli.
Valuation: Rs300 price target; an attractive 42% discount to NAV
We base our price target on a 25% discount to our NAV estimate of Rs400 to
factor in the risk of a near-term slowdown in Mumbai. We believe a high cash
surplus (Rs47/share) and rental assets (Rs59/share) will drive outperformance and
position Oberoi as a relatively defensive play in the current risk-averse
environment.
Investment Thesis
We initiate coverage of Oberoi Realty (Oberoi) with a Buy rating and a price
target of Rs300, which is based on a 25% discount to our NAV estimate of
Rs400. We believe Oberoi’s diversified asset exposure to Mumbai, prime
landbank, growing rent-yielding assets and net cash reserve of Rs15.6bn in a
tight liquidity environment differentiates the company from its peers. With
53% of our NAV based on projects under construction, cash reserves and rentyielding
assets, we believe Oberoi is best placed to outperform amid the current
headwinds, and we view the stock as a relatively defensive play.
While Mumbai’s property market has slowed and high interest rates may
remain a near-term overhang, we believe long-term demand potential is intact
with increasing per capita income, and a rise in nuclear/dual income families
and migrants. We view Oberoi as a proxy to the Mumbai property market,
given its good mix of development/rental assets, premium positioning and
capital base that provides the flexibility to tap new acquisition and project
opportunities faster. We forecast earnings to record a 23% CAGR over FY11-
13, driven by steady rental growth (10%) and high cash flow visibility from
ongoing projects. With the shares trading at a 42% discount to NAV (down
18% from the IPO price of Rs283) and a high cash reserve (Rs47/share) and
rental assets (Rs59/share) providing support, we see upside potential.
Key catalysts
Efficient cash utilisation
We expect a key catalyst to be the efficient utilisation of cash reserves of
Rs15.6bn at the end of Q1 FY12 into new large projects/land acquisitions at
distressed prices in order to take advantage of the tight liquidity conditions. We
believe large new projects will enhance profitability and cash-flow visibility.
The management has reiterated its focus on actively exploring new opportunities
in Mumbai and other tier 1 and 2 markets. That said, with land prices still firm,
we view the option of the joint-development model as another efficient method
to grow in the current environment by leveraging its large cash reserve.
Strong residential recovery in Mumbai
Mumbai’s residential and leasing markets have been slow since Q2 FY11, which
has dampened sentiment for the whole property sector. However, as Mumbai is
traditionally the hub of commercial activity in India, we believe long-term
demand potential is intact and we expect residential volume to recover over the
next six to nine months, similar to the recovery after the financial crisis of 2008-
09.
Our view is based on: 1) property prices softening 8-10% in a few pockets of
Mumbai (the Lower Parel area) and stabilising in other parts of the city; 2)
clarity on the Floor Space Index (FSI) policy and the construction approval
process is beginning to emerge; 3) although infrastructure (metro/mono rail
projects, bridge/road connectivity) progress is slow, connectivity is improving;
and 4) potential pent-up demand.
Strong cash-flow visibility from rental growth and
execution ramp-up
We forecast steady rental growth at a 10% CAGR over FY11-13 from Oberoi’s
leased asset portfolio: 1) the Commerz project (0.36msf of leased + 0.7msf of
office space); and 2) the Oberoi Mall (0.5msf) on growing and healthy
occupancy levels of 76% and 92%, respectively, in FY11. The Oberoi Westin
Hotel should also record strong revenue growth at a 22% CAGR in FY13E. In
addition, we expect increased cash-flow visibility from: 1) the execution of the
project pipeline of 11msf for residential and office projects; and 2) good presales
at new launches; this should be an important catalysts for the share price.
Superior disclosure and corporate governance
We believe management’s efforts to enhance disclosure standards and provide
transparency on revenue recognition significantly differentiates the company
from its peers. Furthermore, good corporate governance standards and the
benefit for Oberoi from the likely monetisation of co-founder Vikas Oberoi’s
prime land holding (two acres) in Worli, Mumbai, will be a share price catalyst,
in our view.
Risks
We believe the key risks to our investment thesis are as follows:
A prolonged delay in large land acquisitions could increase the risk of
inefficient utilisation of the cash reserve through buying land at high
valuations. This may dampen returns and affect sentiment.
A fluid political environment. Regulatory clarity about new FSI policy
norms and the premium payable for increased FSI is critical. While this may
streamline and speed up the development process, if adopted in the current
draft form it could affect Mumbai developers’ profitability in the near term.
Continued slowdown in Mumbai’s real-estate market. Further
approval/environment clearance delays at its Worli, Mulund and Pune (30%
of Oberoi’s NAV) projects would affect cash-flow visibility.
Valuation and basis for our price target
We believe Oberoi’s core presence in the Mumbai market, prime landbank, net
cash balance sheet, growing rent-yielding assets and strong brand name
differentiate the company from its peers. We believe a NAV-based valuation
methodology is the most appropriate for Oberoi, as it factors in: 1) the value of
the land assets; 2) the scale of development opportunities and the diversified
geographic asset mix across different time frames; and 3) execution. We group
Oberoi with regional peers, and factoring in the business model risks we expect
the stock to trade at a discount to NAV in the future.
Our price target of Rs300 is based on a 25% discount to March 2012E
NAV/share of Rs400. While the level of NAV discount is a matter of subjective
assessment, we believe a 25% discount to our base-case NAV is fair. Our lower
discount versus peers’ 25-40% largely factors in: 1) Oberoi’s net cash reserve of
Rs15.6bn (12% of NAV); 2) large contribution (15% of NAV) from rentyielding
assets with growth potential; 3) strong track record and premium brand
franchise; and 4) concerns about a delay in the recovery of Mumbai’s property
market. Our base-case NAV/share of Rs400 assumes the following: 1)
development volume of 18.3msf (including 4msf of land for social infrastructure
projects); 2) a 9% cap rate for rent-yielding assets; 3) no price escalations; 4) an
average cost of capital of 14%; and 5) a tax rate of 25%.
The shares are trading at an attractive 42% discount. Although the share price
has outperformed peers by 10% over the past six months, we see more upside
potential based on its net cash balance sheet, superior execution track record and
its multi-asset presence in the core Mumbai market with a higher ROCE of 17%
in FY11 versus peers at below 10%.
In addition, on a PE basis the stock appears relatively attractive at 12x FY12E
PE versus the sector average of 18x, although we believe this metric is
unsuitable because of the high volatility of India property earnings.
Oberoi Realty
Oberoi Realty is a premium Indian developer involved in residential and
commercial developments, and has built 34 projects for an aggregate 5msf over
the past 30 years. The company is involved in the residential, office, retail,
hospitality and social infrastructure segments in Mumbai.
Statement of Risk
Key risks for Oberoi include exposure to the Mumbai property market, rising
interest rates, a slowdown in economic growth and regulatory risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Oberoi Realty
Well placed amid Mumbai headwinds
We initiate coverage with a Buy rating
Oberoi Realty (Oberoi) is a premium developer with diversified exposure to
Mumbai (residential, office, retail and hotel). We believe the company’s prime
landbank, core presence in Mumbai, net cash reserve of Rs15.6bn, growing rental
asset/income and premium brand positioning differentiates it from the competition.
Good proxy to Mumbai market; slow now, but long-term demand intact
While affordability issues after the sharp price hikes, FSI policy uncertainty and
construction approval delays amid tight liquidity have dampened near-term presales,
we believe the Mumbai market is resilient with long-term demand potential
(rising per capita income, and an increase in nuclear/dual-income families and
migrants). We think Oberoi is well placed to grow due to its balanced portfolio
(development and lease assets) and net cash reserve.
Potential triggers: efficient cash utilisation and strong Mumbai recovery
We expect the key catalysts to be: 1) net cash utilisation of Rs15.6bn for large land
acquisition/joint developments at distressed prices; 2) a strong residential recovery
in Mumbai; and 3) good corporate governance and benefits accruing to Oberoi
from the monetisation of the co-founder’s prime land holding (0.2msf) in Worli.
Valuation: Rs300 price target; an attractive 42% discount to NAV
We base our price target on a 25% discount to our NAV estimate of Rs400 to
factor in the risk of a near-term slowdown in Mumbai. We believe a high cash
surplus (Rs47/share) and rental assets (Rs59/share) will drive outperformance and
position Oberoi as a relatively defensive play in the current risk-averse
environment.
Investment Thesis
We initiate coverage of Oberoi Realty (Oberoi) with a Buy rating and a price
target of Rs300, which is based on a 25% discount to our NAV estimate of
Rs400. We believe Oberoi’s diversified asset exposure to Mumbai, prime
landbank, growing rent-yielding assets and net cash reserve of Rs15.6bn in a
tight liquidity environment differentiates the company from its peers. With
53% of our NAV based on projects under construction, cash reserves and rentyielding
assets, we believe Oberoi is best placed to outperform amid the current
headwinds, and we view the stock as a relatively defensive play.
While Mumbai’s property market has slowed and high interest rates may
remain a near-term overhang, we believe long-term demand potential is intact
with increasing per capita income, and a rise in nuclear/dual income families
and migrants. We view Oberoi as a proxy to the Mumbai property market,
given its good mix of development/rental assets, premium positioning and
capital base that provides the flexibility to tap new acquisition and project
opportunities faster. We forecast earnings to record a 23% CAGR over FY11-
13, driven by steady rental growth (10%) and high cash flow visibility from
ongoing projects. With the shares trading at a 42% discount to NAV (down
18% from the IPO price of Rs283) and a high cash reserve (Rs47/share) and
rental assets (Rs59/share) providing support, we see upside potential.
Key catalysts
Efficient cash utilisation
We expect a key catalyst to be the efficient utilisation of cash reserves of
Rs15.6bn at the end of Q1 FY12 into new large projects/land acquisitions at
distressed prices in order to take advantage of the tight liquidity conditions. We
believe large new projects will enhance profitability and cash-flow visibility.
The management has reiterated its focus on actively exploring new opportunities
in Mumbai and other tier 1 and 2 markets. That said, with land prices still firm,
we view the option of the joint-development model as another efficient method
to grow in the current environment by leveraging its large cash reserve.
Strong residential recovery in Mumbai
Mumbai’s residential and leasing markets have been slow since Q2 FY11, which
has dampened sentiment for the whole property sector. However, as Mumbai is
traditionally the hub of commercial activity in India, we believe long-term
demand potential is intact and we expect residential volume to recover over the
next six to nine months, similar to the recovery after the financial crisis of 2008-
09.
Our view is based on: 1) property prices softening 8-10% in a few pockets of
Mumbai (the Lower Parel area) and stabilising in other parts of the city; 2)
clarity on the Floor Space Index (FSI) policy and the construction approval
process is beginning to emerge; 3) although infrastructure (metro/mono rail
projects, bridge/road connectivity) progress is slow, connectivity is improving;
and 4) potential pent-up demand.
Strong cash-flow visibility from rental growth and
execution ramp-up
We forecast steady rental growth at a 10% CAGR over FY11-13 from Oberoi’s
leased asset portfolio: 1) the Commerz project (0.36msf of leased + 0.7msf of
office space); and 2) the Oberoi Mall (0.5msf) on growing and healthy
occupancy levels of 76% and 92%, respectively, in FY11. The Oberoi Westin
Hotel should also record strong revenue growth at a 22% CAGR in FY13E. In
addition, we expect increased cash-flow visibility from: 1) the execution of the
project pipeline of 11msf for residential and office projects; and 2) good presales
at new launches; this should be an important catalysts for the share price.
Superior disclosure and corporate governance
We believe management’s efforts to enhance disclosure standards and provide
transparency on revenue recognition significantly differentiates the company
from its peers. Furthermore, good corporate governance standards and the
benefit for Oberoi from the likely monetisation of co-founder Vikas Oberoi’s
prime land holding (two acres) in Worli, Mumbai, will be a share price catalyst,
in our view.
Risks
We believe the key risks to our investment thesis are as follows:
A prolonged delay in large land acquisitions could increase the risk of
inefficient utilisation of the cash reserve through buying land at high
valuations. This may dampen returns and affect sentiment.
A fluid political environment. Regulatory clarity about new FSI policy
norms and the premium payable for increased FSI is critical. While this may
streamline and speed up the development process, if adopted in the current
draft form it could affect Mumbai developers’ profitability in the near term.
Continued slowdown in Mumbai’s real-estate market. Further
approval/environment clearance delays at its Worli, Mulund and Pune (30%
of Oberoi’s NAV) projects would affect cash-flow visibility.
Valuation and basis for our price target
We believe Oberoi’s core presence in the Mumbai market, prime landbank, net
cash balance sheet, growing rent-yielding assets and strong brand name
differentiate the company from its peers. We believe a NAV-based valuation
methodology is the most appropriate for Oberoi, as it factors in: 1) the value of
the land assets; 2) the scale of development opportunities and the diversified
geographic asset mix across different time frames; and 3) execution. We group
Oberoi with regional peers, and factoring in the business model risks we expect
the stock to trade at a discount to NAV in the future.
Our price target of Rs300 is based on a 25% discount to March 2012E
NAV/share of Rs400. While the level of NAV discount is a matter of subjective
assessment, we believe a 25% discount to our base-case NAV is fair. Our lower
discount versus peers’ 25-40% largely factors in: 1) Oberoi’s net cash reserve of
Rs15.6bn (12% of NAV); 2) large contribution (15% of NAV) from rentyielding
assets with growth potential; 3) strong track record and premium brand
franchise; and 4) concerns about a delay in the recovery of Mumbai’s property
market. Our base-case NAV/share of Rs400 assumes the following: 1)
development volume of 18.3msf (including 4msf of land for social infrastructure
projects); 2) a 9% cap rate for rent-yielding assets; 3) no price escalations; 4) an
average cost of capital of 14%; and 5) a tax rate of 25%.
The shares are trading at an attractive 42% discount. Although the share price
has outperformed peers by 10% over the past six months, we see more upside
potential based on its net cash balance sheet, superior execution track record and
its multi-asset presence in the core Mumbai market with a higher ROCE of 17%
in FY11 versus peers at below 10%.
In addition, on a PE basis the stock appears relatively attractive at 12x FY12E
PE versus the sector average of 18x, although we believe this metric is
unsuitable because of the high volatility of India property earnings.
Oberoi Realty
Oberoi Realty is a premium Indian developer involved in residential and
commercial developments, and has built 34 projects for an aggregate 5msf over
the past 30 years. The company is involved in the residential, office, retail,
hospitality and social infrastructure segments in Mumbai.
Statement of Risk
Key risks for Oberoi include exposure to the Mumbai property market, rising
interest rates, a slowdown in economic growth and regulatory risks.
No comments:
Post a Comment