Oberoi Realty: Continues to remain resilient in an adverse environment::Kotak Sec,

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Oberoi Realty (OBER)
Property
Continues to remain resilient in an adverse environment. Oberoi reported 31%
yoy and 38% qoq growth in revenues aided by higher-than-expected recognition while
sales remained reasonably steady at 0.2 mn sq. ft (-10% qoq) with Esquire contributing
68% to area sold. We cut FY2012E/FY2013E revenues and earnings by 15.6%/1.2%
and 14%/2% led by slower commercial sales and sales skew to Esquire and retain our
BUY recommendation with a revised target price of Rs310/share at par with our March
2013E NAV
Revenue surprises positively though EBITDA and PAT margins decline qoq
Oberoi reported revenues of Rs2.2 bn (+31% yoy, +38% qoq and 21% above expectation) and
EBITDA of Rs1.2 bn (+15% yoy, 28% qoq and 12% above expectation). While Splendor achieved
100% project completion, better-than-expected execution in its other projects led to the positive
surprise in revenues – (1) Exquisite achieved 39% completion versus 33% at end-1QFY12 and (2)
Splendor Grande is now 45% complete versus 36% at end-1QFY12. EBITDA margin declined qoq
to 51.9% versus 56.2% in 1QFY12 due to higher costs of construction and development and PAT
margin declined by 15.7% qoq to 50.1% since 1QFY12 margin was propped up by Goa land sale.
Sales volume and realization remain in steady zone though no upward trajectory visible
Oberoi sold 0.19 mn sq. ft in 2QFY12 versus 0.21 mn sq. ft in 1QFY12 with Esquire contributing
68% (79% in 1QFY12) to total sales – a trend we expect to continue even in 3QFY12E. Average
sales realization from ongoing projects declined to Rs12,414/sq. ft versus Rs12,449/sq. ft in
1QFY12 with Esquire realizations declining 11% qoq; we would await details from the earnings
call to get clarification if this has been led by apartment mix or it is a genuine price decline.
Buys 50% stake for Rs2.8 bn from India Advantage Fund I in JV owning 4.1 acres at Worli
Oberoi has bought 50% stake in the JV that owns 4.1 acres of the erstwhile Glaxo Smith Kline
land at Worli. The remaining 50% is owned by Mr. Vikas Oberoi and so the land owning entity is
now effectively under a 50:50 JV between Oberoi Realty and promoter Vikas Oberoi. Our concerns
– (1) no explicit disclosure of transaction value though news sources indicate a price of Rs 3 bn and
incremental utilization from IPO proceeds indicates a transaction value of Rs 2.8 bn (2) first land
purchase after March 2009 JDA (Oasis Realty) is a related party transaction.
Retain BUY with a revised target price of Rs310/ share (Rs315/share earlier)
We find Oberoi relatively better placed in this environment as (1) Oberoi is net cash 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
risks are (1) risk of further delays in the Mulund project as it awaits environmental approval, (2) risk
of lower FSI and hence potential developable area due to adverse car-park and FSI loading
regulations, and (3) delay in leasing at Commerz II as Commerz I has an occupancy rate of 76%.