Oberoi Realty-Sustainable cash flows to drive growth:: Religare

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Oberoi Realty Ltd
Sustainable cash flows to drive growth


We initiate coverage on Oberoi Realty (Oberoi) with a BUY rating and a price
target of Rs 340/sh, which implies an FY12E P/E of 17x and P/B of 2.7x. Oberoi
offers one of the best exposures to Mumbai’s real estate space with its presence
across markets (south central, western) and segments (residential, office, retail).
We expect the company to trade at a premium to peers led by (a) its strong
brand equity, (b) high ROE profile, (c) robust cash flow visibility from existing
projects, and (d) potential value accretion on deployment of free cash
(~Rs 25bn of free cash estimated by March ’12, pre-debt issue). We estimate an
EPS CAGR of 20% over FY10-FY13. Key downside risks are: (1) inability to
scale up operations despite a superior balance sheet to peers (as seen in the
past), (2) approval-related delays, and (3) macro issues.


Strong cash flow pipeline remains the key upside: We expect Oberoi to generate
Rs 3.4bn/Rs 7.6bn of cash flows over FY11/FY12, mainly from residential sales in
Goregaon and Andheri. This, along with a current cash balance of Rs 14bn
(including IPO funds), may leave the company with Rs 25bn of total cash in hand
(without debt raising) to be used to scale up the business. This growth capital, if
deployed in value accretive projects, may add Rs 38–77/sh (at a P/B of 1.5–2x). We
currently do not ascribe any value accretion from this capital.

Leased property provides steady income: Oberoi currently has 1.3msf of
investment property under operation, including 0.36msf of hotels in Goregaon,
Mumbai. The company plans to develop a further 5.6msf of investment property
over the next 5–7 years, across the commercial (3.9msf), retail (0.3msf) and hotel
(1.4msf) space. The leased portfolio, in our view, will provide steady income and
stability to cash flows, especially as the current land bank (premium land at low
cost) is exhausted. Oberoi earned Rs 0.8bn as lease income during FY10; we
expect this income (including newly operational Westin Hotel) to grow at a 44%
CAGR over FY10-FY13. The commercial portfolio contributes 30% to our NAV.
High margins and ROEs: Oberoi enjoys high margins in its residential projects
aided by low land cost and premium development (implying higher realisations).

Further, the cash deployment to date has been optimal, thereby generating ROEs of
20–30% over FY08-FY10. Here onwards, we expect Oberoi to report a revenue
CAGR of 32% (over FY10-FY13) with ~70% EBITDA margins, led by higher
realisations from under-construction projects. Note that our estimated ROE of 22%/
17%/20% over FY11/FY12/FY13 does not factor in cash utilisation.

Initiate with BUY: At our 1x NAV-based price target of Rs 340/sh, the land value
works out to ~Rs 4,990psf (Rs 3,740 post-tax) as against current TDR prices of
Rs 2,800–3,200psf in Goregaon (~50% of Oberoi’s land bank). Property prices in
Mumbai, execution delays and inefficient cash deployment are key risks.