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Oberoi Realty
Initiation
Overweight
OEBO.BO, OBER IN
"Cash and the City". A potent combination that can drive growth. Initiate with OW
Oberoi Realty Limited (ORL) is, we believe, well positioned as a pure play on
Mumbai’s high-end residential and commercial real estate. The company’s
portfolio of ~20msf comprises mainly city centric developments that are
largely monetizable over the next 5-6 years. This, in turn, gives us high
confidence on its valuation estimates. ORL is one of the few developers that
was able to navigate the previous cycle well by buying bulk of its land when it
was cheap (pre 2005) and raising cash (2007) well before the crisis, thereby
remaining net cash all through the downturn. With its recent IPO, the
company now has healthy cash on book (Rs 15B). This along with a growing
rental portfolio (5.9 msf by FY14) and healthy operating cash flows (Rs13B
over FY 11/12) gives it strategic flexibility to pursue growth over and beyond
the current portfolio. Initiate with OW with Mar12 price target of Rs320.
• Not cheap on valuations, but premium can sustain: ORL’s relative
valuations are not cheap on NAV, P/B basis vs. the sector, which has taken
a beating of late. However, this is compensated by lower land bank levels
(translating into better DCF visibility) and higher-than-average ROE
(20%+). On a P/E basis, we believe the company stacks up well relative to
competitors thanks to its cheap land cost (which should last for 5-6 years).
Against other Mumbai developers, we estimate ORL will likely remain at
a premium given better perceived governance and clarity on land titles,
unlike its peer group which primarily specialize in redevelopment space.
• Mumbai is an attractive market but affordability issues have been
constraining volumes leading to a slowdown in the overall market. CY10
absorption run rate was ~ 17% below the CY09 levels. Pricing, however,
has started to correct off late, coming down by 10-20% in incremental
transactions especially in Central Mumbai and select suburbs. ORL,
however, has been able to beat this slowdown thus far thanks to sales in its
flagship Goregaon project. However pricing will need to be attractiv
e in
company’s new launches in Mulund /Worli to sustain volumes.
• Price target and risks- Our PT of Rs 320 is based on 15% discount to
FY12E NAV and equates to 2.5x FY12E P/B and 13x FY12E P/E. A
lower-than-average sector discount, in our view, is justified given a)
relatively short (5-6 years) land bank and 2) strong net cash B/S which can
be used to show accretion. Key risks: (a) Delay in sourcing regulatory
approvals for some projects (Mulund/ Pune/ Worli) given current political
un-certainties, (b) Inability to buy new land parcels at accretive pricing.
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