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Omaxe Limited
Expensive valuation; Maintain
Underperform
„1Q results better than expected, Maintain Underperform
Omaxe reported net profit at Rs200mn (lower by 5% YoY) but better than our
expectation as it recognized commercial projects and plotted development in 1Q
leading to higher EBIDTA margin. The pre sales at 2.6mn sq ft in 1Q are on track
to meet our estimate of 10mn sq ft in FY12. We maintain our Underperform rating
with PO of Rs86 offering potential downside of 33% from the current levels and
lowered our earnings by 4% for FY12/13 to reflect higher interest costs.
Cash flows improving but leverage remains high
Omaxe reported improvement in cash flows leading to reduction in debt by
Rs750mn in 1Q to Rs14.8bn which is encouraging. But leverage still remains high
at 0.9x and in the current environment where financial institutions have become
wary of lending to the sector, could pose challenge in servicing the same. Omaxe
is looking to reduce its debt to Rs10bn in FY12 from internal accruals.
Margin unlikely to improve in near term
We expect Omaxe’s margin to remain under pressure in coming quarters as well
as older projects which have been delayed due to slowdown in 2008-09 will likely
be completed over next 2 years. Also rising construction and interest cost and as
it focuses on cash realization to meet its debt repayment obligations will further
pressure margin. We expect EBIDTA margin to remain at FY11 levels of 14-15%
for FY12/13.
Valuation expensive at 1.3x FY12E P/B
Our underperform rating reflects high leverage at xx and company’s lack of pricing
power in the current environment of high inflation. – leading to higher construction
cost and interest rates would keep margin and cash flow under pressure. It is also
trading at rich valuation of 1.3x FY12E P/B against BSE Realty index at 25%
discount to book value which we believe is unjustified.
Price objective basis & risk
Omaxe Limited (XOMXF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate project. Our price objective of Rs86 is therefore
based on our NAV of Rs123. We expect Omaxe to trade at a discount of 30% to
large developers like DLF on discount to NAV basis, because of its high leverage,
concentration of land bank in Tier 2 and 3 towns and smaller size. Key
assumptions underlying our NAV are WACC of 16%, capitalization rate of 11%
and inflation of 5% from FY12 on both selling price and construction costs. On a
P/E basis, at our PO of Rs86, the stock would trade at 12x our FY11E earnings.
Upside risks are higher than expected volume and sale of assets leading to
reduction in debt. Downside risks are a larger than expected slow down in
volumes for mid income residential property in tier 2 and 3 locations and a
prolonged delay in refinancing debt obligations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Omaxe Limited
Expensive valuation; Maintain
Underperform
„1Q results better than expected, Maintain Underperform
Omaxe reported net profit at Rs200mn (lower by 5% YoY) but better than our
expectation as it recognized commercial projects and plotted development in 1Q
leading to higher EBIDTA margin. The pre sales at 2.6mn sq ft in 1Q are on track
to meet our estimate of 10mn sq ft in FY12. We maintain our Underperform rating
with PO of Rs86 offering potential downside of 33% from the current levels and
lowered our earnings by 4% for FY12/13 to reflect higher interest costs.
Cash flows improving but leverage remains high
Omaxe reported improvement in cash flows leading to reduction in debt by
Rs750mn in 1Q to Rs14.8bn which is encouraging. But leverage still remains high
at 0.9x and in the current environment where financial institutions have become
wary of lending to the sector, could pose challenge in servicing the same. Omaxe
is looking to reduce its debt to Rs10bn in FY12 from internal accruals.
Margin unlikely to improve in near term
We expect Omaxe’s margin to remain under pressure in coming quarters as well
as older projects which have been delayed due to slowdown in 2008-09 will likely
be completed over next 2 years. Also rising construction and interest cost and as
it focuses on cash realization to meet its debt repayment obligations will further
pressure margin. We expect EBIDTA margin to remain at FY11 levels of 14-15%
for FY12/13.
Valuation expensive at 1.3x FY12E P/B
Our underperform rating reflects high leverage at xx and company’s lack of pricing
power in the current environment of high inflation. – leading to higher construction
cost and interest rates would keep margin and cash flow under pressure. It is also
trading at rich valuation of 1.3x FY12E P/B against BSE Realty index at 25%
discount to book value which we believe is unjustified.
Price objective basis & risk
Omaxe Limited (XOMXF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate project. Our price objective of Rs86 is therefore
based on our NAV of Rs123. We expect Omaxe to trade at a discount of 30% to
large developers like DLF on discount to NAV basis, because of its high leverage,
concentration of land bank in Tier 2 and 3 towns and smaller size. Key
assumptions underlying our NAV are WACC of 16%, capitalization rate of 11%
and inflation of 5% from FY12 on both selling price and construction costs. On a
P/E basis, at our PO of Rs86, the stock would trade at 12x our FY11E earnings.
Upside risks are higher than expected volume and sale of assets leading to
reduction in debt. Downside risks are a larger than expected slow down in
volumes for mid income residential property in tier 2 and 3 locations and a
prolonged delay in refinancing debt obligations.
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