Island of prosperity
Sharp focus, trusted brand – the key strengths
* Oberoi Realty (OBER) is a Mumbai-focused premium real estate developer, with presence in the residential, commercial and hospitality segments. The sharp focus on delivery of quality products has helped the company create a strong brand over the past 20 years. Its trusted brand enables its projects to enjoy premium, resulting in superior EBITDA margins of >50%.
* Its residential portfolio comprises 19msf of developable area, providing strong growth and cash flow visibility over the next 10-12 years. The recent foray into affordable housing completes its bouquet of offerings and should help it enjoy tax incentives. We expect the company to be a key beneficiary of the likely consolidation post RERA.
* OBER plans to multiply its annuity portfolio from 1.6msf to 4.2msf by launching two new malls and an office complex on its existing land bank, which is fully paid for. The expansion will result in leasing income increasing by 4x over the next five years. It will also provide stability to revenues.
* We estimate OBER's FY19 value at INR580/share (par to its NAV). However, we believe the company can trade at a premium to its FY19 NAV due to its (1) strong balance sheet, with ample room for leveraging to buy new land and (2) strong brand equity, which helps it to command premium pricing. We initiate coverage with a Buy rating, and value OBER at par to its NAV at INR580/share, implying an upside of 28%.
A distinguished Mumbai-focused play
OBER has ~22msf of premium developable/unsold area in prime locations of Mumbai/Thane, which is suitable for large-format integrated development. It typically buys large land parcels of over 25 acres, which are developed in phases over 10-12 years. Integrated development consisting of residential, social infrastructure, malls, hotels and offices uplifts the image of the micro market, creating value for itself. OBER’s superior product quality and timely delivery have enabled it to create a trusted brand. This helps its projects to command premium over prevailing rates in the vicinity, resulting in superior EBITDA margins of >50%. Also, it enjoys >20% bookings within a quarter of project launch (Exhibit 11).
Residential segment – in a virtuous cycle of growth
OBER has a strong residential portfolio of 19msf, which is expected to continue providing growth and cash flow visibility over the next 10-12 years. Post RERA implementation, we expect consolidation in the industry, where a quality player like OBER stands to benefit from its strong operating and financial discipline. Due to stricter rules under RERA, most land owners with no prior experience of development will either choose the JV/JD route for development or simply sell away the land parcel. This will clearly enrich growth prospects for companies like OBER. Additionally, the company has a catalyst in the form of low debt to equity of 0.1x. It also plans foray into affordable housing via its recently acquired Thane land parcel, which, apart from providing tax incentives, completes its bouquets of offerings in the residential segment.
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