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2QFY23 earnings a mixed bag; growth triggers intact

Strong pre-sales; commercial performance steady but P&L subdued

* Oberoi Realty (OBER) clocked a pre-sales of INR11.5b in 2QFY23, up 39% YoY/52% QoQ and was 28% above our estimate. OBER reopened sales at its ultra-luxury project 360 West (Worli), and reported sales of eight units worth INR6b (>50% contribution). Management expects the momentum to continue.

* Occupancy at Commerz I improved marginally QoQ. Revenue/EBITDA for the commercial portfolio remained flat QoQ at INR711m/INR667m, respectively. ARR at the Westin Hotel improved 5% QoQ and led to flat revenue in the Hospitality segment despite a drop in occupancy to 83% in 2Q from 91% in 1Q.

* Revenue declined 9% YoY/25% QoQ to INR6.9b and was 27% below our estimate due to slower-than-expected execution at Mulund projects. EBITDA margin remained healthy at 45%. PAT stood at INR3.1b, up 20% YoY but down 21% QoQ and was 46% below our estimate.

Strong launch pipeline to drive pre-sales growth in FY23E

* Ex-off Worli project, OBER’s performance was a mixed bag as sales sustained QoQ in its Mulund projects (Eternia/Enigma), while there was a sequential drop in sales velocity at Borivali (SkyCity) and Goregaon (Elysian) projects.

* The decline in sales velocity at SkyCity, Borivali was attributed to lower inventory where the company expects to launch a tower in 2HFY23. OBER is also confident to launch its Pokhran Road (Thane) project in 3QFY23E, while the Kolshet Road (Thane) project is likely to be launched in 2HFY23E.

* Aided by strong launch pipeline and higher-than-expected pricing and velocity at 360 West (Worli), we increase our FY23 pre-sales estimates by 11% to INR53b, up 36% YoY.

Key management commentary

* Pricing: Depending upon the stage of construction and balance inventory, company has hiked prices by 5-10% across its projects in Borivali, Goregaon and Mulund.

* Commercial assets: Construction at Commerz III will be completed by Mar’24 and management highlighted that there is significant leasing interest in the asset. OBER has taken up an SRA project adjacent to the ongoing project at Borivali. The project site is 95% cleared and will be used for commercial development.

* Business development (BD): Management continues to remain committed on BD and is close to signing a redevelopment project in Mumbai. Company has also paid some advances in 2QFY23. The decision to develop retail or residential project at Glaxo land will be taken during the current quarter.

Valuation and View

* Because of the delayed execution at Mulund projects, we reduce our FY23/FY24 EBITDA estimates by 13%/12%, respectively.

* Management indicated a strong visibility on business development that will provide further growth visibility and will be a key re-rating trigger. Reiterate BUY with an unchanged SOTP-based TP of INR1,100, implying 28% upside.

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