Unusually resilient real estate stock: Oberoi Realty sees an upswing
By Suhani Adilabadkar After coming under the grind of RERA and GST, the real estate industry has accepted the ongoing ‘Swachatta Abhiyaan’ as the new normal. The industry reported decent growth against the preceding landmark year, and was on a roller coaster ride in 2018 before getting snubbed by the NBFC fallout. But the zing seems to be back, with the recent GST cut evident from the top realty stock movement, 7-10% north over the past one month. Apart from Godrej Properties, all real estate biggies have witnessed happy bullish movement, making hay before the uncertainty sets in with the upcoming general elections. With highest level of risk variables in the real estate equation, it is extremely essential to remove the wheat from the chaff to include this dynamic sector in a sustainable long term portfolio. Oberoi Realty Oberoi Realty (OBER) which is in 12 stock screeners, is the second most valuable Indian real estate company and has already proved its mettle over the past eight years since its IPO in 2010. At the time, it was fourth in line to the Indian Realty Throne, behind HDIL, Unitech and market leader DLF, It has climbed its way to the runner up dais, with the December quarterly profit surpassing DLF and Operating Profit Margin highest in the industry. Coming to company basics, Oberoi Realty is a pure premium segment real estate player in Mumbai. Functioning in all major real estate streams, residential, hospitality and commercial, OBER, a complete Mumbai focused company, has developed 42 projects at strategic locations across Mumbai. The FII-DII holding has increased to 29.85%, a 480 basis points jump in June 2018 and has held on since, after the company raised Rs. 1200 cr by issuing 24 million equity shares through QIP route. The reason for institutional investor preference for this stock is based on three fundamental growth indicators, namely strong differential positioning with respect to revenue mix, robust financial stability with highly ethical and transparent management practices and long term revenue/profit growth visibility. Quick Takes: OBER, a complete Mumbai focused company has developed 42 projects at strategic locations across Mumbai. Key differentiator for OBER, second most valuable real estate company has been its transparency and high ethical standards. Rental portfolio of about Rs. 1200 cr annually in the next 4-5 years. Lean balance sheet, low debt equity of 0.20 and 9M FY19 consolidated PAT growing more than 100%. Focused And Differentiated Player Real estate exhibits uncertain, unstable revenue, linked with economic variables and the general mood of the economy, with politics never completely out of the picture. This results in a lumpiness in revenues, as companies depend on rental assets or development and sale of residential units. As a result, there are often huge negative surprises for investors as companies report huge profits in one of the four quarters and pessimistic momentum for the rest of the financial year. OBER has differentiated itself from the rest of the pack by following a business model over the years which seems to be resilient to these systematic business and economic factors. OBER has successfully survived the real estate downturn over the past 5-7 years due to the stability of its diversified revenue portfolio which includes both developmental projects and rent yielding assets. Rental assets such as the ‘Oberoi Mall’ (retail asset) contributes 10% of total turnover and boasts in excess of 95% EBDITA margin, COMMERZ I (office space asset) also falls in the same frame, EBDITA of 95% and COMMERZ II (office space asset) which reported operating revenue doubling YoY in December quarter with EBDITA margin of 90%. The list also includes Westin Mumbai Garden City (Hospitality asset) which reported 15% sequential growth in Q3 FY19. Revenue from rental assets and hospitality constituting 23% of total revenues grew 28% YoY in December quarter. Thus even if development projects are impacted by liquidity crunches and legal hassles, the rental revenue trickles in providing the required financial stability and long term profit visibility. Moving on to developments projects, the company has quite a few up on its sleeve. ‘Sky City’ at Borivali, ‘Eternia’ and ‘Enigma’ at Mulund are the current ongoing residential projects. Apart from this residential line up, ongoing mixed-use development projects (mall/office/hotel) are in Worli and Borivali. OBER boasts an impressive assemble of successfully completed projects which have become landmarks such as Oberoi Sky Gardens and Oberoi Springs in Andheri West, Oberoi Garden City, Esquisite and Esquire in Goregaon East, Oberoi Splendor, Prisma and Oberoi International School in JVLR, Oberoi Chambers, Oberoi Mall and Commerz I ⅈ to name a few. Revenue from developmental projects (ongoing + completed) has galloped 58% YoY in December quarter which contributed 75% to the revenue basket leading to overall consolidated revenue growth of 48% YoY. Another key differentiator for OBER has been its transparency and ethical standards which have transformed the company into a well reputed premium brand. While the rest of the industry was tiding over RERA, OBER was already following that rule book, and didn't suffer the impact of rules being enforced. Securing requisite approvals before launching a project, transparent utilization of sales proceeds of a developmental project for its specific construction activity and buying land parcels mainly from corporate and not developers. Clarifying on the land aspect, MD & CEO of OBER, Mr Vikas Oberoi said, “There are two reasons why we buy land from corporates. One, we love the process it is transparent, it is seamless, it is non-emotional, it is basically driven by market and you know these guys are prudent people. Whereas when we deal with developers they tend to get very emotional about their property and their expectations are way above what market wants to pay them”. As a result of such processes adopted by the company, Oberoi Realty’s properties command 15-20% premium pricing compared to industry peers. In addition to this, strong fiscal discipline has led to a lean balance sheet, strong cash flows, low debt equity ratio of 0.2 and robust profitability with 9M FY19 consolidated PAT growing more than 100%. Last but not the least, revenue and profit visibility is steeply inclined north with rent yielding assets such as Commerz Iⅈ, Oberoi Mall, Borivali (GLA: 1.73 msf) and Worli (GLA: 1.7 msf) projects (operational in next 4-5 years) expected to stack up annuity portfolio of about Rs. 1200 cr annually. In addition to this superlative revenue source, Commerz III is on the drawing table, OBER’s ambitious Thane project for which 60 acre land had been acquired from GlaxoSmithKline is in the final lap of documentation closure in March quarter and Project Maxima (JVLR) will be launched in FY20E. The QIP funds are yet to be deployed and of-course affordable housing is also going to be a part of this premium portfolio. With all these growth prospects, scrip seems to at mouth watering levels.12-03-2019
