Add Oberoi Realty - Consortium

Oberoi Realty (Oberoi), with a strong city-centric real estate portfolio of 20.4mn sqft, has emerged as one of the most successful developers in Mumbai in terms of execution track-record and quality. This has not only generated strong brand equity for the company, but also provides comfort in terms of project monetisation and sales visibility. With a prudent strategy of selective land-banking, Oberoi has managed to keep its balance sheet net cash-positive. With a balanced portfolio of sales and investment properties (ongoing projects of 6.8mn sqft and two rent-yielding assets) coupled with launches of 10mn sqft, we believe Oberoi will remain well-capitalised (we estimate FY14 cash at Rs20.3bn) to capture any growth opportunity. Launches of Exotica (Mulund, Mumbai) and Oasis (Worli, Mumbai) projects and fresh land-acquisition could be positive triggers as they have potential to double Oberoi's annual sales run-rate. Concerns pertaining to sluggishness in the commercial realty market, prolonged slowdown in residential transactions in Mumbai and rising land prices, still remain. We initiate coverage on Oberoi with a ADD rating with an FY14E NAV-based target price of Rs305/share (73% of NAV to be realised in the next five years).

City-centricity with strong brand equity and visible project pipeline. Based in Mumbai, Oberoi Realty (Oberoi) has maintained an impeccable track-record in project deliveries, which provides high visibility on monetisation of its land reserves, leading to comfort on cashflow expectations. This has also enabled Oberoi to build strong brand equity with customers, who are therefore willing to pay a premium.

Balanced development and investment portfolio. Oberoi has a strong and well-placed project portfolio of 20.4mn sqft. The company is currently executing residential projects of ~4.7mn sqft and has two operational rental assets - 1) Oberoi Mall (0.55mn sqft with annual rent of Rs782mn), and 2) Commerz-1 (0.36mn sqft of office space with annual rent of Rs452mn) - and a planned pipeline of ~10mn sqft.

Well-capitalised for future growth. Prudent land acquisition strategy has led Oberoi's balance sheet to be net cash-positive (net cash at Rs20.3bn in FY14E).

With lower capex in FY14-FY15E, conservative cash deployment to replenish land bank (largely JDAs), and expected rentals of Rs2.5bn/annum by FY16 - would keep Oberoi's free cashflow strong, balance sheet almost unleveraged and in a firm position to capitalise on the same for continued growth.

Likely triggers. Clearance on the Mulund and launch of the Worli projects (together estimated to contribute Rs42.2/share or 15% of NAV) - are likely to double Oberoi's volume sales momentum by FY15. Any fresh cash deployment for land-acquisition would also be a likely near-term trigger.

Valuations reasonable at current levels. Our FY14E NAV for Oberoi stands at Rs305/share. The stock trades at an FY14E P/E and P/BV of 13.7x and 1.9x respectively. We remain upbeat on the company's development and rent portfolio, visibility on monetisation of projects, and strong balance sheet. Initiate with ADD.

Source : Equity Bulls

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