Oberoi Realty - A lot to blue sky - Karvy

Over the past 6 months Oberoi Realty Ltd. (ORL) share price has fallen by 32%, owing to (i) concerns on slowing sales & unaffordable property markets; (ii) delay in getting Mulund project regulatory clearance and (iii) pessimistic outlook on new sales booking for FY14E. In spite of this we initiate coverage with a BUY because of ORL's strong competitive positioning, healthy balance sheet and upcoming strong launch pipeline.

Strong balance sheet lends scope for locational diversification

Strong balance sheet with FY13 net debt/equity of (0.3x) and robust operational cash flows gives ORL headroom to acquire land banks outside home locations. We expect NCR/Bangalore to contribute about 15% to volumes from FY16E though we have not yet built these numbers in our optional value estimates. Replication of strong brand recall in home markets across newer markets remains key re-rating trigger.

Best placed v/s Western peers

ORL stands out as a leader in our competitive business mapping of the Western developers. High land bank quality, superior brand recall and relatively healthy access to finance are the key contributing factors. We expect ORL to capture incremental market share outside home location and deliver above industry average growth.

Well balanced annuity and residential mix augurs well

ORL operationally derives value from a well balanced mix of residential & commercial projects contributing 43% and 42% to our NAV estimates respectively. Unlike peers, in an event of slowing residential segment sale the cash flows from commercial projects lend visibility to earnings.

Initiate coverage with BUY: Target price Rs308/share

We initiate on the company with a BUY stance and a SOTP-based target price of Rs308/share. We value the residential real estate at Rs133/share, commercial annuity assets at Rs129/share and others at Rs46/share. We believe that the near-term catalysts are: (i) Mulund & Worli launch; (ii) successful foray outside Mumbai & (iii) new land acquisitions.

Key risks

(i) Unaffordability may lead to a 8-10% real estate price; (ii) Delays in new land acquisitions remains key de-rating trigger

Source : Equity Bulls

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