Oberoi Realty Limited - Mumbai Demand Slowdown intensifying - Antique

Oberoi reported a lackluster sales quarter with a 28% sequential decline in revenues. The mix was heavily skewed in favor of lease income with devco recording the lowest sales in any reported quarter @ 49000 square ft. Higher margins were attributable to inventory on higher floors being sold at greater realisations at Oberoi Exquisite. The quarter also saw an adverse impact of Oasis JV. Oberoi's balance sheet detoriated during the quarter with a decline in cash (from 10bn to INR8.7bn). This was primarily on account of negative operating cash flows of INR1.2bn

Launches /Strategy hostage to extraneous factors

The management attributed lower sales during the quarter to uncertainty pertaining to the proposed Real Estate regulator and also some dispute with the inmates of an existing project forcing a relook at contracts/documentation. Also given the overall uncertain economic environment buyers tend to buy real estate closer to completion and Oberoi has exhausted the Andheri(E) inventory and the other part of the inventory is moving slowly. Also management has not been able to acquire land parcels as per earlier commentary given no visible signs of stress in land prices.

Outlook hostage to new launches

Clearance of Mulund project's environmental hurdles and acquisition of new land parcels are the key stock catalysts in our view. We believe visibility on operational performance will be driven by the above two developments and we will stay on the sidelines from a stock perspective until clarity on these emerges. Given the high ticket size real estate transactions being peculiar to the Mumbai micro market, we believe that Oberoi Realty will struggle to see sales traction purely based on existing projects.

Valuation and Outlook

We have valued ORL on the NAV methodology as this methodology captures the true value from the entire land bank. We have considered discounting rate of 15% for valuing the projects. To value the commercial and retail property, we have used the cap rate of 11%. Based on these assumptions, our NAV work outs to INR 279/share and TP of 209. Our target price implies a discount of 25% to our NAV as we have valued the Mulund project at a 20% discount to NAV due to regulatory delays. Additionally, we have valued commercial developments at a discount of 25% and have not incorporated commercial and retail development at Worli, Sangam city and I-Ven property in our target price as we would like to see ramp up / absorption in these projects.

Source : Equity Bulls

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