Oberoi Realty: SBICap Research Report

SBICAP Securities are bullish on Oberoi Realty and have recommended a Subscribe with the following investment rationale:

Strong brand name in premium housing segment

Oberoi Realty (ORL) is one of the leading real estate developers in Mumbai. The group has its presence in Mumbai since past 27 years and till date; it has developed 33 projects with saleable area of 5 msf. Oberoi Realty has its presence in premium housing segment and enjoys strong brand loyalty among the upper middle segment of the population. This is visible from the fact that at most of the locations of presence, Oberoi Realty enjoys a premium to the local builders.

Mumbai focused player

Oberoi Realty is a Mumbai focused player with just one project outside Mumbai. In Mumbai, Oberoi Realty has focused on 4 micro markets (Goregaon east, Andheri east, Mulund and Worli). With strong inherent housing demand, Mumbai real estate market has witnessed very strong rise in the property prices. Property price at most of the locations have already reached previous peak unlike other metros in the country which are still 10 -15% below. This provides good visibility to Oberoi Realty’s project portfolio and cash flow.

High visibility on project pipeline

Oberoi Realty currently has a strong pipeline of projects. It has 13 ongoing projects with saleable area of 10 msf and 11 planned projects with an 10 msf. Most of the ongoing projects are in various stages of completion with strong cash flow visibility while the planned projects provide visibility for the next 5 – 7 years.

Zero debt company

Unlike other real estate companies in the listed market space, Oberoi Realty has a very strong balance sheet with cash balance of INR 3.7 bn and zero debt on its books. Limited land acquisition during the past five years and strong cash inflows from the residential projects has helped Oberoi Realty to manage such strong balance sheet.

Valuation of Oberoi Realty:

Fully valued; subscribe with long term view. We have valued Oberoi Realty on NAV approach. While the ongoing projects are valued as per Oberoi Realty’s guidance on completion dates, we have built in conservatism while valuing longer duration and still to commence projects. As per our post money valuation, the IPO is available at 11% – 13% discount at its price band of INR 253 – 260. Though the valuation is relatively rich compared to the other listed players in the real estate industry, high visibility on Oberoi Realty’s limited number of projects along with zero debt on the balance sheet should justify the premium. On conservative valuation, the stock looks fully valued and the upside is possible from the timely completion of the projects, increase in realizations and land acquisition through leveraging balance sheet. We recommend Subscribe with long term view.