Tuesday, March 6, 2012

>OBEROI REALTY: Cash rich in debt-trapped industry; initiate with a BUY

■ Premium developer with a strong track record: Oberoi Realty (ORL) is a premium real estate developer in Mumbai. Till date the group has developed 35 projects with a saleable area of 6.6msf. The company’s high focus on quality has earned goodwill from the buyers and hence it earns itself a premium over its peers. The company has a land bank of 124 acres with a saleable area of 13msf.

 Focus on Mumbai, the strongest real estate market in India: Among all macro markets in India, Mumbai has been the strongest where the impact of property price correction came later and revival is faster and steeper compared to others cities. Demand in the region has also remained high between Nov 2008 and Nov 2010, when absorption grew by more than three-and-half times. Though, due to unaffordable prices pushed absorption down considerably following the slump in new launches, we expect increase in the pace of approvals from the government and new launches by the developers.

■ Balanced portfolio provides smooth cash flow: ORL has created a strong product mix, which includes development properties and investment properties (rental earning). The mix helps the company to enjoy smooth cash flows and places it in advantageous situation in every business cycle.

■ Land acquisition is a strategic game, ORL played it well till date: Unlike its peers in listed space, ORL has not increased its land bank aggressively. The management does not want to own land bank that has longer than 5-6 years of construction visibility. This strategy has helped the company in creating a healthy financial position, which is a rare case in listed space of Indian real estate industry.

■ Premium to cash is warranted: The strong net cash position places ORL in a good bargaining position against its peers who are desperate to monetise their land assets. This helps the company in buying assets at a significant discount either by paying upfront cash or by entering into joint development with the land owner. Thus, the company can buy assets with a value of 140x-150x by paying only100x.

Mumbai - one of the strongest real estate markets in India
Macro markets in India have witnessed sharp corrections and saw strong recoveries in the past few years. However, among all, Mumbai is the strongest and most-resilient real estate market. This was evident during the downturn in 2008-09; Mumbai (excluding Navi Mumbai and Thane) was the last to see property price corrections and was amongst the first to recovery. Considering July 2007 levels as a base of 100, Mumbai property prices came down to 83 and within less than 6 months, it rose back to the original levels. Currently, it is at 121. This, when compared to other active markets, is the fastest and strongest recovery.

■ Valuation and recommendation: We have valued ORL using NAV approach. We value the company’s net asset at Rs138bn, including a 30% premium to its cash balance. We initiate our coverage on ORL with a BUY rating at a target price of Rs336 (20% discount to NAV), providing 26% upside.