Saturday, August 18, 2012


Recommendation: Hold
Price target: Rs60
Current market price: Rs46
Price target revised to Rs60
Result highlights
  • Results below expectation: Orbit Corporation (Orbit)'s Q1FY2013 consolidated revenues came in at Rs85 crore, which is below our expectation. The revenues were flat year on year (YoY) and declined by 31% quarter on quarter (QoQ) mainly due to weak execution of projects and poor pre-sales during the previous quarters. Revenues were booked largely from Orbit Terraces with a 56% share followed by Orbit Residency Park with a 27% contribution. The quarter witnessed poor execution of a few projects that are stuck or have slowed down for want of clearances and approvals.
  • OPM expands but higher interest cost spoils the play completely: The operating profit margin (OPM) expanded from 38.3% in Q1FY2012 and 35.7% in Q4FY2012 to 39.6% in the quarter under review due to a lower raw material cost. On the other hand, in spite of the margin expansion, an escalating interest burden (up 77.5%) completely eroded the bottom line and resulted in a loss of Rs2.2 crore for the company. The company raised additional debt of ~Rs50 crore during the quarter taking the debt/equity ratio to 1x.
  • Looking at partial or full exit in a few projects: Orbit is looking to partially or fully exit a few of its projects, namely Orbit Grandeur, Santa Cruz (an SRA project), the Kilachand project at Napean Sea Road and Orbit Midtown at Lalbaugh, all in Mumbai. If Orbit manages to successfully close these deals, it will help the company to bring down the debt on the books which is currently at about Rs1,000 crore. The management is eyeing Rs300-400 crore from these deals.
  • Estimates revised downwards: We are reducing our earnings estimates for FY2013 and FY2014 by 28% and 14% respectively to factor in the higher interest cost and the persistent slower pace of approvals and clearances. Even the management has indicated that for the next three to four quarters project execution would remain slow because of the delay in obtaining approvals and few new launches in the pipeline. 
  • Reduce to Hold with a price target of Rs60: Poor sales across projects due to regulatory uncertainty and the absence of new launches on account of the pending approvals and clearances had taken a toll on the company as well as the industry. Though the regulatory environment has started to improve but it is yet to gain momentum and would take another three to four quarters to do so. Till then the execution of the existing projects and the new launches will be rolling at a snail's pace. This would keep the inventory and the debtor levels high which will keep the debt level high in the books. Thus, the key thing to watch out for going ahead will be the success of the company in exiting a few of its projects to bring down the working capital pressure slightly. Hence, we downgrade the stock from Buy to Hold with a revised price target of Rs60. At the current market price, the stock trades at 12.1x and 6.2x its FY2013E and FY2014E earnings respectively.