CONSTRUCT YOUR PORTFOLIO WITH OBEROI REALTY

Oberoi Realty Ltd. (ORL) is engaged in the business of real estate development and hospitality. It operates across the residential, commercial, retail, social and hospitality segments. It has developed over 42 projects throughout Mumbai, aggregating about 11.89 million sq. ft., with another 27.43 million sq. ft. in the making. To achieve such voluminous scalability, ORL has outsourced its work concerning architecture, design, engineering and construction to leading domestic and international consultants.

Industry overview
The real estate sector took a big hit on account of demonetisation. The demand for housing plummeted, causing inventories to pile up with construction companies. However, with time, the situation has started to normalise, backed by the government impetus on infrastructure development and its vision to provide affordable housing for all. This, coupled with policies facilitating ease of doing business, are catalysts for an upgraded lifestyle and will, in turn, Analysis Equity increase the demand for luxury housing – which is precisely what ORL is recognised for.



In India, real estate is the second largest employer and forecasted to grow at 30 per cent over the next decade. The growth in demand for corporate offices as well as urban and semi-urban accommodations has enhanced the prospects of the sector. The two reforms by the government, namely, GST and RERA, bode well for the industry. While the unified tax regime under the GST has bolstered the Indian economy, RERA has enhanced transparency in the real estate sector, thereby protecting the interests of both buyers and developers.

Moreover, an increase in NRI investments is anticipated in the short and long run. Forecasts predict that the Indian real estate market will reach US$ 180 billion by 2020 and grow at a CAGR of 11.2 per cent between FY 2008-2020. Between April 2000 to September 2017, the construction development sector received FDIs amounting to US$ 24.66 billion.

Revenue
During FY18, the major contributor to revenue was the residential segment. The Exquisite and Esquire project in Goregaon generated around Rs.4,173 crore with almost 100 per cent occupancy. The Mulund project with two high rise towers sold 452 units and the expected revenue realisation is Rs.1,759 crore. Meanwhile, the Sky City project in Borivali is 33 per cent booked with revenue recognition of Rs.2,137 crore.

Product pipeline
The company has undertaken several residential projects like Sky City and Exquisite III. It has recently acquired land in Thane. It plans to construct malls across Mumbai and other commercial spaces in Commerz III in Goregaon. The company has ventured into the affordable segment under the brand Aspire, through which it will offer units with a saleable area of 1,000 sq. ft. at an average ticket size of Rs.1.2 crore. In the hospitality segment, the Westin property in the Garden City, Goregaon, witnessed steady growth in occupancy to 84.78 per cent in Q4FY18 versus 77 per cent in Q4FY17. 

Financial Performance
The consolidated quarterly financial performance on a Q-o-Q basis is not very impressive. The revenue from operations dropped to Rs.592.11 crore in Q2FY19 from Rs.888.26 crore in Q1FY19, thereby sinking 33.34 per cent. Its EBITDA fell to Rs.295.84 crore in Q2FY19 from Rs.461.71 crore in Q1FY19, reporting a drop of 35.92 per cent. The net profit dwindled to Rs.213.83 crore in Q2FY19 from Rs.309.42 crore in Q1FY19, thus tumbling 30.89 per cent. 



Despite a subdued Q-o-Q performance, the company has showcased its potential by producing an outstanding consolidated Y-o-Y quarterly financial performance. The revenue from operations increased to Rs.592.11 crore in Q2FY19 in comparison to Rs.303.52 crore in Q2FY18, registering an increase of 95.08 per cent. The company reported total income of Rs.619.78 crore in Q2FY19 as against Rs.308.49 crore in Q2FY18, posting a remarkable surge of 100.90 per cent. The EBITDA increased to Rs.295.84 crore in Q2FY19 in comparison to Rs.163.76 crore in Q2FY18, registering a growth of 80.65 per cent. The profit after tax (PAT) rose to Rs.213.83 crore in Q2FY19 from Rs.104.32 crore in Q2FY18, thereby growing 104.97 per cent.

The consolidated annual financial performance shows that operating revenue increased to Rs.1,265.4290 crore in FY18 from Rs.1,113.7439 crore in FY17, registering a growth of 13.61 per cent. Consequently, the total revenue increased to Rs.1,292.0070 crore in FY18 from Rs.1,161.3468 crore in FY17, thereby showcasing a growth of 11.25 per cent. Its EBITDA increased to Rs.675.2586 crore in FY18 from Rs.569.7616 crore in FY17, posting a growth of 18.51 per cent. The profit after tax (PAT) rose to Rs.458.8032 crore in FY18 from Rs.378.5876 crore in FY17, marking an increase of 21.18 per cent. 

On the valuation front, the return on equity (ROE) increased to 7.8 per cent in FY18 from 6.8 per cent in FY17. Meanwhile, return on capital employed (ROCE) improved to 12.9 per cent in FY18 from 12.6 per cent in FY17. The earnings per share (EPS) climbed to Rs.13.5 in FY18 from Rs.11.2 in FY17. The P/E multiple stood at 41.8 in FY18 versus 50.6 in FY17. The P/BV multiple stood at 3.1 in FY18 versus 3.3 in FY17, while the EV/EBITDA multiple stood at 30.7 in FY18 versus 34.5 in FY17.

During FY18, ORL sold approximately 3,22,563 sq. ft. RERA carpet area versus 3,06,225 sq. ft. in FY17. It also reported a healthy order book of Rs. 5,360.82 crore towards the end of FY18 as against Rs.5,037.45 crore at the end of FY17.

Growth drivers/Outlook-
ORL holds a dominant position in Mumbai – a market with astronomical costs and limited land availability. The company’s acquisition of large land parcels in and around Mumbai offers substantial growth potential. Currently, the company has around 28 million sq. ft. of land under development with ongoing projects. It has announced a subvention scheme for its Exquisite and Esquire projects in Mumbai. Since a major chunk of its customers comprises of well-off people with lavish lifestyles, it is relatively protected from fluctuating demand caused by negative economic factors. 

Strengths
The company enjoys a reputed brand name, contemporary architecture and well-designed projects scattered across strategic locations. Its strong customer connect results in greater premium realisations. ORL’s strength lies in its robust balance sheet and conservative debt practice. Its business model is such that it ensures steady cash flows even during adverse business cycles. This provides a significant leveraging opportunity for further expansions. By operating an outsourcing model of appointing proficient architects and contractors, the company has managed to reach impressive scalability, embodying contemporary design and quality construction.

Challenges
The unforeseen delays in project approvals, rising cost of construction and excessive regulation are some of the challenges faced by ORL. So are the increased cost of manpower and growth in auxiliary infrastructure facilities.

Furthermore, finding an accomplished and trained labour force remains a major concern. The company’s performance depends on sales and rental realisations of its projects – both of which are governed by market conditions, as well as the nature, location, brand, design and reputation of the projects. The volume of bookings is driven by customer preference and the company’s ability to garner their trust. The company also has to factor in contingencies such as litigation, weather conditions and access to utilities like electricity and water. Sometimes, the construction materials have to be imported and execution depends on timely shipment and clearance. Land acquisition requires substantial capital outflows, which can expose the company to high interest costs and inadequate funding sources. To reduce its vulnerability, the company has diligently tried to build sufficient reserves from operating cash flows in order to fund the upcoming development opportunities.



Conclusion and recommendation
Although the quarterly performance on a Q-o-Q basis shows a dip in numbers, the Y-o-Y numbers on the quarterly as well as annual basis reflect how well the company has done in the past year. The management commentary signalled a strategic shift towards volumes driven market share gain and an emphasis on attaining sales velocity on completed projects through deferred payment programmes. ORL’s creation of cash reserves for upcoming land acquisition proffers a positive outlook on the company’s future prospects.

ORL has aligned its strategy with the New Mumbai Development Plan as the low cost of land in conjunction with higher FSI will result in price correction and better sales velocity. The company’s consistent track record of timely delivery combined with the state government’s focus on developing world class infrastructure in Mumbai has engendered trust and confidence in consumers. By inculcating the principle of customer centricity, ORL has emerged as a producer of best-in-class projects with distinctive designs and functional aesthetics. Owing to these factors, plus the stock's very attractive valuation and positive financial trend, we recommend our reader-investors to BUY this stock.