Oberoi Realty. Oberoi Realty: Well-developed plot - Buy

The stock of Mumbai-based property developer, Oberoi Realty, has been on a roll despite the headwinds in the real-estate market. The company has been able to command better prices for properties in its residential segment. A diversified business mix has also helped it withstand the challenges in the real-estate sector. Now, with the segment slowly adjusting to structural reforms and consumer sentiments recovering, particularly in the residential segment, the company’s prospects look healthy.

Tapering down of the GST (Goods and Service Tax) impact may also aid the company’s sales growth. Further, new project launches are picking up as unsold inventories come down. In this regard, Oberoi Realty appears well-placed to gain from the favourable market conditions.

The company has a strong pipeline of projects coming up over the next two years in Mumbai, which would boost its revenue and profits.

Also, the favourable locations of its land parcels bode well for the company’s realisations, while selling or leasing out residential office spaces. Investors with a two to three-year perspective can buy this stock. At ₹489, it trades at a reasonable 17 times its likely per share earnings for FY-19.

The company develops and sells both residential and commercial properties. Strong brand recognition allows for premium pricing. Its financials are healthy with low debt equity levels and superior operating margins compared with peers.

Strong market presence

A chunk of the revenue — about 67 per cent — is contributed by the residential segment and it operates in premium and luxury housing space. Favourable locations, timely completion of projects and strong brand image indicate that the company has strong execution capabilities even during adverse market conditions.

To improve the sales volumes, the management has announced a subvention scheme for its large residential properties, Exquisite and Esquire. The management has indicated that it has received strong response for the scheme.

Despite offering discounts, the company has been able to retain its pricing power. The prices of Oberoi’s properties are still 30-40 per cent higher than that of other developers. So far, about 63 per cent of Esquire’s inventories and more than 91 per cent of Exquisite’s inventories have been booked.

As part of its strategy to improve market share and handle the increasing competition, the management is likely to launch this scheme for other projects as well.

With workplace-sharing becoming common among corporates and start-ups, the company has leased four floors (0.7 lakh sq ft) of its premium commercial development, Commerz II. This will take the occupancy level of the property to 63-64 per cent for the coming quarter (47.5 per cent in Q4 FY-18).

Diversified business

The office and hospitality segments contribute about 18 and 10 per cent respectively, to revenues. The lease rentals and hospitality business are relatively stable, with high monthly rentals and healthy occupancy. Currently, the company has four operational assets — Oberoi Mall, Commerz-I, Commerz II - Phase I and Westin Hotel.

The occupancy ratios of its Oberoi Mall and Westin Hotel were 99 per cent and 84 per cent respectively, while it was 82 per cent for Commerz-I and 47 per cent for Commerz II.

With the company’s strategy to drive sales volume, unsold inventory levels are coming down and new sales bookings for various projects such as Prisma, Eternia, Enigma and Sky City have picked up. It has several on-going projects in residential and hospitality segments.

The company plans to launch projects in the recently-acquired Thane land in September-October this year. Given the market condition in Thane, the company may end up developing mid-size apartments, as volumes are robust and project completions quicker.

Similarly, the company is likely to launch the third phase of projects in Goregaon during the festive period (Sep-Nov) this year along with the mall projects in Worli and Borivali.

The current rate for projects in Goregaon is around ₹17,000 per sq ft; Oberoi is likely to realise the same or even higher rates in the next three to four years when booking starts for its project.

The company expects the occupancy in Commerz II to increase to around 80 per cent. The mall projects in Worli and Borivali are likely to be launched by end-FY 19.

Stable financials

For FY-18, the company’s revenue and profit grew 10 per cent and 17 per cent respectively. Oberoi’s debt-equity ratio is fairly healthy, at 0.3 times.

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