Real Estate companies in India are going through a rough phase. There has been significant slowdown in demand and prices - the worst hit have been the ones which over-stretched themselves during the boom to buy land at lavish premiums, funded with debt. I think real estate business has huge potential in India, considering the demographics, low urbanization and rapidly increasing demand for residential and commercial space. The current slump would subside and sooner or later the growth in real estate sector is bound to happen, think it makes sense to invest in this space. After going through a number of listed real estate players, the one that captivated me the most is OBEROI REALTY.
This company is a Mumbai-centric developer with mainly 3 segments - residential, commercial and hospitality. It has a reputation for building quality projects and enjoys a good brand value in the market, for which its projects are often sold at premium compared to peers. Its promoters (not be confused with those of Oberoi Hotels) have a reputation of good corporate governance and clear vision. I have listed down some reasons which, according to me, make this stock a good buy.
a) Revenue mix - The company gets revenue of around 800 crores annually, of which rentals from its commercial properties account for roughly 160 crores, nearly 20%. This is interesting from an investor's point of view, considering the fact that the rental business enjoys EBITDA margins of whooping 99% !!! Practically every penny it gets from rental adds to its profit and can be assumed to be royalty payment which the company would keep on getting from properties it has invested in. The rentals (around 125/sq ft/month) have a fair chance of heading north, given the strong presence Oberoi Mall has in Goregaon/Malad area.
b) Good Margins - Oberoi Realty works with EBITDA margins of around 60% and PAT margins of 45% !! There are very few companies with market cap of 6,500 crores plus operating on such healthy margins. The hospitality business (which runs Westin) has the lowest margins of 30% (not bad at all for Hotels), otherwise the residential and rental business are highly profit-making. This gives an insight into the mindset of the management, which is more focused on quality than quantity and has restricted itself to few projects with good sell-ability rather than stretching itself and working on many projects with lower profitability.
c) Cash Reserves - Oberoi Realty is sitting on cash reserves of appx 1000 crores!! This is very important in current context when companies in similar business and same geography and in neck-deep trouble owing to high debt levels and have engaged in desperate asset sale to service their debt. It presents a great opportunity for the company which is now in a position to get a great bargain to purchase land, when there aren't many buyers and the prices are low. To just give an example, there were talks with HDIL to buy TDR (transfer of development rights) @2100/sq ft instead of 3000/sq ft, at which HDIL was already selling TDRs. This was due to the fact that HDIL was keen to bring down the debt levels and was ready to sell TDRs at below market value.
d) Good Valuations - At current market price of 185 and EPS of 15 on a trailing basis, P/E works out to be just 12, which I think makes it highly undervalued. For a company which has grown well in 5 years, maintained good margins, built quality projects and saved cash even in troubled times, the valuations are cheap. The cash reserves alone work out to be 30 per share, leave alone the investment properties of Oberoi Mall (6 lacs sq ft), Commerz I (4 lacs sq ft), Westin Hotel (4 lacs sq ft) and many more properties under construction (as well as land bank!). The share trades at 1.5x the book value of 125 and EV/EBITDA of 9x. I don't have the precise information, but I am sure the sum of parts valuation of the portfolio of Oberoi Realty's properties would yield the same conclusion, that is, the stock is fairly undervalued.
e) Upcoming Projects - Besides having a strong brand presence in the suburbs of Goregaon, Oberoi Realty is doing a big residential project of 1.5 million sq ft in the premium Worli area of Mumbai (has already constructed 20 plus floors till date). With projects lined up in Mulund and Pune as well, the company seems to be in no mood to leave any opportunity present in the current market conditions. It has great expectations from the Worli project, which would start contributing to its bottom line from next quarter. In a recent interview, the management said that they have already sold enough and just have to build more to realize profits.
A few negatives have contributed in keeping the share price depressed, some of them being:-
a) Poor performance in Q1FY14 - the company was able to sell just 48,000 sq ft residential area, equivalent to 23 flats, which was a huge disappointment compared to previous year's figure of 115,000 sq ft area. This reflects the kind of slump Mumbai's real estate players are going through.
b) The Mulund project has been delayed due to regulatory hurdles and environmental clearances and may pose a threat for the company in future.
c) The slowdown may be more prolonged than expected and the poor performance of last quarter, if repeats in coming quarters can adversely effect the valuations and fundamentals of the company.
Though the negatives pose risk for the company, it is relatively well shielded from major downside, unlike its peers. It doesn't have to worry about inflows, with rental income contributing well, it has good projects in hand and doesn't have to worry about bookings, has the capability to complete these projects with own capital, in case required bookings don't happen and can get bargain on land deals. Although it may be premature to say that the real estate sector is headed for a turn around immediately, I think the valuations, fundamentals and the sensibility and vision of management make Oberoi Realty a good bet. Investors with some appetite for risk and looking for a proxy for real estate play definitely stand a chance to earn good returns on their Investment.
This company is a Mumbai-centric developer with mainly 3 segments - residential, commercial and hospitality. It has a reputation for building quality projects and enjoys a good brand value in the market, for which its projects are often sold at premium compared to peers. Its promoters (not be confused with those of Oberoi Hotels) have a reputation of good corporate governance and clear vision. I have listed down some reasons which, according to me, make this stock a good buy.
a) Revenue mix - The company gets revenue of around 800 crores annually, of which rentals from its commercial properties account for roughly 160 crores, nearly 20%. This is interesting from an investor's point of view, considering the fact that the rental business enjoys EBITDA margins of whooping 99% !!! Practically every penny it gets from rental adds to its profit and can be assumed to be royalty payment which the company would keep on getting from properties it has invested in. The rentals (around 125/sq ft/month) have a fair chance of heading north, given the strong presence Oberoi Mall has in Goregaon/Malad area.
b) Good Margins - Oberoi Realty works with EBITDA margins of around 60% and PAT margins of 45% !! There are very few companies with market cap of 6,500 crores plus operating on such healthy margins. The hospitality business (which runs Westin) has the lowest margins of 30% (not bad at all for Hotels), otherwise the residential and rental business are highly profit-making. This gives an insight into the mindset of the management, which is more focused on quality than quantity and has restricted itself to few projects with good sell-ability rather than stretching itself and working on many projects with lower profitability.
c) Cash Reserves - Oberoi Realty is sitting on cash reserves of appx 1000 crores!! This is very important in current context when companies in similar business and same geography and in neck-deep trouble owing to high debt levels and have engaged in desperate asset sale to service their debt. It presents a great opportunity for the company which is now in a position to get a great bargain to purchase land, when there aren't many buyers and the prices are low. To just give an example, there were talks with HDIL to buy TDR (transfer of development rights) @2100/sq ft instead of 3000/sq ft, at which HDIL was already selling TDRs. This was due to the fact that HDIL was keen to bring down the debt levels and was ready to sell TDRs at below market value.
d) Good Valuations - At current market price of 185 and EPS of 15 on a trailing basis, P/E works out to be just 12, which I think makes it highly undervalued. For a company which has grown well in 5 years, maintained good margins, built quality projects and saved cash even in troubled times, the valuations are cheap. The cash reserves alone work out to be 30 per share, leave alone the investment properties of Oberoi Mall (6 lacs sq ft), Commerz I (4 lacs sq ft), Westin Hotel (4 lacs sq ft) and many more properties under construction (as well as land bank!). The share trades at 1.5x the book value of 125 and EV/EBITDA of 9x. I don't have the precise information, but I am sure the sum of parts valuation of the portfolio of Oberoi Realty's properties would yield the same conclusion, that is, the stock is fairly undervalued.
e) Upcoming Projects - Besides having a strong brand presence in the suburbs of Goregaon, Oberoi Realty is doing a big residential project of 1.5 million sq ft in the premium Worli area of Mumbai (has already constructed 20 plus floors till date). With projects lined up in Mulund and Pune as well, the company seems to be in no mood to leave any opportunity present in the current market conditions. It has great expectations from the Worli project, which would start contributing to its bottom line from next quarter. In a recent interview, the management said that they have already sold enough and just have to build more to realize profits.
A few negatives have contributed in keeping the share price depressed, some of them being:-
a) Poor performance in Q1FY14 - the company was able to sell just 48,000 sq ft residential area, equivalent to 23 flats, which was a huge disappointment compared to previous year's figure of 115,000 sq ft area. This reflects the kind of slump Mumbai's real estate players are going through.
b) The Mulund project has been delayed due to regulatory hurdles and environmental clearances and may pose a threat for the company in future.
c) The slowdown may be more prolonged than expected and the poor performance of last quarter, if repeats in coming quarters can adversely effect the valuations and fundamentals of the company.
Though the negatives pose risk for the company, it is relatively well shielded from major downside, unlike its peers. It doesn't have to worry about inflows, with rental income contributing well, it has good projects in hand and doesn't have to worry about bookings, has the capability to complete these projects with own capital, in case required bookings don't happen and can get bargain on land deals. Although it may be premature to say that the real estate sector is headed for a turn around immediately, I think the valuations, fundamentals and the sensibility and vision of management make Oberoi Realty a good bet. Investors with some appetite for risk and looking for a proxy for real estate play definitely stand a chance to earn good returns on their Investment.
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