Oberoi Realty - Review + Recommendations

[sunil]

Edwelweiss' Views on the Public Issue of Oberoi Realty,

We have factored in Oberoi’s cash flow from ~20 msf over 8-9 years and discounted it with WACC of 14%. Our NAV for the company stands at INR 91.7 bn or INR 279/share at the lower price band. Residential projects of ~12.3 msf account for ~51% of the company’s GAV, commercial/retail projects of 5.4 msf (including rent-yielding properties) 43% of GAV, with the balance accounted for by hospitality/social infrastructure projects. At the lower price band, the stock is available at 9% discount to NAV. We believe that the issue is fairly priced, taking into account the company’s current land bank. However, possible redeployment of cash for new land acquisitions may offer upsides to the NAV. We, therefore, recommend ‘SUBSCRIBE’ to the IPO at the lower price band, keeping in mind the long-term prospects.

[Amit Chand]

I am a newbie into stock markets and have 'heard' that IPO's are the fastest way to earn quick money. However, in this case I have reservations as realty has not been doing really great. Career Point has seen extreme appreciation whereas EROS was more or less on expected lines. Do you see a bullish trend in IPO's in the current quarter and would you suggest to subscribe if someone is looking at a 10-15% appreciation in Oberoi short term post listing?

[jatinrshah]

Oberoi Realty IPO looks slightly expensive: Udayan

Here is a verbatim transcript of Udayan Mukherjee’s comments on CNBC-TV18.

The business looks pretty okay because most of their land banks seem to be around Mumbai suburban area and the rates are very strong out there, demand is pretty good. So, their next few projects would be coming up in Goregaon. Andheri, Mulund and a sizeable project in Worli and all of those are fairly high demand area and rates are very firm. So, of the 20 million sq feet that they are bringing to the market over the next few years much of it is in the Mumbai suburban area, which the market should take a bit of a comfort from.

Has it totally being priced in? It is difficult to say because you can not map delivery schedules quite so easily for many of these projects which are coming up. Also, they will not be getting that much tax relief going forward. The kind of net profit margins they have today are very large, Oberoi Realty’s FY10 numbers. But even if you assume that they do something like Rs 650-700 crore of profit after tax (PAT), which is quite conceivable this year, on a Rs 8500 crore market cap that is about 12 or 13 times. Just talk about price earning multiples, the net asset value (NAV) business is crazy business, you do not want to get in to that because if you map real estate stocks only by NAV, you would have got things quite wrong in the past. So, simple cash flows what will they deliver in profits and what is the PE multiple. It seems reasonable enough for me.

There are four-five large Mumbai centric listed players in the space already. Relatively speaking is Oberoi more attractive or less attractive? That is a different ball game. But a lot of institutional guys who want a large chunk of a Mumbai player will probably be interested in Oberoi Realty. It might be slightly on the expensive side, but the business is quiet robust, so there should not be a major problem. Anyway real estate is a space as we were discussing a couple of days back, which is coming back into vogue. I think some of these stocks might be trading well below what their intrinsic values could be. But when the mood on a sector goes wrong as it did on real estate on after 2008, it takes a long while to come back from their skepticism.

[sunil]

Views of HDFC Sec on this IPO,

ORL has a strong position in the real estate business in Mumbai. ORL is highly experienced in real estate development in relatively resilient Mumbai with primary focus on the residential segment. The company has been able to establish a strong brand due to its quality of construction and execution track record. The promoter and the promoter group have developed 5.0 mn sq ft of real estate in 33 projects till now. Due to its strong branding, ORL has been able to command pricing premium over its competitors in most of the locations. The company has a strong project pipeline for the next four to five years in Mumbai and Pune.

The issue is priced fairly compared to its peers based on P/E, P/BV and D/E ratios. One can subscribe to the issue from a listing gains and medium term investment point of view. However investments in real estate stocks need to be reviewed at times (and profits taken out - atleast partly) based on the macro economic situation prevailing in the country and typically such stocks are high beta stocks  – they rise more than the broader indices and fall more than the indices.

[sunil]

Anand Rathi's Views on the IPO,

Debt to equity is almost zero with huge cash and cash equivalents of Rs. 482.5 crs as on June 2010. Experienced management with a brand name and
consistent track record of successfully executing all the residential projects on time.

Looking to the quality of the management and the Mumbai focus work of the company we expect company to perform well in the long term therefore
we recommend investors to SUBSCRIBE.

[sunil]

SBI Cap sEcurities Analyst Akshit Shah has the following View [One of the Major Indian Institutional Investor]

We have valued the company on NAV approach. While the ongoing projects are valued as per company’s guidance on completion dates, we have built in conservatism while valuing longer duration and still to commence projects. As per our post money valuation, the IPO is available at 11% - 13% discount at its price band of INR 253 – 260.

Though the valuation is relatively rich compared to the other listed players in the real estate industry, high visibility on company’s limited number of projects along with zero debt on the balance sheet should justify the premium. On conservative valuation, the stock looks fully valued and the upside is possible from the timely completion of the projects, increase in realizations and land acquisition through leveraging balance sheet. We recommend Subscribe with long term view.

[sunil]

Motilal Oswal Analys Siddarth Bothra has this recommendation for the Oberoi IPO

At the indicated price band of Rs253-260/share, ORL is attractively valued at 9.4-9.6x FY12E EPS of Rs27 and 2x FY12E BV of Rs128. We estimate ORL's post-IPO NAV (FY12) at Rs287/share. At the stated price band, the company would be valued at 9-12% discount to its NAV. We expect ORL to
witness to earnings CAGR of 42% till FY14 on the back of (1) strong pipeline, (2) reputed brand and execution skill, and (3) strong balancesheet. We expect ORL to trade at premium to NAV Subscribe.

[sunil]

Prabhudas Liladhar has the following View,

Company revenues have grown from Rs0.8bn in FY06 to Rs7.8bn in FY10, with strong EBITDA margins ranging between 44-60%. In the last three fiscals, profits have been above Rs2.5bn levels, with FY10 at Rs4.5bn. As per our rough-cut valuations, the company’s post-money NAV stands at Rs281/share. At the lower end of the band, the issue is priced at 10% discount to the NAV, while the upper end is at 7.5% discount. We recommend ‘Subscribe’.

[sunil]

Hemendra Shah and Sanket Shah of Sushil Finance has the following view,

Company revenues have grown from Rs0.8bn in FY06 to Rs7.8bn in FY10, with strong EBITDA margins ranging between 44-60%. In the last three fiscals, profits have been above Rs2.5bn levels, with FY10 at Rs4.5bn. As per our rough-cut valuations, the company’s post-money NAV stands at Rs281/share. At the lower end of the band, the issue is priced at 10% discount to the NAV, while the upper end is at 7.5% discount. We recommend ‘Subscribe’.

[sunil]

MF Global's Views on the IPO,

We believe that the company's strong presence in the Mumbai market with a good brand, well-diversified portfolio, and a premium quality product, assures a delivery of sustainable cash flows in the long term. In the short term though, ORL may face tough competition while positioning its offering in a highly competitive Mumbai realty space. At a lower price, the company's stock trades at 15x FY10E earnings. On the back of good cash flow visibility and no substantial debt, we rate the issue as a "Subscribe".

[sunil]

Unicon's Falgesh Sanghvi has a SUBSCRIBE Recommendation,

Post IPO, promoter holding will reduce to 78% from 89% currently. At the upper price band of INR 260, ORL is offered at 18.6x its FY10 earning (post IPO), while its peers having lower RoNW and higher debt are trading at higher multiples. Given the a) strong brand image b) successful track record of project completion on time with quality construction c) property development at prime location which makes sell easier d) no debt and higher liquidity to
fund its expansion plan and e) higher RoNW of ~24% (FY10), issue is attractively priced. Recommend SUBSCRIBE for long term capital appreciation.

[sunil]

Sharekhan's Views on the IPO,

At the price band of Rs253-260 per share, Oberoi is ttractively valued at 18.4-18.9x FY2010 diluted earning per share (EPS) and 2.9x its post diluted book value (BV). On a rough cut working, we arrive at a net asset value (NAV) of Rs275-290 per share which provides upside to the price band. In addition, IPO procceds would further add to the NAV

[sunil]

HSBC's Recommendation for the IPO, - Excerpts from the Full Report]

ORL has a strong brand image in the residential business across Mumbai with an access to niche segment of premium class customers in the upper income band group. Quality construction and superior designing enables the company to charge superior premium for its flats as compared to its peers and hence impacts the profitability. The management has not taken any aggressive steps till now which has proved expensive in nature makes it more significant play for the profitability and cash rich business. Diversification into hospitality sector would add to its revenue in the near term. The inherent risk of boom and bust in the real estate business and company's concentrated market presence are of concerns.

On the valuation front, at the upper price band of 260, at post issue FY10 EPS of 13.9, the P/E multiple will be 18.7x. At Book Value, the stock is priced at pre-issue P/B of 4.0x on its book value of 64.6. Post issue, the stock is priced P/B of 3.0x on its post issue book value of 88.

Although the stock looks bit expensive on valuation, it has higher earnings visibility, adequate business model and simplified ownership structure. This makes it a compelling BUY at current levels. So we would be suggesting the investors to subscribe the issue for long term gains.