BUY - breport.myiris.combreport.myiris.com/hdfc/OBEREALT_20151207.pdf · Goregaon/JVLR projects (achieve d over FY10-12). Competitive positioning: High land bank quality, superior

COMPANY UPDATE 07 DEC 2015

Oberoi Realty BUY

Towering ambition Over the past month, Oberoi Realty’s (OBER) share price has corrected over 9%. This, despite the successful launch of the Borivali project (~70%, 0.8mn sqft sold in a month), start of construction in Mulund, and the likely launch of Oasis Worli in 4QFY16E. OBER has defied investor concerns about a weak real estate market with the Borivali launch. We expect a positive surprise in the Worli pre-sales as well. With multiple launches (Mulund, Worli, Borivali and Goregaon) as new/subsequent phases, OBER is set to deliver horizontal and vertical growth.

While inquiries for leasing of Commerz-II have improved, they are not translating into numbers. OBER expects to lease out the entire 0.7mn sqft over the next year. Our channel checks indicate new leases will pick up during 4QFY16E. Maintain BUY. Upgrade SoTP-based TP to Rs 411/sh.

Key takeaways OBER’s pre-sales – minimal impact of macros:

OBER delivered strong pre-sales volume with big launches. While investors were concerned that the Mulund and Borivali projects would see a muted response owing to weak real estate macros, OBER surprised with robust sales. Within a month, ~70% of the launch area was sold vs. ~50% for the Goregaon/JVLR projects (achieved over FY10-12).

Competitive positioning: High land bank quality, superior brand recall and healthy access to finance put OBER in the top quartile vs. Western peers.

Annuity assets buffer volatile devco value: OBER operates a well-balanced business model, with residential (devco) and commercial (rentco) segments contributing 60% and 40% to our NAV, respectively. In case of a slowdown in residential sales, cash flows from commercial projects lend visibility to earnings.

FY15-18E revenue/EBIDTA/PAT to outpace peers: With strong pre-sales backlog, we forecast OBER’s FY15-18E revenue/EBIDTA/PAT CAGR at 48.7/52.3/59.2%. With higher visibility on these numbers, re-rating is likely.

We have upgraded OBER’s SoTP to Rs 411/sh (vs. Rs 339/sh earlier). Our NAV increase is primarily on account of (1) Incorporating present value of advances given to Oasis Worli for construction (Rs 17/sh), (2) Rolling forward our NAV to FY17E, and (3) Increase in our base property price assumptions by 0-5%, in line with current prices for the Mulund and Borivali projects.

Financial Summary (Rs mn)* FY15 FY16E FY17E FY18E Net Sales 9,227 13,731 21,781 30,378 EBITDA 5,138 8,029 13,079 18,143 APAT 3,171 5,173 8,799 12,785 Diluted EPS (Rs) 9.3 15.2 25.9 37.7 P/E (x) 27.4 16.8 9.9 6.8 EV / EBITDA (x) 18.1 10.7 6.1 4.0 RoE (%) 7.0 10.3 15.0 18.6 Source: Company, HDFC sec Inst Research, * Consolidated

INDUSTRY REAL ESTATE

CMP (as on 7 Dec 2015) Rs 256

Target Price Rs 411

Nifty 7,765

Sensex 25,530

KEY STOCK DATA

Bloomberg OBER IN

No. of Shares (mn) 339

MCap (Rs bn) / ($ mn) 87/1,307

6m avg traded value (Rs mn) 64

STOCK PERFORMANCE (%)

52 Week high / low Rs 334/209

3M 6M 12M

Absolute (%) 19.2 (11.7) (5.9)

Relative (%) 16.6 (7.1) 4.4

SHAREHOLDING PATTERN (%)

Promoters 72.56

FIs & Local MFs 0.90

FIIs 21.20

Public & Others 5.34

Source : BSE

Parikshit Kandpal [email protected] +91-22-6171-7317

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

OBEROI REALTY : COMPANY UPDATE

Investment rationale OBER tastes success with Mulund, Borivali in a slow market

The Mumbai Metropolitan Region (MMR) has about 45 months of unsold inventory. While the high residential inventory is attributed to unaffordable property prices, we believe new launches provide an attractive entry point, as they are 15-20% lower than completed projects.

With new launches in Mumbai gaining momentum over the past quarter, sales volume, too, has picked up. This has resulted in 3QFY16E being one of the best quarters for the sector in recent times.

OBER encashed its brand with the Borivali launch. Fence-sitters appreciated the strategy of opening all the floors in the building at the launch price, which is quite unlike OBER. The Mulund and

Goregaon projects are being opened floor-wise. The strategic shift played out well as buyers saw value in higher floors being made available at the launch price.

Other factors that influenced strong sales were (1) Limited gated community projects in Borivali, (2) Proximity to the Western Express Highway, and (3) Inroads by a reputed brand at marginal premium of 0-5% to current market prices.

OBER has right-sized this project with compact 3BHK, studio and 3BHK grande combination (20% of total flats).

The base price was fixed at ~Rs 13,000/sqft, in line with current prices.

S.NO. Developer Project Name Location Oct-14 Saleable

Rate (Rs/sf) Oct-13 Saleable

Rate (Rs/sf) Price Change

(%) Possession

1 Acme Group Acme Oasis Kandivali (E) 13,500 10,500 28.6 Dec-17 2 Acme Group Acme Avenue Kandivali (W) 10,900 9,500 14.7 Dec-16 3 Ajmera Realty Ajmera Pristine Borivali (W) 14,040 11,700 20.0 Mar-16 4 Ekta Group Bhoomi Garden III Borivali (E) 13,000 11,000 18.2 RFP 5 Rajesh Lifespaces White City Kandivali (E) 12,200 11,700 4.3 Dec-17 6 Sunteck Realty Signia High Kandivali (E) 13,500 New launch NA Mar-18 7 Oberoi Realty Not Named Borivali (W) 13,000 Launch: Oct-15

Jun-19

Average 12,857

Source: Company, HDFC sec Inst Research

OBER’s Projects Have Yielded Better Returns Than Peers Average Price CAGR % 1 yr 2 yr 3 Yr 4 yr Oberoi Exquisite (Goregaon) 7.5 15.7 16.6 16.7 Oberoi Esquire (Goregaon) 3.2 7.3 14.1 11.7 Oberoi Splendor (JVLR) 14.0 14.0 24.7 NA Average Mumbai 2.9 6.2 6.6 9.2 Source: Liases Foras, HDFC sec Inst Research

Despite weak real estate macros, OBER has tasted success with the Mulund and Borivali launches ~70% of launch area in Borivali (0.8mn sqft) was sold in a month. A total of 1.2mn sqft was launched in Oct-15 OBER’s projects have given superior appreciation vs. average Mumbai project appreciation. Average outperformance CAGR is ~7%. This is also a key factor driving sales

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Minimal impact of underlying macros

FY10-12: OBER launched ~3.1mn sqft in Goregaon and ~0.9mn sqft in JVLR. The sales cycle was long as it took two years to sell about 40% of the inventory in Goregaon and 67% in JVLR.

FY12-14: Lack of new launches hit pre-sales, while legacy projects with limited flat options resulted in sharp slowdown in off-take.

FY15-16E: There was pickup in new launches with sharper sales velocity. About 70% of Oberoi’s Mulund and Borivali projects, with a cumulative launch area of 2.2mn sqft, were absorbed within a month. The strong pre-sales defied the weak underlying real estate macros. OBER’s FY15 pre-sales volume returned to about ~1mn sqft average, largely driven by Mulund. For, FY16E the Borivali project will be a key volume driver.

FY17-18E: Pre-sales will be diversified across different micro-markets and projects. Opening up of higher floors in the Mulund project, launch of the Goregaon Phase III (2.2mn sqft) and a subsequent phase at Borivali will be the key pre-sales drivers for OBER.

Worli, Exquisite and residual area in Esquire (JVLR) will be revenue drivers over the FY17-18E period. Borivali and Mulund will boost revenue in FY17E and FY18E, respectively.

Barring the time when there were no new launches, Oberoi’s strong pre-sales record indicates that it is well placed to gain market share in a weak market, maintain price premium in a stable market and improve sales velocity in ready-to-move-in/ultra luxury projects in a positively trending market. Though Oasis Worli will be the acid test for the company.

Pre-sales Trend Project Name FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Goregaon - Garden City 0.5 0.6 0.5 0.4 0.2 0.2 0.1 0.9 0.4 JVLR - Prisma, Maxima 0.5 0.1 0.2 0.1 - 0.1 0.1 0.1 0.1 Worli - Oasis Residential - - - - 0.1 -

0.1 0.1

Mulund - Exotica

0.7 0.1 0.4 0.4 Oberoi Borivali

- 1.0 0.3 0.8

Area sold (mn sqft) 1.0 0.7 0.7 0.5 0.3 1.0 1.2 1.8 1.8 Source: Company, HDFC sec Inst Research

OBER has delivered strong pre-sales in years loaded with new launches We expect pre-sales to average about ~1.6mn sqft over FY16-18E

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Project Area (mn

sqft)

Area sold as of 2QFY16

(mn sqft)

Inventory as of 2QFY16

(mn sqft)

Sales Value (Rs mn)

Avg. realisation

(Rs/sqft)

PoCM (%)

Balance revenues to be recognised

(Rs mn)

Cash to be received (Rs mn)

Oberoi Esquire* 1.5 1.1 0.4 14,732 13,739 <20% 14,732 5,555 Oberoi Exquisite* 1.5 1.3 0.3 20,275 15,717 100%

766

Oberoi Oasis$ 1.8 0.1 1.7 3,824 28,563 <20% 3,824 1,228 Oberoi Priviera@ 0.0 0.0 0.0 592 62,947 100% 0

Oberoi Prisma^ 0.3 0.1 0.2 2,045 17,694 41% 1,202 1,039 Oberoi Eternia& 0.6 0.4 0.2 6,249 14,756 <20% 6,249 4,451 Oberoi Enigma& 0.5 0.3 0.2 4,087 14,654 <20% 4,087 3,264 Total 6.3 3.4 2.9 52,305 15,579

19,757 16,303

Source: Company, HDFC sec Inst Research * Goregaon, $ Worli, @ Khar, ^JVLR, &Mulund

OBER has Rs 19.7bn of revenues yet to be recognised and Rs 16.3bn of cash to be collected from existing pre-sales

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Enjoying a dominant competitive positioning

OBER is best placed amongst its Western peers on account of its superior land bank quality, access to finance, healthy balance sheet and high potential for successful foray in newer markets.

The micro factors are supported by strong execution, quality construction and management bandwidth. We highlight our findings in the exhibit below to arrive at an overall competitive positioning.

Overall Competitive Positioning Of Real Estate Developers

Macro* competitive

- 30% weight

Business$ competitive

- 25% weight

Land bank & pricing -

20% weight

Balance sheet

positioning - 25%

weight

Overall Comments

Oberoi

Top quartile with minimal net debt, higher return ratios and strong cash flows

Godrej

A top quartile on macro competitive while mid-quartile on all other parameters. High leverage is the key overhang. We rate it mid-quartile

HDIL

Middling in all parameters

Hiranandani

Overall a mid-quartile

Raheja

Middling in all parameters

Sunteck

Overall a mid-quartile on back of low leverage, high return ratios

Wadhwa

Overall a mid-quartile

Kolte Patil

Mid-quartile on all parameters Source: Company, HDFC sec Inst Research , *Macro – affordability, brand; $Businesss Competitive – Execution, vendor tie-up, construction quality

On overall competitive positioning, we find that the top real estate players in the Western markets are Oberoi, Godrej, Sunteck and Kolte Patil. OBER, with the right mix of attractive land bank, superior execution capability, branding, balance sheet

strength and underlying business fundamentals, remains best poised amongst its peers.

Although their scores differ on these factors, we see limited differentiation on an overall basis.

Healthy balance sheet, superior land bank and strong execution capability places OBER in top quartile vs. peers

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Change in Estimates

Rs mn FY16E FY17E

Comments Old New Change % Old New Change %

Operating income 17,773 13,731 (22.7) 22,280 21,781 (2.2) Revenue decline largely on slow sales in Exquisite and delay in Esquire revenue recognition

% growth 92.6 48.8

25.4 58.6 0.0

Operating expenditure 8,076 5,702 (29.4) 9,751 8,702 (10.8)

Higher-than-revenue change as Worli project has high margins ~70%+ and gross profit will be recognised as OBER’s revenue

EBITDA 9,696 8,029 (17.2) 12,528 13,079 4.4

EBIDTA Margin (%) 54.6 58.5 391.6bps 56.2 60.0 381.7bps Margin expansion owing to Oasis Worli project hitting revenue recognition during 2HFY17E

Depreciation 631 505 (20.0) 575 575 0.0 Depreciation change in line with 1HFY16

EBIT 9,065 7,524 (17.0) 11,954 12,505 4.6

Interest expenditure 19 19

2 2

Largely stable

Other income 207.6 281.5 35.6 526.0 614.1 16.7 Increase owing to higher cash on book

PBT 9,255 7,787 (15.9) 12,478 13,117 5.1

Tax 3,298 2,614 (20.8) 4,390 4,318 (1.6)

Adjusted PAT before minority 5,956 5,173 (13.1) 8,087 8,799 8.8 Margins expansion and higher other income to result in positive net profit variation during FY17E

PAT Margin (%) 33.5 37.7 416.5bps 36.3 40.4 409.8bps


Cut in revenue estimate largely on slow sales in Exquisite and delay in Esquire revenue recognition Margin expansion owing to Oasis Worli project hitting revenue recognition during 2HFY17E

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Key assumptions and estimates Summary Of Key Assumptions And Estimates

Estimates Growth (%) Comments FY16E FY17E FY18E FY16E FY17E FY18E

Volume assumptions

Residential (mn sqft) 1.2 1.8 1.7 18.8 47.9 (7.4) Strong volume growth contributed by Goregaon, Mulund and Borivali launches, which have a total saleable area of ~10mn sqft

Average rate (Rs/sqft) 14,284 18,448 17,248 (16.5) 29.2 (6.5) With high unaffordability and new supply, we expect the realisation to remain muted. FY17E price growth owing to change in product mix

Pre Sales value (Rs mn) 17,551 33,526 29,026 (0.8) 91.0 (13.4) 17.9% FY15-18E sales CAGR largely contributed by new launches

Rental Income

Area for lease (msf) 1.9 1.9 1.9 15.2 - - Addition of Commerz-II results in increased leasable area

Average occupancy (%) 67.4 76.7 88.4 1,503 933 1,167 Occupancy to gradually pick up during FY17E owing to slower leasing momentum in Commerz - II

Average Rental (Rs/sqft/month)

140 144 151 (1.3) 2.3 5.0 Lease rentals growth to be muted, new lease rentals to be in line with re-negotiated lease rentals

Rental income (Rs mn) 1,665 2,004 2,925 13.4 20.3 46.0 25.8% FY15-18E lease rentals revenue CAGR on back of incremental leasing in Commerz- II

Earnings forecast

Sales real estate (Rs mn) 10,827 18,488 25,186 65.5 70.8 36.2 56.7% revenue CAGR for FY15-18E. FY16E - Esquire key driver, FY17E - Worli & Mulund, FY18E - Borivali key revenue driver

Income from hospitality 1,239 1,289 2,266 1.8 4.1 75.8 Addition of Worli hotel to drive 23% FY15-18E income CAGR

Annuity assets 1,665 2,004 2,925 13.4 20.3 46.0 Mix of volume and lease rental renewal to drive 25.8% FY15-18E income CAGR. Commerz-II lease pickup key volume driver

Total 13,731 21,781 30,378 48.8 58.6 39.5 48.7% revenue CAGR for FY15-18E EBIDTA (Rs mn) 8,029 13,079 18,143 56.3 62.9 38.7 52.3% CAGR for FY15-18E

EBIDTA Margin (%) 58.5 60.0 59.7 279.0 157.5 (32.4) Margin expansion during FY16E as Exquisite higher floor start contributing to revenues with better realization, FY17E expansion owing to Worli

Net interest expense* 19 2 2 5.1 (90.5) -

PAT (Rs mn) 5,173 8,799 12,785 63.1 70.1 45.3 59.2% CAGR for FY15-18E Source: Company, HDFC sec Inst Research

We expect OBER to deliver 17.9% pre-sales CAGR over FY15-18E. Realisation to remain muted Esquire to hit revenue recognition during 3QFY16E, Worli/Mulund in 2HFY17E and Borivali in FY18E We have estimated 59.2% EPS CAGR over FY15-17E

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Cash flows forecast

Rs mn Estimates

Comments FY16E FY17E FY18E

Cash flows forecast

CFO ( a) 5,693 7,647 8,008 CFI – (b) (1,863) (523) 450 FCF (a+b) 3,830 7,124 8,457 Free cash flow to remain strong CFF (c) (2,076) 468 (750) Total change in cash (a+b+c) 1,754 7,592 7,708


HDFC sec vs. consensus Consensus HDFC Sec % Divergence Sales (Rs mn) FY16E 16,502 13,731 (16.8) FY17E 24,622 21,781 (11.5) FY18E 35,613 30,378 (14.7) EBITDA (Rs mn) FY16E 9,545 8,029 (15.9) FY17E 14,022 13,079 (6.7) FY18E 19,940 18,143 (9.0) Net Profit (Rs mn) FY16E 6,175 5,173 (16.2) FY17E 9,217 8,799 (4.5) FY18E 13,349 12,785 (4.2) Source: Bloomberg, HDFC sec Inst Research

For FY16/FY17/FY18E, our net profit numbers are sub-consensus. Consensus is expecting faster sales velocity in key projects, which are expected to hit revenue recognition. Esquire and Worli will have longish sales cycles while Mulund and Borivali will have an initial boost and then revenue recognition will stabilise.

After initial revenue recognition, most of these projects will see significant progress. Although they may not be near completion anytime soon. Buyers will decide to wait for the projects to complete, rather than bearing EMIs.

Our EBITDA margin forecast is higher than consensus. Our higher margin estimates are attributable to (1) Worli revenue contribution from FY17E with higher average realisation vs. current basket, (2) Pickup in Commerz-II leasing, with high EBIDTA margins, and (3) Contribution from Exquisite/Esquire projects that have high realisations. Net profit estimates cut lower than EBIDTA cut due to higher other income estimate vs. consensus.

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Valuation: Increase NAV to Rs 411/sh SoTP Valuation

We have adopted the DCF methodology to arrive at OBER’s NAV. We value the residential real estate business at Rs 209/sh, hotels at Rs 25/sh, commercial annuity assets at Rs 110/sh, social infrastructure at Rs 9/sh, other assets at Rs 37/sh and net debt at (Rs 21) to arrive at the total SoTP valuation of Rs 411/sh (previous NAV Rs 339/sh). We don’t assign any NAV discount to OBER as we have only valued the projects that have visibility over the next five years. For land bank beyond that period, we ascribe 1x P/BV for invested equity.

Our NAV increase is primarily on account of (1) Incorporating present value of advances given to Oasis Worli for construction (Rs 17/sh). Rs 10.1bn of advances are attributable to construction of which we have attributed PV of Rs 5.8bn, (2) Rolling forward our NAV to FY17E, and (3) Increase

in our base property prices assumption by 0-5%, in line with current launch prices for Mulund and Borivali projects.

We were hitherto not valuing Glaxo Worli and advances given by OBER to Oasis Worli. We have now incorporated these as (1) Oasis Worli will be launched in 4QFY16E and advances will be returned to OBER. This will reflect in higher net cash levels that will impact valuation positively, (2) There is some visibility emerging around Glaxo Worli; we estimate about ~0.6mn sqft of residential saleable area or ~1.6mn sqft of commercial area. A final call is awaited. A major portion of the Rs 32/sh increase in NAV is on account of the Glaxo Worli project being incorporated in SoTP and construction advance for Oasis Worli.

Sum Of The Parts

Rs mn New New

(Rs/share) Old

(Rs/share) Change

(Rs/share) Comments

Gross NAV Residential

70,756 209

192 17 DCF-based NAV. Rs 17/share change on account of (1) rolling forward NAV estimate to FY17E, and (2) increase in base price by 1-5%, in line with current prevailing prices

Gross NAV Hotels 8,348 25 22 3 8x FY17E EV/EBIDTA Gross NAV Commercial

37,353 110 107 3 DCF-based NAV

Social Infra 3,134 9 9 0 Discounting at 11% cap rate viz. school, hospital etc

Other Assets 12,701 37 5 32 Worli Glaxo land value discounted at 14% Rs 5.1bn, Oasis Worli advances of Rs 10.5bn valued at Rs 5.8bn. Investments in other projects at 1x P/BV, viz. Sangam city, Juhu hotel etc.

Less: Net Debt (7,283) (21) (3) -18 Net debt end FY17E NAV 139,576 411 339 73


Location Gross NAV

(Rs mn) Rs/

Share Residential

Goregaon 19,103 56

JVLR 3,128 9 Worli - Residential

10,616 31

Mulund 15,768 46

Borivali 22,142 65 Total Residential

70,756 209

Hotels

Westin Hotel 5,223 15

Worli Hotel 3,125 9

Total Hotel 8,348 25

Commercial

Commerz-All Phases

24,855 71

Oberoi Mall 8,753 26 Worli Commercial

3,745 11

Total Commercial

37,353 110

Grand Total 116,458 343 Source: Company, HDFC sec Inst Research

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Real estate development: NAV calculation methodology

We have divided OBER’s entire land bank into residential/commercial projects (based on the information given by the company).

We have arrived at the sale price/sqft and the anticipated sales volumes for each project based on our discussions with industry experts.

We have deducted the cost of construction based on our assumed cost estimates, which have been arrived on after discussions with the experts.

We have further deducted marketing and other costs, which have been assumed at 5% of the sales revenue.

We have then deducted income tax based on the tax applicable for the project.

The resultant cash inflow at the project level have been discounted based on WACC of 14% (cost of equity 14% based on beta of 1x & debt/equity ratio of 0.2x). All the project-level NAVs have been summed up to arrive at the final value of the company.

For commercial office, we have discounted rentals using 14% WACC for the forecasted period and terminal value using the cap rate of 11%.

Social infrastructure created by OBER viz. school, hospital, etc, have been discounted using a cap rate of 11%.

Other assets have been valued at 1x P/BV of invested equity.

From the NAV, we have deducted the net debt as of FY17E to arrive at the final valuation of the company.

Key valuation assumptions

In the exhibit below, we highlight our sales and cost inflation forecasts. We expect property prices to appreciate in line with WPI inflation, i.e. 5%, and cost of construction to grow at 6%. We forecast other costs including marketing, SGA and employee cost at 5% of sales.

Base Case Assumptions (%) Discount rate 14 Annual rate of inflation-sales price 5 Annual rate of inflation-cost of construction 6 Other costs – marketing, SGA, employee cost (as % of sales)

5

Tax rate (%) 33 Source: Company, HDFC sec Inst Research

In the exhibit below, we highlight our sale price and construction cost forecasts. Our pricing assumptions are moderate and at a 0-5% premium to the current prevailing prices on account of OBER’s 15-20% brand premium vs peer.

Base Property Price And Construction Cost Assumptions

Location Prices

Rs/sq ft Cost

Rs/sq ft

Goregaon 15,000 5,500 Worli 35,000 8,500 Mulund 12,500 5,000 JVLR 15,000 5,000 Borivali 11,500 4,500


Our base property price assumption is at a 0-5% premium to the current prevailing prices on account of OBER’s brand pull

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NAV sensitivity analysis

Sensitivity to our assumption of property price

Our model is sensitive to changes in the assumptions regarding property prices. For every 1% change in the base property prices, the NAV will change by approximately 3.1%.

NAV Sensitivity To Change In Average Sale Price % change in sale price

(10) (5) 0 5 10

NAV/share (Rs) 284 348 411 475 538 Change in NAV (%) (31.0) (15.5) - 15.4 30.9 Source: Company, HDFC sec Inst Research

Sensitivity of NAV to changes in sale inflation

In our base case, we have assumed annual sale price inflation of 5%. For every 100bps increase in the annual sale price inflation, the NAV will increase by approximately 5.3%.

NAV Sensitivity To Change In Sales Inflation Sales inflation rates (%)

3 4 5 6 7

NAV/share (Rs) 373 390 411 433 450 Change in NAV (%) (9.4) (5.1) - 5.3 9.5 Source: Company, HDFC sec Inst Research

Sensitivity of NAV to changes in cost inflation

In our base case, we have assumed cost inflation to be 6%. For every 100bps increase in construction cost inflation, the NAV will change by approximately 2.9%.

NAV Sensitivity To Change In Cost Inflation Cost inflation rates (%) 4 5 6 7 8 NAV/share (Rs) 434 422 411 400 387 Change in NAV (%) 5.5 2.7 - (2.9) (5.9) Source: Company, HDFC sec Inst Research

The combined impact of a 100bps increase in sale price inflation and cost inflation will be a NAV increase of 2.4%.

Sensitivity of NAV to changes in discount rate

In our base case, we have assumed a discount rate of 14%. For every 100bps increase in the discount rate, the NAV will fall by 4.9%.

NAV Sensitivity To Change In WACC WACC rates (%) 12 13 14 15 16 NAV/share (Rs) 454 431 411 392 369 Change in NAV (%) 10.4 4.9 - (4.7) (10.3) Source: Company, HDFC sec Inst Research

1% increase in average base sale price impacts our NAV positively by 3.1% Every 100bps increase in sale price inflation impacts our NAV positively by 5.3% 100bps increase in cost inputs decreases our NAV by 2.9% 100bps increase in discounting rate impacts our NAV negatively by 4.7%

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Key catalysts

Success of Worli launch and subsequent phases of Mulund, Borivali, pick up in Commerz-II leasing

OBER sold ~0.7mn sqft in Mulund (vs. 1mn sqft of launch) and ~0.8mn sqft in Borivali (vs 1.2mn sqft of launch) in a weak market. Strong brand value, timely completion and gated community living were key factors for the success. The market has high expectation from OBER’s Oasis Worli launch and sales velocity will trigger re-rating. OBER needs to sell 50 flats (25% of inventory, incremental sale of 36 flats as 14 are already transferred from Glaxo Worli) to book revenues. The company’s residential segment pickup over the past two quarters has lead to a partial re-rating. Oberoi will witness a dream run if Oasis/subsequent phases of launched projects do well. . Besides, Commerz-II may see further client lease area signup during 4QFY16E. This alleviated rental income growth concerns.

Change in product mix may surprise margins

OBER has historically delivered 55-60% EBIDTA margins on back of low historical land bank cost, higher-than-average market realisation and increasing contribution from annuity assets. With the Worli revenues hitting P&L and incremental contribution from unsold inventory in Exquisite, blended margins may surprise positively. The only dampener will be the revenue recognition from earlier tranche of units sold in Esquire, which were at lower realisations. Hence, margin recovery is contingent on sales velocity in Exquisite and the Worli projects.

Further growth opportunities

From being regional to top-8 cities realty player, aspiration is driving the domestic real estate companies to diversify. While we believe that the pan-India theme has its own challenges, we expect OBER to gain 10-15% sales volume from new markets (similar to Sobha’s volume contribution from NCR) on back of its strong brand recall replication. This may happen with an asset light strategy of entering into joint development agreement with land owners.

Key risks to our BUY stance

Correction in property prices

Western markets have 45 months of unsold inventory and current property prices have crossed previous highs. While OBER is focused on premium residential developments and has been sticky on holding prices, any correction may be detrimental to our valuation assumptions. For every 1% correction in base residential prices, our NAV estimate for OBER will be negatively impacted by 3.1%.

More effort needed for land bank replenishment

OBER has cautiously approached land acquisition and this has been one of the thorny issues with investors. With the acquisition of the Borivali land, Oberoi mitigated some of these concerns and also assumed debt of ~Rs7bn to part finance the purchase. Going forward, with a robust launch pipeline, the company needs to replenish its land bank inventory and any major delays may impact future revenue visibility.

Success of the Worli launch will be a key catalyst for OBER’s re-rating. OBER has received about 50 inquiries for the project Depending on sales velocity, Oasis Worli project will hit revenue recognition during 2HFY17E. The EBIDTA margins will be about ~70%+. This may lead to margins outperformance Land bank replenishment and correction in property prices remain key risks to our BUY stance

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Income Statement (Consolidated) Y/E March (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Sales 7,985 9,227 13,731 21,781 30,378 Growth (%) (23.8) 15.6 48.8 58.6 39.5 Material Expenses 2,897 3,148 4,741 7,449 11,020 Employee Expenses 442 527 618 762 759 Other Operating Expenses 298 414 343 490 456 EBIDTA 4,348 5,138 8,029 13,079 18,143 EBIDTA (%) 54.5 55.7 58.5 60.0 59.7 EBIDTA Growth (%) (29.0) 18.2 56.3 62.9 38.7 Other Income 571 175 281 614 900 Depreciation 272 403 505 575 619 EBIT 4,647 4,910 7,806 13,119 18,424 Interest 3 18 19 2 2 PBT 4,644 4,892 7,787 13,117 18,422 Tax 1,533 1,721 2,614 4,318 5,637 PAT 3,111 3,171 5,173 8,799 12,785 Minority Interest - - - - - EO items (net of tax) 0 0 0 0 0 APAT 3,111 3,171 5,173 8,799 12,785 APAT Growth (%) (38.4) 1.9 63.1 70.1 45.3 EPS 9.2 9.3 15.2 25.9 37.7 EPS Growth (%) (38.4) 1.9 63.1 70.1 45.3 Source: Company, HDFC sec Inst Research

Balance Sheet (Consolidated) Y/E March (Rs mn) FY14 FY15 FY16E FY17E FY18E SOURCES OF FUNDS

Share Capital 3,282 3,284 3,394 3,394 3,394 Reserves 40,682 43,060 51,065 59,349 71,386 Total Shareholders’ Funds 43,964 46,344 54,459 62,743 74,780 Minority Interest - - - - - Long-term Debt 761 9,016 4,016 5,000 5,000 Short-term Debt - - - - - Total Debt 761 9,016 4,016 5,000 5,000 Deferred Taxes 220 242 242 242 242 Long-term Provisions & Others - - - - - TOTAL SOURCES OF FUNDS 44,944 55,602 58,717 67,985 80,022 APPLICATION OF FUNDS

Net Block 6,658 10,148 11,393 12,568 12,400 CWIP 4,337 218 613 - - Goodwill 2,654 2,654 2,654 2,654 2,654 Investments, LT Loans & Advs 496 0.1 0.1 0.1 0 Inventories 16,491 34,817 35,943 35,565 39,476 Debtors 862 828 1,129 1,541 2,323 Cash & Equivalents 4,997 2,937 4,691 12,282 19,990 ST Loans & Advances, Others 18,375 19,598 20,798 22,298 23,748 Total Current Assets 40,725 58,180 62,560 71,685 85,536 Creditors 9,138 14,758 17,593 17,945 19,521 Other Current Liabilities & Provns 789 841 909 978 1,047 Total Current Liabilities 9,926 15,599 18,503 18,923 20,568 Net Current Assets 30,799 42,582 44,057 52,763 64,968 Misc Expenses & Others - 1 0 - TOTAL APPLICATION OF FUNDS 44,944 55,602 58,717 67,985 80,022 Source: Company, HDFC sec Inst Research

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Cash Flow (Consolidated) Y/E March (Rs mn) FY14 FY15 FY16E FY17E FY18E PBT before minority 4,644 4,892 7,787 13,117 18,422 Non-operating income & EO items (578) (178) (281) (614) (900) Taxes (1,412) (1,531) (2,614) (4,318) (5,637) Interest expenses 1 870 19 2 2 Depreciation 272 403 505 575 619 Working Capital Change (8,100) (14,170) 278 (1,114) (4,498) OPERATING CASH FLOW ( a ) (5,173) (9,712) 5,693 7,647 8,008 Capex (482) 360 (2,145) (1,138) (450) Free cash flow (FCF) (5,655) (9,352) 3,549 6,510 7,558 Investments 88 45 0 0 0 Others 7,542 -955 281 614 900 INVESTING CASH FLOW ( b ) 7,149 (551) (1,863) (523) 450 Share capital Issuance 0 1 3,245 0 0 Debt Issuance 761 8,255 (5,000) 984 0 Interest expenses (0) (552) (19) (2) (2) Dividend (768) (768) (303) (515) (748) FINANCING CASH FLOW ( c ) (8) 6,936 (2,076) 468 (750) NET CASH FLOW (a+b+c) 1,968 (3,327) 1,754 7,592 7,708 Non-operating and EO items - - - - - Closing Cash & Equivalents 12,693 1,616 4,691 12,282 19,990 Source: Company, HDFC sec Inst Research

Key Ratios (Consolidated) FY14 FY15 FY16E FY17E FY18E PROFITABILITY (%)

GPM 63.7 65.9 65.5 65.8 63.7 EBITDA Margin 54.5 55.7 58.5 60.0 59.7 APAT Margin 39.0 34.4 37.7 40.4 42.1 RoE 7.3 7.0 10.3 15.0 18.6 Core RoCE 10.8 9.8 13.7 20.7 24.9 RoCE 10.8 9.8 13.7 20.7 24.9 EFFICIENCY

Tax Rate (%) 33.0 35.2 33.6 32.9 30.6 Asset Turnover (x) 0.2 0.2 0.2 0.3 0.4 Inventory (days) 661 1,015 940 599 451 Debtors (days) 32 33 26 22 23 Payables (days) 445 473 430 298 225 Cash Conversion Cycle (days) 248 576 537 324 249 Debt/EBITDA (x) 0.2 1.8 0.5 0.4 0.3 Net D/E (1.0) 1.2 (0.1) (0.6) (0.8) Interest Coverage 1,499 279 422 7,462 10,480 PER SHARE DATA EPS (Rs/sh) 9.2 9.3 15.2 25.9 37.7 CEPS (Rs/sh) 10.0 10.5 16.7 27.6 39.5 DPS (Rs/sh) 2.3 2.3 0.8 1.3 1.9 BV (Rs/sh) 129.6 136.6 160.5 184.9 220.4 VALUATION P/E 27.9 27.4 16.8 9.9 6.8 P/BV 2.0 1.9 1.6 1.4 1.2 EV/EBITDA 19.0 18.1 10.7 6.1 4.0 OCF/EV (%) (0.1) (0.1) 0.1 0.1 0.1 FCF/EV (%) (6.8) (10.1) 4.1 8.2 10.5 Dividend Yield (%) 0.9 0.9 0.3 0.5 0.7


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Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 12-Jan-15 269 BUY 328 19-Jan-15 269 BUY 328 29-Jul-15 260 BUY 339 3-Nov-15 282 BUY 339 7-Dec-15 256 BUY 411

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Oberoi Realty TP

RECOMMENDATION HISTORY

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BUY - breport.myiris.combreport.myiris.com/hdfc/OBEREALT_20151207.pdf · Goregaon/JVLR projects (achieve d over FY10-12). Competitive positioning: High land bank quality, superior