Initiating Coverage SECTOR: REAL ESTATE Oberoi Realty Premium brand Improved RoA, RoE High quality land bank Integrated development Lower credit 33% EPS CAGR Strong monetization visibility Multiple revenue streams cost Higher productivity Robust loan growth Premium play Siddharth Bothra (SBothra@MotilalOswal.com); Tel: +91 22 3982 5407 Sandipan Pal (Sandipan.Pal @MotilalOswal.com); Tel: +91 22 3982 5436
Oberoi Realty: Premium play Page No. Distinguished Mumbai-focused play...4-11 Strong monetization visibility... 12-15 ORL to post revenue CAGR of 46% over FY10-13... 16-17 Prudent utilization of surplus cash could be a key trigger for the stock... 18 Key headwinds... 19-21 Valuation and view... 22-26 Background...27 Annexure-I: Project location... 28-31 Financials and valuation... 32-33 2
SECTOR: REAL ESTATE BSE SENSEX S&P CNX BLOOMBERG REUTERS 17,729 5,310 OBER IN OEBO.BO Oberoi Realty Rs225 Buy Y/E MARCH 2010 2011E 2012E 2013E Net Sales (Rs b) 7.8 10.4 13.9 24.4 EBITDA (Rs b) 4.7 6.0 8.0 15.6 NP (Rs b) 4.6 5.2 6.5 11.3 EPS (Rs) 14.0 15.8 19.8 34.6 EPS Growth (%) 81.7 12.9 25.5 74.7 BV/Share (Rs) 56.8 102.8 120.9 150.9 P/E (x) 16.1 14.3 11.4 6.5 P/BV (x) 4.0 2.2 1.9 1.5 EV/EBITDA (x) 15.0 9.7 7.2 3.3 EV/ Sales (x) 9.0 5.6 4.1 2.1 RoE (%) 27.7 19.8 17.7 25.4 RoCE (%) 28.9 24.4 24.4 35.1 KEY FINANCIALS Shares Outstanding (m) 328.2 Market Cap (Rs b) 73.9 Market Cap (US$ b) 1.6 Past 3 yrs. Sales Growth (%) 34.5 Past 3 yrs. NP Growth (%) 79.5 Dividend Payout (%) 7.0 Dividend Yield (%) 0.3 STOCK DATA 16-W High/Low Range (Rs) 307/220 Major Shareholders (as of December 2010) (%) Promoters 78.5 Foreign 9.4 Institutions 1.0 Others 11.1 Average Daily Turnover Volume ('000 shares) 1,397.3 Value (Rs million) 400.4 1/6/12 Month Rel. Performance (%) 0/-/- 1/6/12 Month Abs. Performance (%) -8/-/- STOCK PERFORMANCE (SINCE 19 OCTOBER 2010) 320 290 260 230 Oberoi Realty Sensex - Rebased 200 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Premium play Oberoi Realty (ORL) is a Mumbai-focused real estate developer. It enjoys high brand equity and is able to command premium pricing across product segments. This coupled with low-cost land bank, sound financials, and high cash flow visibility make it an attractive play on the Mumbai market. The stock trades at 27% discount to FY12E NAV of Rs310. Buy for 38% upside. Distinguished Mumbai-focused play: ORL has ~21.4msf of fullypaid land in prime locations of Mumbai, suitable for large-format integrated development. It is a strong brand in Mumbai's RE market due to its (1) diversified products, (2) superior product quality and (3) management goodwill, which enable it to command a pricing premium over peers. Expect ORL to enjoy superior margins given low cost land parcels and integrated development projects in Mumbai. High visibility on land bank monetization: Most of ORL's RE projects are in micro-markets of Mumbai where the RE demand outlook is buoyant in the medium term. We expect ORL to successfully monetize its land bank over 6-7 years as its healthy cash position and hassle-free land imply certainty of execution. This provides high cash flow visibility, adding to its net cash surplus of ~Rs15b. Besides, ORL enjoys steady cash flow from its annuity assets, which insulate it from vagaries of the RE cycle. We estimate ORL to have surplus cash balance of Rs25b by FY12, which offers a huge opportunity to further acquire value-augmenting projects. Triggers and headwinds to the stock: Key triggers: (1) Prudent use of surplus cash to augment land bank, (2) Broad-based recovery in commercial and retail markets, and (3) Resolution of pending issues (e.g. hotel properties in Juhu). Possible headwinds: (1) Land acquisition challenges due to high cost of land in Mumbai, and (2) Possible hurdles in JDA/SRA-linked projects. Stock at 27% discount to FY12E NAV; Buy: We expect ORL to post 35% earnings CAGR over FY10-13. We estimate ORL's FY12 NAV at Rs310/share and FY13 NAV at Rs342/share based on NPV-based valuation of its land bank. ORL stock is attractively valued at 11.4x FY12E EPS of Rs19.8, 6.5x FY13E EPS of Rs34.6 and ~27% discount to FY12E NAV. We expect ORL to trade at least at par to NAV due to (1) premium brand equity, (2) strong near term cash flow visibility, and (3) value unlocking potential of huge surplus cash. Buy with a target price of Rs310, 38% upside from current levels. 3
Distinguished Mumbai-focused play ORL has ~21.4msf of fully-paid land in prime locations of Mumbai, suitable for large-format integrated development. It is a strong brand in Mumbai's RE market due to its (1) diversified products, (2) superior product quality and (3) management goodwill, which enable it to command a pricing premium over peers. Expect ORL to enjoy superior margins given low cost land parcels and integrated development projects in Mumbai. Mumbai is the most resilient RE market in India in terms of returns on investment Mumbai, the most resilient RE market Mumbai is the most resilient and rewarding RE market in India in terms of returns on investment, product positioning and depth of demand for RE development across segments and price points. After the global downturn, the Mumbai market was at the forefront of recovery. With steady demand, starting with affordable housing and eventually moving to the luxury housing vertical, property prices have not only rebounded, but surpassed the pre-downturn peaks in several micro-markets. However, the recent sharp price appreciation and a bloated supply pipeline has resulted in a cyclical downturn in key locations, particularly Central Mumbai. Still, we expect the medium to long term macro outlook for Mumbai RE to be buoyant for products with attractive value proposition. This is because Mumbai's fundamental growth catalysts remain unaltered: Strong GDP growth, rapid urbanization and improving affordability Mumbai's status as India's financial capital (contributing more than 5% of GDP) Favorable demography with an expanding segment of young, upwardly mobile professionals A large base of discerning, high-income customers. Mumbai - a lucrative RE market with superior return potential Medium to long term macro outlook for Mumbai RE to be buoyant for products with an attractive value proposition 4
Between october-10 to September-11, Mumbai contributed ~25% of India's RE volume (number of units) and ~29% of RE capital value of top 7 cities of India. City-wise sale value (%) during Oct-10 to Sep-11 City-wise absorption volume (%) during Oct-10 to Sep-11 Hyderabad 8% Chennai 6% Pune 12% Mumbai 29% Chennai 6% Hyderabad 4% Pune 18% Mumbai 25% Bangalore 13% NCR 32% Bangalore 12% NCR 35% Source: Liases Foras/MOSL ORL: An attractive Mumbai play We believe ORL offers an attractive play on the lucrative Mumbai RE opportunity given its following favorable factors: #1. High concentration of land bank in Mumbai #2. Proven track record, strong management goodwill #3. Low-cost land bank at prime locations, translating to superior margins #4. Leading integrated developer in Mumbai, boosting margins further. #1. High concentration of land bank in Mumbai Almost 94% of ORL's saleable area (~21.4msf) is in Mumbai with ~69% of its land bank located in prime locations in the western suburbs. Along with prime locations and synergies from integrated and a diversified product-mix, ORL's emphasis on contemporary design and quality construction helps it to enjoy premium value for its development. We believe ORL is well placed to benefit from the superior return potential of Mumbai market. 94% of ORL's land bank is concentrated in Mumbai ORL's products straddle diverse segments Central Suburbs 15% Island City 10% Pune 6% Hospitality 9% Retail 4% Social infra 9% Western Suburbs 69% Commercial 20% Residential 58% 5
ORL has a proven track record and rich experience in the Mumbai RE market #2. Proven track record, strong management goodwill ORL's promoters have a proven track record and rich experience in the Mumbai RE market, having delivered ~5msf of RE development in 33 projects over the past three decades. During the past couple of years alone, ORL delivered 2.2msf, indicating robust traction in execution. Key projects delivered by ORL Projects Location Type Year of delivery Area (msf) Plazo (Ghuman Villa) Juhu Residential Sep-01 0.02 Rehabilitation Project Goregaon Residential May-02 0.06 Beachwood House Juhu Residential Jan-05 0.03 Crest Khar Residential May-06 0.02 Seawind Juhu Residential Oct-06 0.02 Oberoi Woods Goregaon Residential May-08 0.60 Oberoi Springs Andheri Residential Jan-10 0.64 Oberoi Townhouse Goregaon Residential Jun-10 0.04 Oberoi Chambers Andheri Commercial May-04 0.09 Commerz - I Goregaon Commercial Mar-08 0.40 Oberoi Mall Goregaon Retail Mar-08 0.55 The Westin Goregaon Hotel Apr-10 0.38 Oberoi International School Goregaon School Nov-10 0.31 Total 3.16 ORL's integrated development and superior product positioning have given it a strong brand image. We believe ORL is well placed to capitalize the trend of customer preference for (1) integrated development, (2) quality construction and (3) goodwill of the developer. This explains why ORL has been consistently booking sales of ~455 units a year over the past five financial years. Strong management goodwill Lack of transparency and corporate governance issues are key concerns in the RE sector. We believe ORL is favorably placed in this regard given (a) transparency in land acquisition, (b) uncomplicated corporate structure and (c) developer mindset. A strong management track record and transparent corporate structure make ORL a preferred developer (a) Transparency in land acquisition: The ORL management has demonstrated a prudent and transparent approach in acquiring its land. ORL has acquired ~140 acres across five projects since 1998. All the land parcels (a) are fully paid for, (b) have clear titles, and (c) enjoy transparent cost and ownership disclosures. (b) Uncomplicated corporate structure: ORL has a simple corporate structure with most of its land holding through wholly owned subsidiaries. We believe this transparent structure augurs well for better corporate governance. (c) Developer mindset: ORL has a relatively limited but high quality land bank, expected to get monetized over 6-7 years. Over the past 3-4 years, ORL focused on converting its land parcels into landmark developments instead of augmenting its land bank at unreasonable prices. We believe such a development mindset is reflected in its product quality and premium brand equity, which differentiates the company from the rest. 6
ORL's corporate structure ORL holds the Garden City projects excluding Oberoi Mall. Oberoi Mall holds Oberoi Mall. Oberoi Constructions holds Andheri and Mulund properties. Oasis Realty holds the Worli properties. Siddhivinayak Realties holds the disputed Juhu Hotel. Sangam City Township, a JV between ORL, DB Realty and the Avinash Bhosale group, holds the Pune project. Oberoi Construction Siddhivinayak Realties Oberoi Mall Kingston Property Services Oberoi Realty Limited 100% 100% 100% 36.7% 100% 100% 100% 50% 100% Perspective Realties Oasis Realty Sangam City Township Kingston Hospitality & Developers Unincorporated Unincorporated JV JV Zaco Aviation Expression Realty Triumph Realty Outsourcing non-core activities to reputed partners releases management bandwidth for core activities Low execution risk: ORL outsources most of its key projects, delegates non-core activities such as design and construction to long-term service providers. ORL has developed a strong relationship with internationally acclaimed architects like SCDA (Singapore), Bentel & Associates (South Africa), HOK (Los Angeles), and domestic contractors like L&T. We believe its outsourcing model mitigates the execution risk involved in large format projects and leaves its management free to pursue activities such as land acquisition and sales and marketing. ORL s average acquisition cost of land has been only ~Rs35m/acre #3. Low-cost land bank at prime locations, translating to superior margins ORL's management has been prudent in its land acquisition strategy. Over 1998-2005, ORL acquired four key land parcels for Rs4.7b: (1) ~84 acres at Goregaon Garden City, (2) ~24 acres for Andheri East Splendor, (3) ~7 acres for Andheri-West Springs and (4) ~19 acres in Mulund. Its average acquisition cost of these city-centric land parcels has been ~Rs35m/acre. After 2005, Mumbai's land prices went through a strong up-cycle, impacting margins of most RE developers involved in land acquisition through the direct route. However, ORL is strongly placed with a low cost land bank that has monetization potential over the next 6-7 years. Low cost historical land bank Particulars Garden City, Oberoi Splendor, Oberoi Exotica, Oberoi Springs, Goregaon Andheri Mulund Andheri (W) Land area (acres) 84 24 19 7 Land consideration (Rs m) 1,068 1,060 2,210 317 Year of purchase 1998-2005 2005 2005 2005 Cost of inherent FSI* (Rs/sf) 292 994 2,695 1,039 * Doesn t include benefit from incremental FSI from TDR, parking scheme and loading After 2005 ORL has not acquired land through the direct route but adopted a different approach to augment its land bank. In 2007, it entered into a joint development agreement (JDA) with a local developer (Sahana Developer) to develop the saleable area of a slum 7
Land acquisition through the JDA/JV route renders opportunity to leverage on the brand rehabilitation project in Worli. The project offers ORL a lucrative proposition, since (1) ORL will have a 25-40% share in net revenue (net of construction and S&M costs) depending on actual realization of the project, (2) ORL hasn't incurred upfront capital expenditure (only a Rs3b refundable deposit, to be adjusted against revenue share), (3) the JDA partner is responsible for related SRA activities such as evacuation and rehabilitation construction (a significant portion of the work has been completed). In such an agreement, even in the most pessimistic scenario, ORL stands to profit. The agreement allows ORL to leverage its brand strength with minimal upfront capital investment and low operational and market risks. We expect ORL to clinch many such deals with similarly attractive propositions due to (1) its strong execution track-record and (2) premium branding, which make it a preferred partner for small and unorganised land owners. Low land cost is attributable to historical acquisition over 1998-2005 Low cost land parcels ensure superior margins ORL's existing land bank of 21.4msf (~130 acres) is located in Mumbai (western suburbs, Central Mumbai) and Pune, and is suitable for large format development. ORL has purchased land outright for most of its projects. We believe the management has been prudent in its land acquisition strategy. Except for Pune (which is still in the land aggregation stage) and Worli (where ORL has entered into a JDA), the remaining land parcels have been acquired over 1998-2005, at very lucrative prices. Large low-cost land parcels with extended monetization, and a huge appreciation of property prices over the past five years provide ORL with an opportunity to command superior profit margins in such projects. ORL is expected to post 45-80% operating margins for its Mumbai-centric land, resulting in superior RoE ORL's superior margins Particulars Garden City, Oberoi Splendor, Oberoi Exotica, Oasis Realty, Goregaon Andheri Mulund Worli Mode of land acquisition Outright Purchase Outright Purchase Outright Purchase JDA Year of purchase 1998-2005 2005 2005 2007 Land area (acres) 84 24 19 3 Land consideration (Rs m) 1,068 1,060 2,210 Nil Saleable area (msf) 11.2 3.1 3.2 2.1 ORL's stake (%) 100 100 100 25-40* Land cost (Rs/sf) 95.6 341.9 691 NIL Avg. construction cost (Rs/sf) 3,500 3,500 3,000 6,000 Other development costs (Rs/sf) (Approvals/TDR/ Parking etc) 1,500 1,500 1,000 NIL Avg. Market price (Rs/sf) 9,500 10,500 7,500 28,000 ORL's premium pricing (Rs/sf) 11,000 12,000 8,500 32,000 ORL's margin (Rs/sf) 5,904 6,658 3,809 26,000 ORL's margin (%) 54 55 45 81 * Profit sharing ratio depending on sale realization Large integrated projects offer a superior product mix and product synergy #4. Leading integrated developer in Mumbai, boosting margins further ORL is one of the few integrated development players in Mumbai. Integrated development offers product synergies and pricing premuim, boosting margins further. Integrated development offers product synergies... Most of the ORL's land is suitable for large format development and situated in attractive city-centric locations which are increasingly gaining customers' preference. This helps ORL to develop large integrated projects with different product mixes such as schools, 8
hospitals, malls and hotels. It allows the company to (1) position its products better, (2) leverage synergies between different asset classes and command premium pricing, and (3) capture strong RE demand at different price points in the project cycle....and pricing premium ORL's integrated land development strategy has started paying off. Over the past 2-3 years, after the early phase of developments, ORL has been receiving a strong response from customers for subsequent phases of monetization. We believe its transformation of a location from terra incognita to a destination development and synergies between the product-mixes of integrated development have boosted its brand image. While initial developments in its Garden City projects like Oberoi Mall, Commerz and Oberoi Woods have enhanced the image of Goregaon (E) as a preferred micro-market, its projects at JVLR, Andheri (E) (Splendor) have boosted demand for subsequent phases. Besides, its superior construction quality, on-time delivery track-record and quality management add to the value of its developments. All these factors contribute to ORL's premium pricing. Approach to land banks: creating value through integrated development Value creation through large format development enables ORL to command premium pricing Uplifting micromarket's image and boosting RE demand Destination development in early phases Integrated projects Product synergy Brand creation through superior offerings Garden City at Goregaon (E) emerged as a preferred destination Oberoi Mall, Commerz, Oberoi Woods Pricing premium Average realization at Garden City grew from Rs2,500/sf (2004) to Rs12,000/sf (currently) Low cost large land parcel Average land acquisition cost of Garden City project is ~Rs100/sf Integrated development example Garden City: Achieves landmark status in Goregaon, Mumbai A key example of integrated development has been its Oberoi Garden City projects, a mixed-use development in Goregaon (E), in Mumbai's western suburbs. ORL acquired ~84 acres of land here for Rs1.07b between 1998-05. The project has saleable area of 11.2msf of which ORL has already delivered projects on ~2.3msf with the development of Oberoi Woods (residential, 0.7msf), Commerz I (0.4msf), Oberoi Mall (0.55msf) and an international school (0.3msf). The project, located on the Western Express Highway, is beside a "no-development" green zone and offers a permanent view of greenery. The later phases of development will comprise residential, office/retail space, a hotel and social infrastructure such as a hospital and a school. Projects on ~5msf are ongoing and projects are being planned on the remaining 3.9msf. Garden City has achieved a status of destination project due its attractive location and benefits from integrated offerings. Consequently, we expect ORL's upcoming developments here to command premium pricing compared with its peers. 9
Integrated development plan at Oberoi Garden City Oberoi Garden City Residential (~6.6msf) Office Space (~3msf) Retail (~0.6msf) Hospitality (~0.4msf) Social infrastructure (~1.6msf) Completed projects Oberoi Woods, Townhouse Commerz I Oberoi Mall The Westin Mumbai - Garden City Oberoi International School Ongoing projects Oberoi Exquisite (Phases I and II) Commerz II (Phases I and II) Planned projects Oberoi Exquisite (Phase III) Hospital and education complex Integrated layout of Oberoi Garden City project Oberoi Mall Commerz and Hotel Westin Oberoi Commerz (II) - Phase (I) Western Express Highway Commerz (II) - Phase (II) Exquisite- 3 Exquisite- 1 Exquisite- 2 Hosipital Town House Educational Complex Oberoi Woods Oberoi International School 10
Key ongoing projects at Garden City Commerz (II)- Phase I and Phase II Exquisite- steady progress in construction Phase I site Town house Oberoi International School Phase II site Integrated development at Garden City is in an advanced stage of monetization We expect phase I of Commerz-II to be operational by FY12-13, while phase II is likely to be ready by FY14. ORL has already sold ~419 units in Exquisite I. Exquisite- I is likely to be delivered in FY12-13, while it plans to launch Exquisite II in 4QFY11. We estimate ORL to complete the monetization of Garden City by FY16-17. Once completed, the project is likely to generate ~Rs83b of total residential sales and ~Rs6b of steady-state annuity income. Garden City accounts for ~60% of ORL's GAV. Oberoi Mall (March 2008) Commerz I (March 2008) Oberoi Wood (May 2008) 11
High visibility on land bank monetization Most of ORL's RE projects are in micro-markets of Mumbai where the RE demand outlook is buoyant in the medium term. We expect ORL to successfully monetize its land bank over 6-7 years as its healthy cash position and hassle-free land imply certainty of execution. This provides high cash flow visibility, adding to its net cash surplus of ~Rs15b. Besides, ORL enjoys steady cash flow from its annuity assets, which insulate it from vagaries of the RE cycle. We estimate ORL to have surplus cash balance of Rs25b by FY12, which offers a huge opportunity to further acquire value-augmenting projects. Hassle free land banks are suitably placed for faster monetization Strong residential sales and steady annuity income are expected to generate robust operating cash flow Hassle-free land bank increases certainty of monetization We expect RE demand outlook in Mumbai to be buoyant in the medium term, especially for mid-income housing, attractively positioned products and preferred micro-markets like the western and central suburbs. This has witness further boost from rising demand for office space in such locations. About 84% of ORL's saleable area is in attractive citycentric areas of the western and central suburbs, which have potential to emerge as destination projects due to their large size and mixed use development. Most of the land is fully paid and available for development with approvals largely in place, which gives reasonable certainty to execution. These factors provide ORL with steady cash flow visibility over five years. Strong development pipeline to drive monetization Assets under sale model FY11E FY12E FY13E FY14E FY15E FY16E Residential (msf) 1.2 1.7 1.6 1.7 1.7 1.1 Commercial (msf) - 0.2 0.3 0.4 0.3 0.1 Retail (msf) - 0.0 0.0 0.1 0.1 0.1 Total 1.2 1.9 1.9 2.3 2.1 1.3 Leased assets (cumulative) Commercial (msf) 0.2 0.3 0.7 1.7 2.1 2.5 Retail (msf) 0.5 0.5 0.5 0.5 0.5 0.5 Total 0.7 0.9 1.2 2.2 2.7 3.0 Hotel (rooms) 269 269 269 269 314 314 High visibility of cash flow (Rs b) Particulars FY11E FY12E FY13E FY14E FY15E FY16E Residential sales 11.7 14.3 19.5 23.0 33.8 28.9 Commercial and retail sales 0.0 1.1 2.8 7.2 6.3 1.9 Rental income (commercial and retail) 0.9 1.2 1.7 3.3 4.3 5.0 Hotel business 0.6 0.6 0.7 0.8 1.1 1.1 Social infrastructure business 0.1 0.2 0.4 0.5 0.6 0.0 Total inflow 13.2 17.4 25.1 34.8 46.1 37.0 % contribution from rental income 12 12 11 13 13 17 % contribution from residential sales 88 82 78 66 73 78 Construction capex 5.8 10.2 10.5 10.5 9.3 4.6 Residential 3.1 6.0 7.1 8.4 8.5 4.5 Non-residential 2.7 4.2 3.4 2.1 0.8 0.1 Operating expenses 0.4 0.5 0.6 0.7 0.9 0.9 Net operating cash pre tax 7.1 6.8 14.1 23.6 35.8 31.4 Tax expense 1.8 1.8 4.2 7.1 10.7 9.4 Net operating cash post tax 5.3 5.0 9.9 16.5 25.1 22.0 12
ORL's development plans are integrated in nature Project Name Status Location Saleable Expected GAV/Share Land cost area (msf) completion date (Rs) (Rs m) Goregaon (E) 10.5 223 1,060 Exquisite-1 Ongoing Residential 1.4 Nov-13 30 Exquisite-2 Ongoing Residential 1.3 Mar-14 37 Exquisite-3 Ongoing Residential 2.5 May-14 37 Townhouse/Garden City Completed Residential 0.0 Mar-10 2 Commerz I Completed Commercial 0.4 Mar-08 16 Commerz II Phase I Ongoing Commercial 0.7 Mar-12 21 Commerz II Phase II Ongoing Commercial 1.7 Mar-12 41 Oberoi Mall Completed Retail 0.6 Mar-08 22 The Westin Ongoing Hotel 0.4 Mar-10 9 International School Ongoing Social Infrastructure 0.3 Mar-10 Education complex Planned Social Infrastructure 0.9 Apr-11 9 Hospital Planned Social Infrastructure 0.4 Oct-10 Andheri - East 3.1 34 317 Splendor-1 Ongoing Residential 1.3 Dec-10 5 Splendor-2 Ongoing Residential 0.3 Jun-12 6 Oberoi Splendor-1 Ongoing Commercial 0.3 Feb-13 6 Splendor IT Tower Planned Commercial 0.1 Aug-12 5 Oberoi Splendor -2 Planned Commercial 0.7 May-13 10 Splendor School Planned Social Infrastructure 0.4 Apr-11 2 Mulund - West 3.2 78 2,200 Exotica-1 Planned Residential 1.6 Aug-13 17 Exotica-2 Planned Residential 1.6 Sep-13 61 Worli 2.1 27 JDA* Oasis Ongoing Residential 1.5 Dec-14 20 Oasis - Commercial Ongoing Commercial 0.2 Dec-12 2 Oasis - Mall Planned Retail 0.1 Dec-12 4 Oasis Planned Hotel 0.2 Dec-14 3 Pune 1.3 14 In progress Sangam City Planned Residential 0.8 Dec-15 8 Sangam City Planned Commercial 0.3 Dec-15 3 Sangam City Planned Retail 0.3 Dec-15 3 Juhu Planned Juhu 1.2 1 Total 21.4 377 * Refundable security desposit of Rs3b ORL is likely to be a key beneficiary of the commercial real estate recovery Commercial recovery to boost annuity cash flow ORL is likely to be a key beneficiary of recovery in the commercial and retail verticals, early signs of which are visible. While ORL's annuity income helps to compensate for the periodic volatility in residential sales, we estimate steady growth in revenue contribution from annuity assets, with (1) broad-based recovery in the commercial and retail businesses and (2) new projects becoming operational in the office, retail and hotel verticals over next two to three years. The commercial RE market has been showing early signs of recovery in key micromarkets. Mumbai, being a frontrunner in this recovery, has registered steady improvement in commercial leasing with ~10msf of lease transactions during 2010. Besides, in the past couple of years, demand has been shifting from central business districts (CBDs) like Nariman Point and Central Mumbai towards suburban business districts like Andheri and Goregaon. This is due to (1) exorbitant rentals and unavailability of Grade A office space in the CBDs and (2) improved infrastructure near the western and central suburbs and their proximity to the airport. 13
Front-loaded cash flow offers investment comfort Cash flow during FY11-16 is expected to contribute 67% of GAV We expect ORL to monetize its land bank over 6-7 years, providing it with strong frontended cash flow unlike many RE companies. Our NAV estimate suggests ORL will derive ~67% of its GAV from next five years cash flow, which is significantly high compared with its peers. Front-loaded valuation makes ORL one of the most attractive plays in the RE sector. Annual value contribution (%) 15 9 2 21 20 8 10 15 Till FY12 FY13 FY14 FY15 FY16 FY17 FY18 Capitalized value post FY18 City centric commercial projects will witness strong demand Expect ORL commercial projects to witness strong response ORL has a strong pipeline of annuity projects of ~5.4msf (~1msf already operational and ~4.4msf to be operational over 3-4 years) largely located in the western suburbs. ORL's 2.4msf of commercial space in the Goregaon Garden City, Commerz II -Phase1 (0.7msf) and Phase2 (1.7msf) are likely to become operational in FY12 and FY13 respectively. We expect the projects to attract a strong response due to (a) a robust demand outlook, driven mainly by MNCs, law firms (on account of the shifting of the High Court to the western suburbs) and film studios (proximity to Film City) in Goregaon, (b) limited supply of grade- A office space in the vicinity and (c) proximity to hotels and the airport. ORL's strong client base with its expansion plan will provide further impetus to the leasing momentum. We estimate the company will generate ~Rs1.6b in FY11 (v/s Rs0.8b in FY10), ~Rs2b in FY12 and ~Rs2.9b in FY13 from its commercial, retail, hotel and school projects. Strong momentum expected in annuity income We expect annuity income to generate ~Rs1.6b in FY11 (v/s Rs0.8b in FY10), ~Rs2b in FY12 and ~Rs2.9b in FY13 Annuity Asset (msf) Commercial/RetailSale (msf) Hotel Rooms (no) Annuity Revenue(Rs b) 4.7 269 269 269 269 2.9 2.0 2.2 1.6 1.2 0.7 0.9 0.0 0.2 0.3 0.5 2.7 394 394 6.2 5.9 0.4 3.0 0.3 FY11 FY12 FY13 FY14 FY15 FY16 14
A balanced cash flow mix offers resilience during a down cycle Multiple revenue streams provide resilience to the down cycle ORL's strongly diversified product-mix (the residential vertical constitutes ~60% of its land bank, and 40% is divided among commercial, retail, hospitality and social infrastructure projects such as schools and hospitals), means that it is poised to generate a quality mix of revenue streams. ORL has maintained a robust balance in its cash flows by following sale and lease models for its ~5.4msf of commercial/retail assets. This provides it with multiple revenue streams, making it resilient to RE cyclicality. Multiple revenue streams insulate ORL from a down cycle Annuity income mix (Rs m) Annuity income (Rsb) RE sales (Rsb) 21.5 Commercial-Lease Retail-Lease Hotel Social Infra 0.7 3.5 0.8 7.0 1.6 8.8 2.0 2.9 288 450 325 508 315 559 611 497 641 662 235 1,050 729 695 396 11.8 FY09 FY10 FY11E FY12E FY13E FY09 FY10 FY11E FY12E FY13E We expect the company to generate ~Rs10b of operating cash flow by FY12 Surplus cash to augment land bank potential We expect ORL's limited land bank of ~21.4msf, to take 6-7 years to be monetized. Hence, going forward, the company is expected to acquire a significant amount of land to maintain its growth momentum. In this connection, the comfort factor is that ORL has ~Rs15b of surplus cash on its balance sheet. Moreover, robust cash flow visibility from its ongoing/upcoming projects (we expect the company to generate ~Rs10b of operating cash flow by FY12) and zero gross debt provide ORL with a healthy financial position to augment its land bank through value accretive acquisitions. While historically the company acquired land through outright purchase, it is also evaluating opportunities in the redevelopment vertical and through the JDA route, in which, we expect, ORL has strong success potential due to its premium brand and superior execution track record. Visibility of strong operating cash flow an opportunity to acquire value-accretive projects Free cash inflow (Rs b) Cummulative till previous year (Rs b) 35 51 16 5 5 15 10 5 20 5 15 25 5 20 10 25 35 Net cash as on March IPO proceeds FY11E FY12E FY13E FY14E 15
ORL to post revenue CAGR of 46% over FY10-13 Exquisite-I (Garden City, Goregaon) and Splendor-I (Andheri E) are primary revenue drivers for FY11 We expect ORL's revenue to grow from Rs7.8b in FY10 to Rs24.4b in FY13, implying FY10-13 CAGR of ~46%. The growth will be led mainly by revenue from residential projects and steady annuity income growth from its commercial, retail, hotel and other social infrastructure verticals. In FY11, Exquisite-I (Garden City, Goregaon) and Splendor- I (Andheri-E) will be primary revenue drivers (contributing ~70% of revenue). We expect its projects in Mulund (Exotica) and Worli (Oasis) to contribute significantly from FY12. Expect revenue CAGR of 46% over FY10-13 191% Revenue (Rs b) Grow th Rate 117% We expect the Mulund and 84% 76% Worli projects to contribute significantly from FY12 32% 34% -17% 0.8 2.4 5.1 4.3 7.8 10.4 13.9 24.4 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Key projects expected to contribute to revenue* Project Name Location Asset Class Saleable / Expected total Revenue GAV/share Leasable revenue (Rsm) Contribution (Rs m) (Rs) area (msf) FY11 FY12 Oberoi Spring Andheri West Residential 0.64 6,911 855-1 Townhouse/Garden City Goregaon-East Residential 0.04 738 360 378 2 Splendor-1 Andheri - East Residential 1.28 13,895 3,203-5 Exquisite-1 Goregaon - East Residential 1.37 18,545 4,088 5,433 30 Splendor-2 Andheri - East Residential 0.29 3,345 319 905 6 Exquisite-2 Goregaon - East Residential 1.33 21,216-733 37 Exotica-1 Mulund - West Residential 1.62 14,355-1,337 20 Exotica-2 Mulund - West Residential 1.58 15,299-332 17 Oasis Worli Residential 0.54 19,647-1,563 37 Commerz I Goregaon-East Commercial 0.365 315 497 16 Oberoi Mall Goregaon-East Retail 0.553 611 662 22 The Westin Goregaon (E) Hotel 269 rooms 559 641 9 10,309 12,480 201 * Only contribution from larger projects We expect a steady increase in revenue contribution from the non-residential vertical ORL's primary focus has historically been residential development. However, we expect steady revenue growth from non-residential projects as ORL has a rich pipeline of nonresidential projects (~8msf) and annuity projects (~5.4msf) (~4.4msf will be operational over 3-4 years) largely located in Mumbai's western suburbs. We expect steady growth in revenue from its non-residential projects, going forward, with (1) a broad-based recovery in commercial and retail businesses and (2) new projects becoming operational in the office, retail and hotel verticals. We estimate the contribution from its non-residential projects to increase from 11% in FY10 to 15% in FY11, 24% in FY12 and 26% in FY13. 16
Revenue: non-residential verticals to increase contribution (FY11-13) Retail 6% Commercial 3% Hotel 5% Social Infra 1% Commercial 11% Retail 6% Hotel 5% Social Infra 2% Retail 5% Commercial 16% Hotel 3% Social Infra 2% Residential 85% Residential 76% Residential 74% FY11 FY12 FY13 ORL to post earnings of 35% CAGR over FY10-13 We expect 35% CAGR in ORL's PAT, from Rs4.6b in FY10 to Rs11.3b in FY13. This will be driven by (1) strong contribution from the residential vertical, and (2) higher rental income with new properties becoming operational. Historically, ORL has enjoyed high EBITDA margins due to its presence in attractive locations and its ability to command a premium. We expect ORL's EBITDA margins will improve from 60% in FY10 to 64% in FY13 due to (1) monetization of later stages of integrated development, which offers higher realization, and (2) contribution from its Worli project. However, net margin could decline from 58% in FY10 to 47% in FY13 mainly due to (1) a higher tax rate after the abolition of 80IB, and (2) possible debt finance which could invite interest costs, hitherto unseen in ORL's financial statements. EBITDA margin to increase after contribution from Worli project EBITDA margins are expected to improve to 64% due to the high-margin Worli project 44% EBITDA(Rsb) 52% 50% EBITDA Margin 58% 60% 58% 58% 64% 0.4 15.6 1.2 2.6 2.5 4.7 6.0 8.0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Expect net profit CAGR of 36% over FY10-13 PAT(Rsb) NET Margin 58% 59% 58% Net margin is expected to decline from 58% in FY10 to 47% in FY13 mainly due to a higher tax rate 43% 0.4 33% 0.8 3.0 2.5 4.6 50% 5.2 47% 6.5 47% 11.3 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 17
Prudent utilization of surplus cash could be a key trigger for the stock Key triggers for the stock are: (1) ORL's prudent use of surplus cash to augment its land bank, (2) broad-based recovery in the commercial and retail market, and (3) traction in pending issues (hotel properties in Juhu) and enhancement of incentives in existing projects (Worli and Pune). Value unlocking is expected from deployment of surplus cash Prudent use of surplus cash to augment land bank Despite a high quality land bank, ORL faces a risk of limited long-term potential of its land parcels. However, ORL has one of the most attractive balance sheets among RE companies with ~Rs15b of surplus cash. Moreover, its ongoing and upcoming project pipeline provide with a strong cash flow visibility over the next 5-6 years. We estimate an incremental net cash inflow of Rs10b by FY12 (total surplus cash balance estimated at Rs25b by FY12). We believe a judicious deployment of this surplus cash in value accretive land acquisition would be a key trigger for the stock. Broad-based recovery in the commercial, retail market ORL has ~1msf of operational assets in the commercial and retail segments along with ~4.4msf of projects in the pipeline, which are to be operational over 3-4 years. Therefore, with the ongoing recovery in commercial RE, we believe ORL is well placed to leverage on the up-cycle of the commercial/retail vertical, which would favorably impact its annuity income. ORL is well placed to leverage the up-cycle of the commercial/retail vertical Traction in pending issues (hotel properties in Juhu), enhancement of incentives in existing projects (Worli and Pune) The ORL management indicated that OCPL (ORL's 100% subsidiary), through its joint venture SRPL, entered into a purchase agreement with Tulip Hospitality Services in 2005 for a six-acre hotel property in Juhu with ORL's share of the development area being ~1.3msf. But the purchase agreement is under dispute and has been referred to for arbitration. We value the property at Rs675m, which is the amount paid by the company. Therefore, a positive outcome of the arbitration in favor of ORL would be value accretive for it. Similarly, a possible increase in saleable area in its Worli project (based on higher FSI allowance for additional land) and the Pune project (since ORL is in the process of land aggregation), would have a positive impact on its NAV. 18
Key headwinds We believe that the key risks for the company are (1) challenges in land acquisition due to increasing land costs in Mumbai, (2) possible operational hurdles in JDA/SRA-linked projects, and (3) over dependence on Mumbai market. Increasing land price in Mumbai could be a key headwind for ORL s land acquisition plans Increasing land prices could exert pressure on margins Land prices in Mumbai have appreciated sharply over the past 4-5 years, exerting pressure on developers' margins. ORL has a limited land bank of ~21msf, which we expect will take 6-7 years to monetize. In the near to medium term, we don't find cause for concern due to replenishing of the land bank, but ORL needs to focus on augmenting its development potential significantly to replicate its growth momentum in the long term. ORL's existing land bank is historical and its attractive acquisition cost is mainly attributed to the pre-2005 RE market, which was before the sharp upswing in prices. After 2007, ORL made no meaningful land acquisition. The company also doesn't have established expertise in the redevelopment business, which is a key land acquisition route in Mumbai city. Hence, the rising land price could be a visible headwind for ORL's land acquisition plans. Sharp increase in land price visible in recent NTC mill auctions Rsm/acre Rs/sf for 2.5x FSI Rs/sf for 4x FSI 960 1,536 918 551 877 1,983 1,798 12,141 11,008 1,469 1,580 2,528 2,109 3,375 3,356 5,369 7,588 6,880 Jupiter Mill (Mar-05) Apollo Mills (Jun-05) Mumbai Textile (Jun- 05) Elphinstone Mill (Jul-05) Kohinoor Mill (Jul-05) Poddar Mill (Jul-10) Bharat Mill (Aug-10) Source: Industry/MOSL ORL s strong surplus cash renders the ability to acquire value accretive land What mitigates the risk ORL has one of the most cash rich balance sheets among RE companies with ~Rs15b of surplus cash. Besides, with strong monetization visibility from its ongoing and upcoming projects, ORL is likely to generate robust operating cash flow over 6-7 years. We estimate ORL will generate a surplus cash balance of Rs25b by FY12, which offers it a huge opportunity to acquire value-accretive projects. Besides, ORL is better off than other its Mumbai peers, who have entered several high value land transactions and already leveraged themselves. Hence they are likely to curtail land acquisition plans in the near term. Consequently, ORL is well placed to capture the opportunity to acquire land at reasonable costs. 19
A stronger balance sheet Comparative financial strengths of RE developers in Mumbai compared with its peers and a market slowdown will offer an opportunity to acquire land at reasonable costs Gross Debt (Rs b) Net Debt (Rs b) 33 5 4 10 2 8 7 41 38 29 27-2 -15-15 Oberoi Realty Peninsula ** DB Realty Indiabulls RE Orbit ** HDIL Lodha * *As on Mar-09 (DRHP data); ** As on Mar-10 Possible operational risk at its SRA-linked project in Worli has vastly been mitigated with steady progress Operational hurdles in key projects could have a negative impact ORL has highlighted operational complications in its key projects, which could be a major headwind for it. Its ~2.1msf mixed-use Worli land (Oasis) could suffer from operational and regulatory uncertainties relating to SRA projects and dependence on JDA partners. Its Pune project (Sangam City) is yet to receive requisite development approvals since ORL is in the land aggregation stage. We believe defaults or delays could have a negative impact on its value, since the two projects contribute ~11% of GAV. What mitigates the risk ORL's developable area in Worli is in the free-sale area of the SRS project and the land is free from encumbrances. The project has been issued a Letter of Intent (LOI) and rehabilitation work is on. Hence the project has overcome a significant operation hurdle and has limited execution challenges. A lack of market diversification exposes ORL to the risk of relying on a single RE market Dependence on western Mumbai Almost 94% of ORL's land bank and over 96% of its GAV emerges from its Mumbai projects, with the western suburbs (projects in Goregaon and Andheri) contributing ~68% of its GAV. This makes it over-dependent on the RE market of the western suburbs. The absence of market diversification exposes ORL to vagaries of a single RE market. The recent price appreciation in Mumbai's residential market has resulted in a slow sales across locations, which could have a negative impact on ORL's monetization velocity and ability to command premium pricing. What mitigates the risk ORL's positioning offers comfort even during the torpidity in RE demand due to: a) Attractive locations, superior quality make ORL's products preferable: All ORL's projects are in attractive city-centric locations. The projects have good ambience, greenery and facilities emerging from the product-mix such as schools, hospitals, malls and hotels in the same land parcel. This enhances a project's attraction and makes it a preferred destination for home buyers. Besides, ORL's quality construction and premium offering increase salability. 20
Product positioning, attractive location, low cost land and better holding capacity offer comfort b) Strong financial position mitigates execution risk: Slow RE demand in Mumbai can be attributed to buyers' concerns about possible execution challenges developers could face in the light of a financially tight market. The sharp appreciation of Mumbai property prices also contributed to slow RE demand. However, ORL's zero-debt, surplus-cash position would mitigate buyers' concerns. ORL's established track record and strong management goodwill ensure on-time delivery and uninterrupted execution. Macro economic risks We have assumed 5% CAGR from FY11 for all projects across cities. However, a decline in property prices, rise in inflation and interest rate, and change in government regulation could have a significant impact on our NAV estimate. Due to lack of predictability of such events we have not incorporated such impacts. 21
Valuation and view Expect ORL to trade at FY12 NAV of Rs310 We estimate ORL's FY12 NAV at Rs310/share and FY13 NAV at Rs342/share based on an NPV-based method of valuing its land bank. We expect ORL to trade at par to our estimated FY12 NAV due to (1) value unlocking potential of huge surplus cash, (2) strong near term cash flow visibility and (3) premium brand equity. Our one year forward target price for ORL is Rs310. We expect ORL to post 35% earnings CAGR over FY10-13. ORL is attractively valued at 11.4x FY12E EPS of Rs19.8 and 6.5x FY13E EPS of Rs34.6 and ~27.4% discount to our target price of Rs310. Buy. Residential projects contribute ~50% of GAV while ~36% comes from commercial/retail properties FY12 NAV calculation Rs m NAV/share (Rs) % GAV Residential 73,011 222 59 Commercial (Lease) 25,609 78 21 Commercial (Sale) 8,289 25 7 Retail (Lease) 7,106 22 6 Retail (Sale) 2,047 6 2 Hotels 3,494 11 3 Infra Business+Land holding 4,164 13 3 Gross Asset Value 123,720 377 100 Add: Cash 15,000 46 12 Less: Other Op Exp 9,898 30 8 Tax 27,136 83 22 Net Asset Value 101,686 310 82 NAV calculation: Key assumptions 1. Our NAV estimate factors in development plans that will be executed over 6-7 years. 2. 5% CAGR in RE prices across cities and verticals (residential, commercial and retail). 3. 4% CAGR in construction cost for all verticals. 4. Steady state occupancy rates of 90% in the commercial and retail segments. 5. Steady state occupancy rates of 70% in the hospitality segments. 6. Cap rate of 11% in the commercial, retail and hospitality verticals. 7. WACC of 14%. Western suburbs contribute ~68% Commercial/retail verticals contribute ~Rs130/sh to ORL's GAV of Rs377/sh Mulund (W) 21% Worli 7% Pune 4% 78 25 22 6 11 13 46 30 83 310 222 Andheri (E) 9% Goregaon (E) 59% Residential Commercial (Lease) Commercial (Sale) Retail (Lease) Retail (Sale) Hotels Infra Business+Land holding Add: Cash Less: Other Op Exp Tax NAV 22
Value unlocking from surplus cash could drive growth potential beyond the existing land bank What could push the stock to trade above NAV We estimate ORL's FY12 NAV at Rs310/share and FY13 NAV at Rs342/share. Our one year forward target price for ORL is Rs310 (at par with its FY12NAV). However, we follow an NPV-based NAV approach to value RE companies based on their land banks, which captures value emerging from their existing development potential only. In this regard, we believe ORL could trade at a premium to its FY12NAV due to its (1) value unlocking potential of its huge surplus cash and (2) strong brand equity, which helps it to command premium pricing power. Value unlocking potential of huge surplus cash: ORL has one of the most cash rich balance sheets among RE companies with zero gross debt. As on date, the company has ~Rs15b of surplus cash on its balance sheet.. Besides, with strong monetization visibility from its ongoing and upcoming projects, ORL is expected generate healthy free cash flow over 6-7 years. We estimate an incremental net cash inflow of Rs10b by FY12 (enhancing the surplus cash balance to Rs25b by FY12) after addressing its requirement for construction capex, operating and tax expenses. We believe such financial strength offers opportunity of value-accretive land acquisitions to drive growth potential beyond the land bank. An RoE of 22% and 0.2x (of cash balance) leverage could render ~37% premium to ORL s book value of cash at Rs46/share Despite the large amounts of idle cash on its books, ORL has had a robust RoE (average RoE of 24.7% over FY08-10) due to its (1) premium pricing and (2) low cost land, leading to superior margins. Besides, ORL's zero debt scenario offers tremendous potential to play on leverage. This speaks volumes about its value unleashing potential through deployment of surplus funds in high RoE projects. Our NPV-based NAV estimate values net cash on books of ~Rs15b at Rs46/share. However, the acquisition of projects with attractive RoE could add to value accretion beyond its book value. With an RoE assumption of 22% and 0.2x (of cash balance) leverage, surplus cash could be valued at Rs63/share or ~37% premium to its book value of Rs46/share. This value unlocking potential explains why we expect ORL to trade at a premium to its NAV. Surplus cash per share sensitivity to RoE and leverage (Rs) If surplus cash With leverage of (x) gives RoE of (%) 0 0.1 0.2 0.3 0.4 20 56 58 59 60 61 22 60 62 63 65 66 24 64 66 68 70 72 26 69 71 73 75 78 ORL s brand equity makes it a preferred partner in (1) redevelopment and (2) joint-development projects Strong brand equity, premium pricing power: ORL has focused mainly on the mid income housing segment and created a premium positioning within this market. This is due to (a) strong brand equity, (b) integrated product positioning in attractive locations, and (c) superior product quality. However, recently the company has also entered into premium projects at Worli through a JDA model, where its brand equity has enabled it to acquire high quality land at an attractive proposition. We believe its premium brand equity makes ORL a preferred partner for (1) redevelopment and (2) joint-development projects, which augur positively for value-accretive project acquisitions going forward. 23
Even with 20% drop from assumed price, stock is 'in the money' Over the last one year, Mumbai's residential prices has appreciated sharply. This has resulted in a huge volume slowdown across Mumbai's residential micro-markets. However, we consider this slowdown a short-term phenomenon emerging from the cyclical nature of the sector. We believe medium-term growth prospects for the RE sector in Mumbai is robust due to (a) huge inherent demand in asset classes, (b) much-hyped oversupply pipeline on paper and limited physical supply of completed projects and (c) all the macroeconomic fundamentals being unaltered for the market. The stock is exposed to limited down side risk in the event of a price correction However, we have assumed realistic price and absorption schedules for ORL s projects considering an ongoing slowdown in the market. In this regard, we have also analyzed the sensitivity of the stock due to a possible price correction. However, we believe this price correction, if any, is likely to impact the residential vertical only, since the ongoing lease rentals in the commercial and retail verticals, in our opinion, has bottomed out and is in the stabilization phase with visible recovery in these verticals. In our sensitivity analysis we have assumed a price correction across ORL's (a) residential projects and (b) commercial/retail projects under the sale model, and we have maintained our base case lease rental assumption for commercial/retail projects under the lease model. Our study suggests that with a price correction of 20% for its projects under the sale model ORL's FY12 NAV would be down to Rs267/share (~14% from the base case NAV of Rs310/share), implying an upside potential of ~19% at current prices. 20% price correction in developement projects to have only 14% impact on NAV Sensitivity of NAV to change in realizations (Rs/share) Change in realization -20% -10% 0% 10% 20% Residential 169 196 222 249 276 Commercial (Lease) 78 78 78 78 78 Commercial (Sale) 19 23 25 31 36 Retail (Lease) 22 22 22 22 22 Retail (Sale) 5 5 6 7 8 Hotels 11 11 11 11 11 Infra Business+Land holding 12 12 13 12 12 Gross Asset Value 315 347 377 410 441 Add: Cash 46 46 46 46 46 Less: Other Op Exp 25 28 30 33 35 Tax 69 76 83 90 97 Net Asset Value 267 289 310 333 355 % change in NAV (13.9) (7.1) - 7.1 14.6 Sensitivity of NAV to price and WACC (Rs/share) Change in realization -20% -10% 0% 10% 20% WACC 13% 276 298 320 342 364 14% 267 289 310 333 355 15% 258 280 302 324 346 FY12E EPS (Rs) 15.8 17.9 19.8 22.2 24.2 24
We believe ORL s limited downside risk to a price correction would be primarily due to its annuity projects which render it a strong support during a downcycle.with the recovery of commercial vertical, we expect its annuity properties to witness a strong upside going forward. Moreover, ORL has low cost land bank and enjoys a superior margins across projects. We belive this provides with a huge flexibility to cut prices without significant impact on its margins and achieve higher sales velocity. Our sensitivity analysis doesn t capture the upside risk arising out of price rationalizations due to its subjectivity. We consider the company to be an attractive bet with (a) its ability to leverage the buoyancy of the Mumbai RE market and (b) limited impact from market slowdown. Key assumptions in our NAV estimate (Rs) Projects Product Type Location Saleable Area (msf) Realization (FY11) Cost/sf Completion Splendor-1 Residential Andheri - East 1.28 14,000 3,200 FY11 Exquisite-1 Residential Goregaon - East 1.37 14,000 3,500 FY13 Splendor-2 Residential Andheri - East 0.29 11,000 3,200 FY14 Exquisite-2 Residential Goregaon - East 1.33 14,000 3,500 FY15 Exotica-1 Residential Mulund - West 1.62 8,000 3,000 FY15 Exotica-2 Residential Mulund - West 1.58 8,000 3,000 FY17 Exquisite-3 Residential Goregaon - East 2.54 14,000 3,500 FY17 Oasis Residential Worli 0.54 32,000 5,500 FY16 Sangam City Residential Pune 0.77 5,500 1,700 FY16 Oasis - Commercial Commercial Sale Worli 0.08 30,000 5,000 FY14 Oberoi Splendor-1 Commercial Sale Andheri - East 0.32 9,500 3,000 FY14 Oberoi Splendor -2 Commercial Sale Andheri - East 0.71 9,500 3,000 FY15 Sangam City Commercial Sale Pune 0.28 7,000 1,700 FY17 Commerz I Commercial Lease Goregaon-East 0.37 120 3,000 FY08 Commerz II Phase I Commercial Lease Goregaon-East 0.73 110 3,000 FY12 Commerz II Phase II Commercial Lease Goregaon-East 1.66 110 3,000 FY13 Oasis - Mall Retail Sale Worli 0.04 30,000 5,000 FY14 Sangam City Retail Sale Pune 0.28 7,000 1,800 FY16 Oberoi Mall Retail Lease Goregaon-East 0.55 100 2,800 FY08 The Westin Hotel Goregaon-East 269 7,000 5,500 FY10 Oasis Hotel Worli 45 10,000 6,000 FY15 25
Comparative valuation ORL is trading at 27% discount to FY12 NAV NAV Prem. / Disc. (%) ORL is trading at 34% discount to FY13 NAV NAV Prem. / Disc. (%) HDIL IBREL Unitech Mah Life Anant Raj Brigade -47-46 -45 DLF -34 Phoenix Oberoi Realty Purvankara -29-27 -22 Godrej Prop -16 Unitech IBREL HDIL Brigade -52 Anant Raj Mah Life Peninsula -50-48 -44 DLF -39 Phoenix Oberoi Realty Purvankara -36-34 -32 Godrej Prop -26-62 -63-59 -65-63 -62 Real Estate: Comparative valuations Company Rating CMP Mcap FY12 FY13 TP* Up- EPS P/E P/B RoE (Rs) (Rs b) NAV NAV (Rs) side (Rs) (x) (x) (%) (Rs) (Rs) (%) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E DLF Buy 242 415 367 397 338 39.5 10.8 12.6 22.3 19.2 1.5 1.5 6.3 7.3 Unitech Buy 38 92 93 107 61 60.0 3.0 4.1 12.7 9.2 0.9 0.9 6.5 8.3 IBREL Buy 107 43 256 291 166 55.0 5.5 6.9 19.5 15.5 0.4 0.4 2.1 2.6 HDIL UR 129 53 348 NA NA NA 21.2 25.1 6.1 5.1 0.6 0.6 9.8 10.9 Anant Raj Buy 99 29 185 200 150 51.4 6.6 7.9 15.1 12.6 0.8 0.7 5.3 6.0 Phoenix Mills Buy 184 27 258 288 260 41.3 6.6 7.8 27.9 23.6 1.6 1.5 5.7 6.4 Mah Life Buy 314 13 593 604 453 44.3 32.2 43.5 9.8 7.2 1.2 1.3 12.0 14.1 Brigade Buy 95 11 172 197 148 55.3 12.0 16.1 7.9 5.9 1.0 0.9 12.1 14.8 Puravankara Neutral 105 22 135 155 124 18.0 7.9 9.1 13.3 11.5 1.4 1.3 10.5 11.0 Peninsula Neutral 59 16 100 105 84 42.5 11.9 13.2 5.0 4.5 1.2 1.0 28.3 29.4 GPL Neutral 576 40 686 777 700 21.5 16.3 39.5 35.2 14.6 4.4 3.4 13.1 26.1 Oberoi Realty Buy 225 74 310 342 310 37.8 15.8 19.8 14.3 11.4 2.2 1.9 19.8 17.7 *TP: Target price 26
Background ORL has undertaken ~5msf of RE development across 33 projects Oberoi Realty Limited is a Mumbai-based real estate developer. It was incorporated in May 1998 as Kingston Properties. The name of the company changed to Oberoi Realty in October 2009. It was converted into a public limited company in December 2009. ORL's primary focus is to develop residential property but it has diversified into retail, commercial, hospitality and social infrastructure projects. The promoters have a proven track record in the Mumbai RE market since 1983. ORL has undertaken ~5msf of RE development across 33 projects so far, which provides it with rich experience in the Mumbai RE market. In October 2010, ORL raised ~Rs10.3b through a public issue of 36.9m shares. The stated objectives for the issue been: (1) construction funding of key ongoing and planned residential and commercial projects, and (2) to acquire land or land development rights. ORL's corporate structure ORL holds the Garden City projects excluding Oberoi Mall. Oberoi Mall holds Oberoi Mall. Oberoi Constructions holds Andheri and Mulund properties. Oasis Realty holds the Worli properties. Siddhivinayak Realties holds the disputed Juhu Hotel. Sangam City Township, a JV between ORL, DB Realty and the Avinash Bhosale group, holds the Pune project. Oberoi Construction Siddhivinayak Realties Oberoi Mall Kingston Property Services Oberoi Realty Limited 100% 100% 100% 36.7% 100% 100% 100% 50% 100% Perspective Realties Oasis Realty Sangam City Township Kingston Hospitality & Developers Unincorporated Unincorporated JV JV Zaco Aviation Expression Realty Triumph Realty ORL has a 21.4msf land bank in Mumbai and Pune ORL's land bank: Location wise (MSF) Western suburbs Central suburbs Island City Pune Total Residential 6.8 3.2 1.5 0.8 12.3 Commercial 3.9-0.2 0.3 4.4 Retail 0.6-0.1 0.3 1.0 Hospitality 1.7 0.2 1.9 Social Infra 2.0 2.0 Total 14.9 3.2 2.1 1.3 21.4 ORL's land bank: Development status wise (MSF) Completed Annuity assets Ongoing Upcoming Total Residential NA 5.8 6.5 12.3 Commercial 0.4 3.7 0.4 4.4 Retail 0.6 0.1 0.3 1.0 Hospitality 0.4 0.2 1.3 1.9 Social infra - 0.3 1.7 2.0 1.3 10.1 10.1 21.4 27
Annexure : Project location ORL has integrated projects location in Goregaon, Andheri, Mulund and Worli 28
ORL has already sold 37 units in Splendor Grande and ~93% in Oberoi Splendor Oberoi Splendor Oberoi Splendor is a mixed-use development, comprising residential, office space and social infrastructure projects, on approximately 21.50 acres of land in Andheri (E) a western suburb of Mumbai. The project is located on the Jogeshwari Vikhroli Link Road (JVLR) and has total saleable area of ~3msf. ORL acquired this land from Madhu Fantasy Land Pvt. Ltd and Avinash Bhosale in 2005 at Rs1.06b.The development is located near the arterial Western Express Highway and overlooks Aarey Milk Colony, a 3,160 acre no-development green zone. This development site is being developed by its wholly-owned subsidiary, OCPL. Residential plot Integrated layout of Splendor (Andheri E) project Splendor II (Grande) Splendor I IT Tower Commerical Phase-I Commerical Phase-II (Prisma) School Plot JVLR ~1,200 units (out of 1,296 units) have been sold in Splendor I Constructions have commenced in Grande(Residential) and Prisma (Commercial) Oberoi Grande School Plot Oberoi Prisma 29
Expect Oasis residential will be launched in 1HFY12 Oberoi Oasis Oasis Realty is a joint venture between ORL's wholly-owned subsidiary, OCPL, Skylark Build and Shree Vrunda Enterprises to develop a mixed-use development of approximately 2.1msf of saleable area in Worli, located on the arterial Annie Besant Road. As a joint venture partner, OCPL will be responsible for developing the free-sale portion arising from the slum redevelopment project being undertaken on the property. The rehabilitation component of the slum redevelopment project is the responsibility of the other joint-venture partners. OCPL would receive 25-40% of net revenues (gross revenue less construction cost) from sale of residential, office space and retail components. Provided construction of hotel is completed by OCPL, it would receive 36.25% of net revenues from the hotel. Layout of Oasis project at Worli Dr. Annie Besant Road Oasis Commerical / Retail / Hotel Oasis Residential Rehab Buildings Excavation work commenced in Worli plots Rehab building Residential plot Commercial and hotel plot 30
Projects at Mulund are likely to be launched in 4QFY11 and land aggreation is progressing in Pune Oberoi Exotica Oberoi Exotica is a residential development on approximately 18.3 acres of land in Mulund (W) a central suburb of Mumbai. The development is located on LBS Marg, a key road in the central suburbs, and overlooks the Borivali National Park. The project has a total saleable area of ~3.2msf and is divided into two phases: Exotica-I has a salable area of 1.6msf comprising ~890 units while Exotica-II has a saleable area of 1.6msf with 869 units. ORL acquired this land for Rs2.2b in 2005 from GlaxoSmithKline Pharmaceuticals Limited. ORL expects to launch the projects by 4QFY11. Oberoi Sangam City project at Pune ORL holds a 31.67% interest in Sangam City Township Private Limited (Sangam City Township), an SPV, established for a development project comprising approximately 56 acres of land located in Sangamwadi, Pune, and surrounded by the Mula Mutha River on three sides. The land is situated 2km from Pune Railway Station and 6km from Pune International Airport. The project will be developed as a mixed-use development, comprising residential, office space and retail components. This agricultural land parcel was acquired through individual agreements with the land owner since 2007. The SPV would be responsible for obtaining approval related to land conversion. While the land aggregation process in still continuing, ORL has made the cash payment partly by disbursing and partly keeping it in an escrow account. 31
Financials and valuation INCOME STATEMENT (Rs Million) Y/E March 2008 2009 2010 2011E 2012E 2013E Net Sales 5,112 4,255 7,836 10,382 13,865 24,383 Change (%) 117.4 (16.8) 84.2 32.5 33.5 75.9 Construction expenses 2,504 1,695 3,094 4,150 5,567 8,491 Staff Cost 33 87 70 259 284 313 EBITDA 2,575 2,474 4,672 5,973 8,014 15,579 % of Net Sales 50.4 58.1 59.6 57.5 57.8 63.9 Depreciation 19 73 91 130 174 189 Interest 0 4 - - - 248 Other Income 474 295 218 545 1,119 1,158 PBT 3,029 2,692 4,800 6,387 8,958 16,300 Tax 69 177 226 1,214 2,464 4,955 Rate (%) 2.3 6.6 4.7 19.0 27.5 30.4 Adjusted PAT 2,954 2,521 4,582 5,174 6,495 11,345 Change (%) 277.5 (14.6) 81.7 12.9 25.5 74.7 BALANCE SHEET (Rs Million) Y/E MARCH 2,008 2,009 2,010 2011E 2012E 2013E Share Capital 26 26 2,887 3,282 3,282 3,282 Reserves 11,395 13,840 15,392 30,087 36,027 45,895 Net Worth 12,204 14,437 18,637 33,728 39,669 49,536 Loans 1,435 107 - - - 4,954 Capital Employed 13,640 14,544 18,637 33,728 39,669 54,490 Gross Fixed Assets 477 2,837 3,258 4,362 4,736 5,841 Less: Depreciation 31 101 190 209 230 253 Net Fixed Assets 446 2,736 3,068 4,153 4,507 5,588 Capital WIP 3,917 3,851 5,103 5,307 6,497 6,458 Curr. Assets 8,991 11,794 16,517 34,007 40,287 54,194 Inventory 5,504 7,127 6,243 8,885 11,958 11,893 Debtors 501 272 404 831 1,387 2,438 Cash & Bank Balance 461 1,669 3,631 15,986 16,543 27,671 Loans & Advances 2,526 2,725 6,240 8,306 10,399 12,192 Current Liab. & Prov. 3,548 3,993 6,843 10,933 12,815 12,944 Creditors 3,540 3,962 6,746 10,909 12,792 12,920 Provisions 9 31 97 24 24 24 Net Current Assets 5,443 7,801 9,675 23,075 27,471 41,250 Misc. Expenses - - - - - - Application of Funds 13,640 14,544 18,637 33,728 39,669 54,490 E: MOSL Estimates 32
Financials and valuation RATIOS Y/E March 2008 2009 2010 2011E 2012E 2013E Basic (Rs) Adjusted EPS 9.0 7.7 14.0 15.8 19.8 34.6 Growth (%) 277.5 (14.6) 81.7 12.9 25.5 74.7 Cash EPS 9.1 7.9 14.2 16.2 20.3 35.1 Book Value 37.2 44.0 56.8 102.8 120.9 150.9 DPS 1.4 0.6 4.0 1.0 1.5 4.0 Payout (incl. Div. Tax.) 9.7 7.0 28.4 7.1 8.5 13.0 Valuation (x) P/E 25.4 29.8 16.4 14.5 11.6 6.6 Cash P/E 25.3 29.0 16.1 14.2 11.3 6.5 EV/EBITDA 29.6 29.8 15.3 9.9 7.3 3.4 EV/Sales 14.9 17.3 9.1 5.7 4.2 2.2 Price/Book Value 6.2 5.2 4.0 2.2 1.9 1.5 Dividend Yield (%) 0.6 0.3 1.7 0.4 0.7 1.7 Profitability Ratios (%) RoE 27.6 18.9 27.7 19.8 17.7 25.4 RoCE 23.3 19.1 28.9 24.4 24.4 35.1 Leverage Ratio Debt/Equity (x) 0.1 0.0 - - - 0.1 CASH FLOW STATEMENT (Rs Million) Y/E MARCH 2008 2009 2010 2011E 2012E 2013E PBT before Extraordinary Items 3,029 2,692 4,800 6,387 8,958 16,300 Add : Depreciation 19 73 91 130 174 189 Interest 0 4 - - - 248 Less : Direct Taxes Paid 69 177 226 1,214 2,464 4,955 (Inc)/Dec in WC 498 1,150 (87) 1,044 3,839 2,651 CF from Operations 2,476 1,448 4,759 4,260 2,830 9,131 (Inc)/Dec in FA (1,937) (2,297) (1,675) (1,419) (1,719) (1,232) (Pur)/Sale of Investments (3,842) 3,692 (640) (404) - - CF from Investments (5,779) 1,395 (2,315) (1,823) (1,719) (1,232) (Inc)/Dec in Net Worth 287 (127) 923 10,288 0 0 (Inc)/Dec in Debt (1,708) (1,328) (107) - - 4,954 Less : Interest Paid 0 4 - - - 248 Dividend Paid 288 177 1,299 369 554 1,477 CF from Fin. Activity (1,709) (1,635) (483) 9,919 (554) 3,229 Inc/Dec of Cash (5,012) 1,208 1,961 12,355 557 11,128 Add: Beginning Balance 5,473 461 1,669 3,631 15,986 16,543 Closing Balance 461 1,669 3,630 15,986 16,543 27,671 E: MOSL Estimates 33
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