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Oberoi Realty jumps 6% after Motilal Oswal initiates Buy, sees 28% upside on strong cash flow

Oberoi Realty jumps 6% after Motilal Oswal initiates Buy, sees 28% upside on strong cash flow
December 14
17:05 2017
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Oberoi Realty shares gained 6.4 percent intraday Thursday after research house Motilal Oswal has initiated coverage with a Buy rating on the stock with a price target of Rs 580, implying a potential upside of 28.3 percent over Wednesday’s closing price.

“We believe Oberoi can trade at a premium to its FY19 NAV due to its strong balance sheet (net-debt-to-equity of 0.1x), with ample room for leveraging to buy new land; and strong brand equity, which helps it to command premium pricing and enter into JD/JV contracts. Our optimism is also supported by the superior IRR (internal rate of return) of its land acquisitions,” the research house said.

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Oberoi Realty is a Mumbai-focused premium real estate developer, with presence in the residential, commercial and hospitality segments. The sharp focus on delivery of quality products has helped the company create a strong brand over the past 20 years.

Its trusted brand enables its projects to enjoy premium, resulting in superior EBITDA margins of more than 50 percent, Motilal Oswal said.

The company has around 22 million square feet of premium developable/unsold area in prime locations of Mumbai/Thane, which is suitable for large-format integrated development. It typically buys large land parcels of over 25 acres, which are developed in phases over 10-12 years.

Motilal Oswal said company’s residential portfolio comprises 19 million square feet (msf) of developable area, providing strong growth and cash flow visibility over the next 10-12 years. The recent foray into affordable housing completes its bouquet of offerings and should help it enjoy tax incentives.

The research house expects the company to be a key beneficiary of the likely consolidation post RERA (Real Estate Regulation and Development Act).

“Post RERA implementation, we expect consolidation in the industry, where a quality player like Oberoi stands to benefit from its strong operating and financial discipline. Due to stricter rules under RERA, most land owners with no prior experience of development will either choose the JV/JD route for development or simply sell away the land parcel. This will clearly enrich growth prospects for companies like Oberoi,” Motilal Oswal explained.

Oberoi plans to multiply its annuity portfolio from 1.6msf to 4.2msf by launching two new malls (Borivali and Worli) and one office complex on its existing land bank, which is fully paid for.

Motilal Oswal expects the construction of all the three properties to complete by FY21/22. Cash inflows from the existing assets should majorly fund the construction cost of the planned projects, it said.

“The expansion will result in leasing income increasing by 4x over the next five years. It will also provide stability to revenues.”

At 11:45 hours IST, the stock price was quoting at Rs 469.90, up Rs 17.95, or 3.97 percent on the BSE.

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