Oberoi Realty-A simple real estate story


(SAMIR SHAH) #1

I never thought that I my first stock story would be a real estate stock. But here goes:

Oberoi Realty: A relatively simple real estate story, restricted to the Mumbai market. This is part of the reason to recommend. It has only a few properties, the disclosure level of the company is high, and the Mumbai new launch market is all white, which is a comfort for a non-promoter investor.

Company has been around since around 15-20 years, known in Mumbai for high quality construction. Went public in 2010 at a price around 30-40% higher than today. CMP is 190, Market Cap: Around Rs. 6000 Crores. Dividend Yield of 1.05%. Stated aim to distribute 20% of the profits.

In Fy 2012-13, the company recorded a revenue of around 1150 crores, and PAT of Rs. 500 Crore. Earnings per share was 15+, which translates to a PE around 12-13.

The company has a strong balance sheet, which cash of around 500 crores, and no debt.

The business of the company is two fold. One is that it creates investment properties which it rents out (the most famous of these is the Oberoi Mall, which has had a good uptake). The other is that it buys land, builds residential buildings, and sells these.

The last 2 quarters have seen earnings and sales slowing. Sales are around 25% down, and profits are around 35-40% down. So why I am invested in this stock?

Let us first example the value of the company (by adding up the value of what it owns. Here, I am including some of the properties which are still to be developed. The company owns the FSI, and thus, that itself has a value). I am putting the current values of its investment properties, and the developed value of its development properties, less what it will cost to develop these. Finance cost is not material, since all development properties are paid for by customer advances.

Investment Properties:

The company owns 3 complete properties, the Oberoi Mall, the Westin Hotel, and a office complex Commerz-I. Commerz-II is almost ready. All these properties are a total of around1.5-1.6 million sq. ft, located in the Western Suburbs. The current market value of these 4 properties is Rs. 3000 crores, at around 18000-20000 Rs. per sq. ft in Goregaon. In addition, the company Is developing in a joint venture, a property called Oasis in Worli. This will be an iconic property, one of the tallest in the city, in a really unique style. While this is primarily residential (1.8 million sq. ft), there will be 300000 sq.ft. in a hotel property. The company will get 50% of the cash flows from the hotel, as part of its joint venture. The operator will be a high end hotel chain, Ritz-Carlton is the rumor. In any case, the value of the hotel (the company’s share) is likely to be Rs. 600 crores. Of course, this building isnot complete, but the company has already spent around Rs. 500 crores in developing it. So the total value of theinvestment properties is Rs. 3600 crores.

In addition, the company has several development properties.

In a property called Exquisite, which is 1.5 million square feet, the company has almost completed the project. However, nearly 250 flats (at around 4.5-5 crores per flat), are in inventory. The company’s expectation is that these flats will only be sold once the building is completely ready.(More on that later). This amounts to Rs. 1100 crores of inventory, with practically no construction cost remaining (and that will come from the customers who have purchased the other 500 flats).

In a property called Esquire, which is again 1.5 million sq. ft., the company had suspended the project, pending the new development rules coming into force. Now, that there is clarity on this, the company has capped the development here to around 30 floors, preferring to use the FSI more efficiently in subsequent projects on the same land. In esquire the company already has bookings worth Rs. 1250 crores, of which it has received Rs. 450 crores. To date, the company has not recognized any of this income. Nevertheless, 800 crores are due from customers who have booked properties, but paid only partially. In addition, the company has free inventory. If one takes the value of the free inventory, and subtract from it the 400-500 crores it will cost to develop the property, one is left with an inventory of Rs. 500 crores.

Therefore, the inventory and money due from these two ongoing projects (where work is apace, and all permissions are in place), is 2400 Crores. Discounting this, we assume a value of Rs. 2000 crores.

In addition, the company will launch in Q4 the remaining 2.2 million sq. ft. in Oberoi Garden City, Goregaon, where the above two projects are located. Current cost of construction is around Rs. 3000/sq.ft, while current prices are Rs. 20000/- psft. Discounting this by around 20%, we get a value of these 2.2 million sq. ft. at Rs. 3000 crores.

In addition, the company is currently developing the Oasis property in Worli. In this case, the arrangement with the JV partners is that they will spend around Rs. 1250 crores to develop the property (of which Rs. 500 crores is spent), and they have also given around 300 crores to the JV partner as an interestfreedeposit. When they sell properties, Oberoi will first get back its construction cost, then its deposit, and then they will get around 30-40% of the remaining, depending on the price at which sales get done. Current sales have been done at 43000 Rs. psft, but after the hotel operator is finalized, and the building starts taking shape, it is expected to sell around 50000 Rs.psft. I have assumed a sales price of Rs. 40000/-. I have estimated the value (less construction cost) of Rs 2000 Crores.

The company has another property called splendour Grande, on which the company has recently paid Rs. 26 crores for fungible FSI, and they will use this to develop a property to be launched in Q4 called splendour prisma. I estimate the value of this to be Rs. 300 crores.

Thus, the total value of the investment properties and the development properties (after taking into account construction costs and discounting for time to sell and to develop-though hopefully, the prices will go in the meantime, which would then negate any need for discounting- to development is around Rs. 10800 crores. As against this the company is available for Rs. 6200 Crores. Reasonable margin of safety. The margin of safety will get greatly enhanced by Mulund (see below).

In case you are wondering about the fixed costs of the company, they are around Rs. 100 crores per annum, which are easily paid by the annuity income.

Now, let us look at the income side:

The company currently has an Annuity PAT Rs. 120 crores, or around 3 Rs. EPS. They are having difficulty in letting out Commerz II, but hopefully, they can let it out to 75-80% in a couple of years time. In addition, the hotel at Oasis should be operational in 3 years. After 3 years, the annuity EBITDA will be Rs. 250 Crores p.a., which translates to a PAT of Rs. 170 crores a year, which is around5 Rs. EPS.

Now comes the kicker. Typically, when buildings get made, a majority of the bookings happen at the beginning or till the building is around 30-40% complete. Inventory which gets left out by the time the building is 75-80% complete, remains unsold till the building gets its OC. This is because, under CLP, the buyer at 80% completion has to pay almost the entire cost upfront, but still can’t occupy. Typically, these people hope to sell their old house for part payment of the new one. So they can only buy once the building is ready for occupation. This is what the company expects will happen with Exquisite. They expect to sell the Exquisite inventory in the first two quarters of FY15. This is 1100 crores of inventory.

In addition, as mentioned earlier, Esquire has bookings of 1200 crores, none of which is recognized (The AS says that you can only recognize once you have 25% sales, and 25% work completed). Esquire revenue will start getting recognized in Q4 FY14, and the majority will get recognized in FY15, and partly in FY16. Assume 800 crores for FY15.

Similarly Oasis revenue is not recognized, even though there is no formal launch, they do have a few bookings, some from an older project which was substituted by this one. This revenue will also get recognized in FY15 and FY16 primarily. Splendour Prisma sales will probably get recognized only in the last quarter of FY15, and otherwise in FY16.

The second phase of Esquire, which is due for launch later this year, or maybe next year, will take at least 3 years for completion.

So the company will, in 3 years, recognize revenue of all these projects. I expect EBITDA of Rs.1500 crores a year from these projects. After tax profits should be in the range of Rs. 1000 crores. In addition, the annuity projects will yield around Rs. 175 crores PAT. So PAT will be around 1100-1200 Crores, or120% of the last years PAT, and double of this years PAT. EPS will be around 35. This is starting in 2014-2015.

Mulund

The company has a large property in Mulund. In Mulund, the land was bought from Borroughs-Wellcome, which had a factory there. However, it has now been classified as forest land, preventing any construction. The company is not the only affected party. Thousands of flats exist in this so called forest. A single bench of the SC gave a favourable (?) judgement, and the same is now being reviewed by a 3 judge bench, The case is up for final hearing after Diwali. The company seems quite confident of the outcome, and has kept everything ready for development, including plans and permissions. if this comes through, it will mean around 6000 crores of additional income over 3-5 years. In such a case, the EPS will go upto at least 50.

Centaur

The company has paid 20% of the agreed price of Juhu Centaur to Cox and Kings. Now the seller has reneged on the agreement. The company has apparently won in a lower court, but the cases drag on in higher courts. If this comes through, it will mean another 1000-2000 crores for the company.

Negatives:

The biggest negative for the company is that it has no land bank, beyond Mulund. If Mulund case goes against them, they will be under a lot of pressure to purchase land, otherwise, incomes would sharply decline after 3 years, to the annuity income. The company has the balance sheet space to buy large amounts of land. But they seem to be quite conservative with regard to land pricing.

The second negative is also that they are present only in Mumbai, and that too in only 2-3 micromarkets. If there is a sharp downturn in the Mumbai realty market, or too much building in an individual micro market, then all the above revenue projections would get postponed. They are looking at other markets, but nothing there to write about at the moment.

All told, the company is clearly available at a discount to its fair value. It seems that after a bad year in FY14, FY15 onwards, they will increase profits sharply, for at least 2-3 years. There isa high potential upside embedded in a court case which is near finalization. There are other suchpossibilities like NESCO, which have high embeddedvalue. However, the disclosures are notthat great, dividend is poor, and the company does not articulate its plans and difficulties, whichmakes it all rather opaque for the external investor.At least with Oberoi Realty, they seem to be more open.

I invite feedback and criticism from all of you on different possibilities than the ones I have outlined.

Disc: I am invested in this stock (about 2.5% of my portfolio), with my average purchase price of Rs. 165, all purchased in the last quarter.


(PRASAD V. K.) #2

Good write up samir.

But as you correctly pointed out lack of land bank is a major factor.Take a look at Godrej

property.The have better brand,and a lot of land.Only problem was valuation…which is correcting to realistic levels.But Iam on the same page as you as far housing market is concerned.Quality companies like Godrej,Mahindra,Prestige will do very well over long term

and take away considerable market share from smaller regional players.


(SAMIR SHAH) #3

Prasad,

Thanks for your comments.

I try to maintain a margin of safety in my investments. If there is a blip in operational or sectoral performance, the basic valuation must not be so unreasonable, that it can have an outsize effect on the price.

With Godrej Properties, I do not have that comfort at all. It has, to my mind, a very high valuation. Many of its projects are JVs where Godrej gets a share. This valuation, of course, is influenced by the Godrej Brand, and the wealth thatthe Godrej group has created for itself and for shareholders over a long time. But such a valuation does not have a margin of safety.

With Oberoi Realty, on the other hand, there are investment properties owned by the company. These properties alone are worth (conservatively) around 60-70% of the current market cap, and will provide at least 3-4% PAT return on market cap, even if nothing else in the company would work.


(PRASAD V. K.) #4

HI Samir,

Theere are two ways to look at a stock

1)calculate intrinsic value of a stock and buy it at some discount.

2)Estimate growth potential of a sector,examine management’s ability to capture it and

participate in it at any given point and stay with it for longer term.

The first approch works if one is banker who is lending money to a business.The second is for an investor who wants to earn returns more than that of lending money.

Now comming back to sector,we must understand that next meaningful demand will come

from rural and semiurban markets and this is going to be a gamechanger for entire real estate sector.Both mahindra and godrej understand rural markets very well,have very good rural brand recall and pan India presence.There is immense opportunity waiting to becapitalised.There are very few companies in this sector who can achieve this.

Real estate demand in metros is slowing down and expected to remain slugish for considerable period of times.Hence companies identified with pure urban markets are

trading at discount to their intrinsic value.

Disc- no investments in any of these.But as I am positive on rural/semiurban/fringe housing have expo to gruh finance.


(SAMIR SHAH) #5

For whatever it is worth, a PL report on Oberoi Realty:

http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=983198&num=0


(SAMIR SHAH) #6

In my first note on the company, I had mentioned the following about the company’s mulund property. Well, it seems the SC has given a favourable judgement for the company. This was a long awaited trigger for the stock.

"Mulund

The company has a large property in Mulund. In Mulund, the land was bought from Borroughs-Wellcome, which had a factory there. However, it has now been classified as forest land, preventing any construction. The company is not the only affected party. Thousands of flats exist in this so called forest. A single bench of the SC gave a favourable (?) judgement, and the same is now being reviewed by a 3 judge bench, The case is up for final hearing after Diwali. The company seems quite confident of the outcome, and has kept everything ready for development, including plans and permissions. if this comes through, it will mean around 6000 crores of additional income over 3-5 years. In such a case, the EPS will go upto at least 50."


(Hemant V Bhatia) #7
Rep by Vikas Oberoi, CMD of the co.Takeaways of the con call by Capital Mkt;

Operating revenue for the quarter was lower by 27% (to Rs 220.57 crore) and this is largely due to 40% fall in project revenue to Rs 140.63 crore as the rental income and hospitality income was higher by 13% and 14% respectively to Rs 41.39 crore and Rs 30.08 crore. Impacted by lower sales and 160 bps contraction in OPM, the operating profit was lower by 30% to Rs 125.43 crore. Eventually the net profit was lower by 47% to Rs 77.03 crore.

Total area booked in Q4FY14 was 0.48 lakh sft (valued Rs 112.17 crore) as against 1.18 lakh sft (valued Rs 222.66 crore) in Q4FY13. Similarly the total area booked in FY14 stood at 2.88 lakh sft (worth Rs 693.00 crore) compared to 4.96 lakh sft (worth Rs 868.69 crore) in FY13.

Residential runrate was not great in 2013-14. As residential market is sentiment driven, the new government and expected economic improvement may facilitate growth for the residential segment. Since input costs have not comedown the company does not see price coming down in residential real estate market. The company has not lowered the price but if the lower floor units sold in large in a period the average price seems lower as they donot have the floor rise charges.

Three key developments in the last few months â clearance by the Hon'ble Supreme Court of the land in Mulund, the appointment of The Ritz - Carlton as the hospitality partner for the Worli development and the acquisition of the land in Borivali â has placed the company in a unique position to capitalize on the changing market sentiments due to expected political stability in the center.

Oberoi Exquisite: Area booked till date is 1035790 sft with inventory on date being 499880 sft. Booking value till date is 1414.86 crore and revenue recognized is 1321.57 crore. The project is completed to the extent of 93%.

Oberoi Priviera: Area booked till date is 4700 sft (out of 18800 sft) with inventory on date being 14100 sft. Booking value till date is 29.17 crore and revenue recognized is 29.17 crore. The project is completed to the extent of 38%.

Oberoi esquire: Area booked till date is 997540 sft (out of 1504815 sft) with inventory on date being 507275 sft. Booking value till date is 1328.71 crore and the project is yet to cross revenue recognisation threshold.

Oasis residential: Area booked till date is 124306 sft (out of 1783928 sft) with inventory on date being 1659622 sft. Booking value till date is 349.12 crore and the project is yet to cross revenue recognisation threshold.

Tata steel Borivali land: as per current norms the company looks at a saleable area of 4.5 million sft. The company has paid about Rs 1155 crore. The borrowing for this specific project is Rs 750 crore. In the next 6-8 months hope to get all permissions and it is already kick start the approval process.

Ritz Carlton deal â typical hotel operating arrangement and similar to Westin itself. The residential component is also part of hospitality arrangement and there is no payment from Oberoi Realty to Ritz Carlton for the services provided by residential component. Ritz Carlton charge periodically directly to each residential owner.

Splendor once occupation certificate is obtained the inventory will be sold off. Similarly the inventory on Oberoi Exquisite will be sold out in next 15 months.

Mulund Project: Will be launched by Q2FY2015. The company is doing minor tweaking on the plan and getting amended approval.

Esquire revenue recognition â depending on work goes on during monsoon, the revenue recognition will start in Q3/Q4FY15.

Worli project has reached construction financing is possible so the company raised a loan of Rs 300 crore.

Borivali â 1000-1500 sft units with a ticket size of Rs 2 crore. Mulund: equivalent to Goregoan and build 3bhk apartments with above 1500 sft units. Ticket size here will be little bigger at about Rs 3 crore.


(Hemant V Bhatia) #8

Key takeaways of the conference call by Capital Mkt;

Revenue for the quarter ended Dec 2014 was up by 18% to Rs 219.6 crore with operating revenue up by 29% to Rs 206.88 crore and non operating revenue down by 50% to Rs 12.72 crore. Strong growth in operating revenue was largely due to 49% jump in revenue from projects to Rs 132.55 crore and that of hospitality was up by 10% to Rs 32.75 crore. However the revenue from rentals was marginally down to Rs 41.61 crore compared to Rs 41.68 crore in the corresponding previous period. With EBITDA margin expand to 57.6% from 48.3% in corresponding previous period the EBITDA was up by 41% to Rs 126.55 crore and the PAT was up by 16% to Rs 79.23 crore.

The Esquire and Oasis Residential where the company has booked sales for a value of Rs 1444.05 crore and RS 357.37 crore respectively and both these projects are yet to reach the revenue recognition threshold.** Oberoi Exquisite â The project is completed to the extent of 99% and the company recognized revenue to the extent of Rs 1655.45 crore so far Dec 31, 2014 against a sales booking of Rs 1680.18 crore. Similarly in case of Privera**, where the work is completed to the extent of 69%, the company has recognized revenue to the extent of 29.17 crore as against sales booking of Rs 29.17 crore. Inventory in Priviera is about 14100 sft as against total estimated area of 18800 sft.

Launched Prisma at JVLR in Dec 14. As end of Dec 14 the company has sold an area of 72711 sft (or Rs 126.42 crore) out of total saleable area of 268750 sft. Average sales price of prisma is about Rs 17386/sft.On Jan 14, 2015, the company has launched two projects at **Mulund â Eternia and Enigma.**Hope to announce the launch of our Borivali project between March and June. Concluded the first transaction for leasing in Commerz II Phase I at Goregaon.

The recent announcement by the RBI to decrease the interest rates will give a further impetus to the Real Estate Sector.


(Umang Joshi) #9

These was some negative news about Vikas being involved forging stamp papers. What are your thoughts on this? I’ve some relatives living in Andheri project, and they have filed petitions against him

Is it a trivial issue for a builder of his scale?http://abinet.org/bombay-high-court-orders-enquiry-builder-420-vikas-oberoi/


(Chintan Shah) #10

Company seems to be doing well off late.

Even in the weak real estate market ,it was able to sell out an inventory of 1 million sqft ( ~Rs 1500 crores ) during a recent launch in Borivali. Project is expected to be completed in next 5-7 years and company still has 3.5 million sqft more to go.This project should be one of the key revenue driver for this company in the years to come.

Company has also launched one of the premium most project at Worli,Mumbai where the sale will be done only on invite basis. They have a total residential inventory of about 1.8 million sqft and we need to check how fast they are able to sell this. Need to watch sales numbers coming from this project really closely.

Sales numbers from their projects in Goregaon and Mulund are pretty decent as well.

If the company continues to sell out such huge inventories during the pre-launch stage for the upcoming projects (Phase-2 Borivali, Mulund and Goregaon) as well and delivers on time which I believe should not be a problem given the strong balance sheet position and past performance, we can expect significant re-rating.

Expected revenue and net profit numbers for the coming years makes the stock look attractive at these levels.

All the Oberoi properties for me are on the way to my office and progress of them can be tracked easily.

Views invited.

Disclosure : Not Invested. Evaluating further.


(Chintan Shah) #11

I am trying to understand revenue recognition method (Percentage of completion method) used by this company and other real estate companies. Can someone please help me with this ?

For one of their projects “360 West” which is on revenue sharing basis as the land is not owned by Oberoi, I see the project is more than 60% complete but revenue is not yet recognized while for most other projects where the land is also owned by the company as soon as the construction is more than 25% complete , company starts recognizing revenue.

Does this method (Percentage of completion method) also has something to do with minimum % sales ?


(SAMIR SHAH) #12

25% of construction must begin and 25% of constructed area needs to be sold for revenue recognition to begin. I don’t expect this to happen with 360 West for at least 2 years


(Chintan Shah) #13

Thank you Samir for the response.

As per this method then, revenue recognition for Skycity in Borivali cannot happen before FY18 because though they have done per-sales of 25% but construction is yet to start in real sense.Same is the scenario with the projects in Mulund as well.

Going by this and with sales volume drying up in the projects which are completed (Exquiste) or about to be completed (Esquire), no real growth can be expected this year.

Would like to understand your take on this and your view on management as well. I have been tracking this for a year now and feel they usually over commit most of the times.


(Abhishek) #14

Their big trigger is 360 West. The project was launched last quarter but sales have been far below expectations. Upto Q4 FY16 only 15 units out of 250 odd have been sold. I do not expect sales to go up anytime soon given the excess inventory of more than 14 quarters within a 20 minute driving range according to a report by Knight Frank. Additionally, each flat has a price tag of 40Cr. My understanding is that they have launched the project at about 30-40% higher than the market price which will make it even more difficult to sell. Plus, I am not sure that there are many people in the city who can afford houses of such size. Sales velocity is likely to remain slow. It goes to be seen how they perform in Borivali and Mulund where their launch price is about 15% lower than market rate and how sales are going forward.

Disc. Not Invested


(Chintan Shah) #15

IMHO prices for the project in Borivali ( about 500 meters from my place) are inline with prevailing market prices but still this project is seeing good response as this is one of the few gated community project in the area by a big developer.

For the project “360” as per the Q4 conference call transcript the show flat is just about ready and they will start showing it to perspective buyers and agents.

All this factors are not worrying me as all of these are premium properties at prime locations and would be sold sooner or later. However I am not to sure about promoter integrity and their ethics as I see some cases against them for selling the same flat to more than one buyer and similar reasons.

Can senior members in the forum help to dig further on the promoter background. For a developer of this scale and considering the industry they operate in , can we ignore such minor things.


(hemtan100) #16

Prices for both Mulund and Borivli are in line with market rates. Management in its latest concall has been very categorical about the same. Promoter integrity can be gauged from the fact that flat buyers need to issue cheques for flat purchases in the name of the project itself. e.g. Obaroi - Sky; Oberoi - Eternia etc. So there’s traceability in the end usage of funds and reduces the prospect of funds being diverted for other projects. This is a far cry from other developers.


(Chintan Shah) #17

@hemtan100 - Thanks for your response. I understand that they do not accept a penny in cash from customers which is a very good sign but when I googled “cases against Oberoi” I did find some cases where people have claimed that they have sold same flat to multiple customers.

I also understand that the domain they operate in is difficult and is not easy for everyone to be very clean but can things like these be ignored considering they are relatively better in the segment they operate ?

I am also looking forward to their Q1 concall to see if they were really able to sell out big ticket flats in South Mumbai as they have been projecting.


(Abhishek) #18

at 10k crore market cap, there is just no margin of safety. If you add up all the inventory available and assign a value of 2500 crore for the investment properties, the total value barely adds up to 10k crore.

This is assuming a 0 value on the remaining land bank at Mulund and Worli (glaxo). Does anyone know what is the further development possible (FSI available) at mulund land after the current projec is complete?


(hemtan100) #19

@xplorechintan its a valid concern. But when i look around and see 678 Borivali flats booked on launch and another couple of hundred in Mulund when the real estate market is sluggish, it tells me that the company’s brand is phenomenal! no other listed developer would have commanded such a mad buying frenzy.
Also, i’ve learnt the hard way that minor blips on the business front may have nothing to do with stock performance. A friend once told me that he was unhappy with PVR since on a busy sunday they were accepting cash payments and not issuing bills due to a faulty mahcine. he booked out of the stock. Another colleague did some scuttlebut on a Repco branch and he was able to sweet talk his way to a higher LTV. PVR is up 50% and Repco doubled since.
you are correct, Worli bookings remain a key monitorable.


(hemtan100) #20

@am648 all i can say is that the total inventory value is way higher. its easy to calculate the same given the quantum of information revealed by the company quarterly.