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Company update: Oberoi Realty — Buy — TP Rs.560
Time to accelerate
Publish date: July 9, 2018
Oberoi Realty is looking to build momentum on the back of improved hotel room rates, increasing occupancy of their commercial assets and reduced debts.
This comes against the backdrop of a poor FY2018, where the company was impacted by poor cash flow due to the implementation of Real Estate Regulatory Authority (RERA) and more land acquisition, especially in Thane, Mumbai. This led the company to borrow Rs8.3 billion to reduce the company’s liquidity woes.
Key Highlights
We recently met the company’s chairman, chief financial officer (CFO) and the director strategy and here are some of the takeaways from the meeting:
- Last fiscal, the company had to pay to register properties under RERA, an advance payment of Rs.5.5 billion buy a land parcel in Thane and an extra Rs.7 billion for the Three Sixty West project.
- The company, which took loan to improve their cash flow last year, has brought down the debt levels this fiscal by raising fresh equity to the tune of Rs.12 billion.
- We believe the company is on a firm footing this fiscal due to the following reasons:
- Their premium property — Three Sixty West — is a joint venture. In this agreement, Oberoi Realty are to incur the construction cost only and will get 30-40% from sales proceeds. As of now, the sales collection is not high because the GST regime has made completed properties more attractive.
i) Two of their real estate projects — Esquire and Sky City — clocked healthy sales volume. However, the overall numbers for Three Sixty West remains on the lower side.
ii) The rental business made EBITDA earnings of Rs.1.9 billion. One of its commercial projects — Commerz II — saw its occupancy increase from 20% in FY 2017 to 45% now. The occupancy levels are expected to rise even further.
iii) We have observed that the construction of new projects has remained slow. But that is likely to improve in the coming years, and will consequently improve sales collection too.
iv) Their hotel property, Westin, has been faring well. Increased occupancy and higher-than-industry-level room rates will contribute to higher earnings.
v) New marketing schemes will lead to a pick-up in property sales in their
Exquisite and Esquire projects.Valuation & outlook
Rise in prices, which have remained stagnant for a few years, will help the company’s fortunes. The company has also used marketing schemes to dial up their sales collection, potentially improving the company’s bottom line.
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