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  • Stock Recommendation | Oberoi Realty - REDUCE - Target price : 460

    Publish date: OCTOBER 24, 2018

    Sales momentum maintained. Oberoi Realty maintained the pick-up in sales since 1QFY19, with sales of Rs5.7 bn in 2QFY19 with healthy growth at Oberoi Skycity and Three Sixty West. Annuity portfolio will see a further step-up in earnings as Commerz II will improve occupancy to 97% giving further stability to an already liquid balance sheet. Maintain BUY rating though cut target price to Rs460/share (from Rs560/share) as we prune realization estimates and prolong sales cycle across the portfolio while eliminating premium to NAV on future asset build-up.

    Oberoi Realty had operating cash flows of Rs452 mn for 2QFY19 compared to cash flows of Rs42 mn in 2QFY18 and negative cash flow of Rs2 bn for FY2018. Oberoi Realty continued to report a robust performance with sales of Rs5.7 bn (+61% yoy) and collections of Rs5.6 bn (+287% yoy) in 2QFY19. The operational performance kept up the momentum seen in 1QFY19 which cumulatively makes it the best performance for the company since the launch of Oberoi Sky City in 3QFY16. Earnings from the rental business also grew 36% yoy to Rs782 mn owing to higher occupancy of 63% at Commerz II, while the hotel business reported 10% yoy growth in revenues at Rs321 mn aided by increase in RevPAR to Rs7,055/day from Rs6,416/day in 2QFY18.On a consolidated basis, Oberoi reported revenues of Rs5.9 bn (+95% yoy) and EBITDA of Rs2.9 bn (+81% yoy) that yielded a PAT of Rs2.1 bn (+106% yoy). Lower-than-estimated revenue was on account of lower revenue recognition in the residential business. Residential business saw revenues of Rs4.7 bn with margins of 45%, while the rental business as well as hotel segment saw margin expansion.

    Oberoi Realty maintained the sales momentum first seen in 1QFY19, with sales of Rs5.7 bn comprising among others (1) Rs2.2 bn (+194% yoy) at Three Sixty West, (2) Rs1.3 bn (+48% yoy) at Oberoi Sky City, and (3) Rs1.1 bn (+7% yoy) at Esquire. Growth in collections should also be seen in the context of the transition phase due to implementation of RERA and GST in 2QFY18. Blended realizations at Rs23,781/sq. ft were up 17% yoy owing to the higher contribution of Three Sixty West in the overall sales mix. On an asset basis, prices firmed up at Oberoi Sky City as well as Esquire, though sales at lower floors saw prices at Three Sixty West drop to Rs43,402/sq. ft. On a reported basis (Ex-TSW), margins for the residential business narrowed slightly to 45% compared to 50% in the preceding periods.

    Improved execution at the larger under construction projects, new launch activity at extant land parcels and conclusion of the acquisition at Thane are likely triggers for Oberoi Realty going into FY2019.
    Improving room rates for the hotel property as well as higher occupancy at Commerz II will further supplement the contribution from the investment portfolio, while conclusion of construction at TSW coupled with re-imbursement of construction cost (with interest) will curtail incremental cash drain for the project. We have revised our target price to Rs460/share (from Rs560/share) primarily as we remove option value for growth in the current environment, as well as moderate sales and pricing assumptions.
    Earnings from commercial and hospitality business remained stable as the company reported revenues of Rs782 mn (+36% yoy) and Rs321 mn (+10% yoy) respectively. Operations at Oberoi mall reported improvement in margins due to renewal of lease contracts at higher rates even though occupancy declined by 182 bps yoy. Decline in revenues for Commerz I was due to (1) decline in rentals by 5% yoy to Rs137 per sq. ft (Rs143 per sq. ft in 1QFY19) and (2) occupancy by 440 bps to 77.7% in 2QFY19.
    Commerz II (Phase 1) currently operating at lower occupancy of 63% is likely to see an increase to 97% by 3QFY19E as the company leased additional space of 0.24 mn sq. ft during the quarter.
    In the hospitality segment, revenues and EBITDA at Westin Hotel increased to Rs321 mn (+10% yoy) and Rs 107 mn (14% yoy) respectively. Occupancy improved to 81% in 2QFY19 (78% in 2QFY18) along with improvement in ARR to Rs8,715 per day from Rs8,224 per day in 2QFY18.
    Reinforcing its view highlighted earlier, Oberoi's management expressed relief on the recent credit-crisis in the sector, that it believes will bring a shift towards larger organized developers. As per management, a credit crisis by local developers was long anticipated as they piled on debt to buy land parcels with less definite plans to monetize the same. Such a situation is likely to work in Oberoi's favor as land parcels would now be available at the “right” price as there would be fewer takers for the same.
    According to the management, there is little or no finished inventory available with the unorganized developers (in Mumbai region). As for Oberoi, the company has largely been reliant on its cash flows for development of new projects and as such is unlikely to face any delays on part of credit availability.
    Oberoi, in-line with its prudent cash management policy, has slowly started to build up its annuity portfolio. Upcoming mall in Borivali and Worli are likely to provide annual cash flows of Rs 3 bn and Rs 3.5 bn respectively and construction for the same is to commence shortly. These malls are expected to come up at a cost of Rs4,000 psf (on GLA basis).
    The company has currently released Towers A-D for sale in Sky City and is constructing Tower E. Construction at towers F-H is to commence post sales completion at Towers A-D. With 97% of space at Commerz II leased out, Oberoi is likely to start construction of Commerz III.
    As per management, sales at Three Sixty West are likely to pick up (current inventory of 150 flats) as the company would release higher floors (above 48th) for sale. All payments for land parcel in Thane are now complete and a project launch is expected in 4QFY19 or early 1QFY20.

    Definitions of ratings

    BUY - We expect this stock to deliver more than 15% returns over the next 12 months.
    ADD - We expect this stock to deliver 5-15% returns over the next 12 months.
    REDUCE - We expect this stock to deliver -5-+5% returns over the next 12 months.
    SELL - We expect this stock to deliver

    Our target prices are also on a 12-month horizon basis.

    Other definitions

    Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

    Other ratings/identifiers

    NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
    CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
    NC = Not Covered. Kotak Securities does not cover this company.
    RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
    NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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