Oberoi Realty?s (ORL) reported earnings of R111 crore (17% y-o-y) were in line with our expectations. However, earnings mix was different as higher revenue recognition for older projects boosted top-line growth of 31% y-o-y, while rising construction costs (40-50% of the increase likely recurring due to cost inflation, while the rest was due to cost overrun in Oberoi Splendor adjusted after project completion pulled down Ebitda margin to 52% (HSBC estimate of 59%).
ORL?s Q2 new sales volume of 0.18 m sq ft (-14% q-o-q) despite prices remaining flat suggests new contracted sales at R220 crore (-14% q-o-q, 7% below HSBC). In the absence of new project launches (Worli and Mulund projects likely to be launched in 4QFY12) and tapering sales for its recently launched exquisite project (-24% q-o-q) we expect 3QFY12 new sales volume trend to be similar to 2Q.
Our target price of R200 implies about 30% discount to ORL?s FY12e NAV of R82 (lower than its peers at 40-55%). ORL is trading at a steep premium to its peers (about 19% discount to NAV vs peers? 32-75%); we expect this to narrow over the next 12 months. Key downside catalysts consensus earnings downgrades for FY13-14 and the potential risk of huge new supply of ORL stock (about 45% of the free float) hitting the market in the next few months as the IPO lock-up period (October 2011) ends. Key upside risks include better than expected volume growth and realisations.
ORL is a leading developer in Mumbai, where high property prices (30-40% over the peak of the previous cycle in 2008) have hurt affordability and pulled down volumes about 32% y-o-y during July 2011. We anticipate this slowdown will persist for another 8-12 months. While ORL has bucked the industry trend by rapidly launching new inventory at only marginally lower prices despite having unsold stock in existing projects, this is likely to cannibalise future sales volumes. Without significantly lower prices to entice customers, volumes could stagnate over FY12-14. The majority of ORL?s existing land bank of about 20 million sqft was bought at historically low prices and has short development duration of 7-9 years. We expect top line at a CAGR of 24% over FY12-14 as new projects start contributing.
HSBC