Oberoi Realty: Sector premium to shrink

By Accommodation Times Bureau

A report by Standard Chartered Security : The report has been authored by Gaurav Pathak and Shashikiran Rao, Standard Chartered Securities, India.

The following are the highlights of the report:

§ We believe Oberoi Realty’s sector premium – arising from its strong balance sheet and earnings/execution – is likely to shrink.
§ Delays have hit its Exotica, Oasis and Sangamwadi projects. Furthermore, the ramp-up of the Goregaon residential and the lease projects have high downside risk.
§ We believe the rationale for premium valuations (FY13 PB of 2x vs sector’s 1.3x) will be tested given falling RoEs.
§ Sales/lease momentum is declining. The strong balance sheet advantage has yet to result in land acquisitions.
§ Given a subdued outlook, we cut FY12/13/14E earnings by 21/41/26%, respectively, and revise our NAV-based PT to Rs267 (Rs300 earlier) and downgrade Oberoi to In-Line.

Slowdown in revenue growth: Revenue recognition of its Splendor project is largely complete. Earnings in the coming quarters would depend on sales at Exquisite and Splendor Grande (premium projects). We do not expect revenue recognition from Esquire before Q2 FY13. Furthermore, the Oasis launch has been delayed – likely in H1 FY13. The launch of the Exotica and Sangamwadi projects are also unclear.

Leases under pressure: In a first, Oberoi mentioned that office leases could witness a slowdown, result in downward pressure on rentals. We downgrade FY12/13/14E earnings by 21/41/26% to reflect sluggish sales and lease momentum.

Strong balance sheet advantage to moderate: Oberoi has outperformed the Sensex (+11%) and the BSE Realty Index (21%) since Mar ‘11. We believe a potential reversal in the credit cycle will repair real estate corporate balance sheets ahead of its positive impact on real estate demand volume or pricing. In such an environment, sector premium will shift to corporates with the ability to deliver and launch new projects rather than for strong balance sheets.

Sales disappoint: While Q3 earnings was in line at Rs1bn, sales run rate was weak at 0.12m sq ft vs last 4 quarters’ run rate of 0.21m sq ft. Given Q3 is seasonally a strong quarter the numbers were disappointing. It was the second consecutive quarter of declining sales due to 1) no projects launches and 2) low ready-possession inventory post completion of Splendor.

Valuation: We reduce NAV by 10% to Rs314/sh. We raise NAV discount to 15% (10% earlier) to factor in shrinking sector premium to derive our price target of Rs267/sh.