Oberoi Realty: Buy

A recent Supreme Court verdict removes the ‘private forest’ tag on about 6.4 lakh acres in areas such as Mulund and Vikhroli in Mumbai. This resolves a decade-old dispute on this matter.

With a major hurdle cleared, developers can now monetise their land assets by launching projects. In the light of this ruling, investors with a long-term view can consider buying stocks of Oberoi Realty and Godrej Properties. In the last year, the Oberoi and Godrej stocks have fallen by around 30 per cent and 50 per cent, respectively, due to concerns in the property market and delays in project launches.

At the current stock price of ₹184, Oberoi Realty trades at a trailing 12-month earnings multiple of 16 times compared with its historical range of 22-25 times. The stock price of ₹159 for Godrej Properties discounts the trailing 12-month earnings by 16 times, at the low end of its trading band. Also, the strong brand names, financial strength and robust pipeline of these companies should help them weather the slowdown.

While the judgment is positive for both the companies, Oberoi is likely to benefit more. It fully owns 19 acres of land in Mulund, while Godrej Properties has only development agreements for the 133 acres of land in Vikhroli owned by its parent Godrej & Boyce.

The verdict will not immediately change Godrej’s launch plans and the gains are likely be realised only over a longer time horizon. However, unlike Godrej which has a geographically diverse presence, Oberoi operates only in the Mumbai market.

Oberoi plans to launch a residential project with about 3.2 million sq. ft. of saleable area in Mulund within the next few months. The two phases of the project are likely to be completed in three years.

These and other planned launches should aid revenue and profits which have been under pressure in the last few quarters. Residential property sales, which accounted for over 80 per cent of its revenue in 2012-13, have been on a downtrend.

In the December quarter, Oberoi’s development revenue fell 58 per cent year-on-year to ₹89 crore, causing a 42 per cent drop in total revenues to ₹160 crore.

Profits fell by a half from a year ago to ₹68 crore. Delay in finalising a hospitality partner has been holding up the launch of its mixed development project ‘Oasis’ in Worli. Things seem to be turning around, though. Oberoi has indicated that a partner will be announced shortly and the Worli project will be launched soon.

There will also be a revenue boost when accounting begins for its Esquire project in Goregaon, which has had bookings of around ₹1,300 crore so far.

The company’s rental income from commercial properties, which include malls, hospitality and office property, has been strong even amidst the slowdown. For Godrej however, its commercial segment, especially the lacklustre booking at its Bandra Kurla Complex project (saleable commercial area of 1.2 million sq. ft), remains a concern.

The revenue recognition for the project is expected in 2014-15 and demand pick-up needs to be watched closely.

Meanwhile, the company’s residential property sales have been stable. Revenue and profit for the nine months so far in 2013-14 increased 36 per cent and 10 per cent, respectively. Godrej also has a good pipeline of projects in Mumbai and other regions.

Also, the ₹700-crore rights issue by Godrej in August 2013 has helped ease concerns about its high debt.

The company had a net debt of around ₹1,500 crore as of December 2013. While debt has remained unchanged, the net debt-to-equity is currently at a more comfortable 0.69 times, compared with 1.1 times last June. The company has a cash balance of ₹760 crore as of December 2013. In contrast to Godrej’s debt, there was concern that Oberoi’s large cash pile of over ₹1,000 crore at the start of 2012-13 could drag down return on equity. Lack of expansion plans further heightened worries.

However, the company used the cash to fund working capital requirements and purchase additional floor space index (FSI) for its projects.

As of December 2013, the company’s cash hoard had reduced to a more optimal ₹450 crore.

This should help Oberoi fund its immediate cash needs for upcoming constructions and support its expansion plans.