Oberoi Realty: It’s time to check out

Last September, we had recommended a buy on the stock of Oberoi Realty at ₹305 as the stock valuation seemed attractive. The stock has rallied about 61 per cent since then. But during this period, the real estate industry also went through a series of challenges — demonetisation, RERA (The Real Estate (Regulation and Development Act, 2016) and the GST (Goods and Services Tax).

While the realty market has partially bounced back, post-demonetisation, sales volumes continue to be poor for Oberoi Realty. At ₹492 now, the stock seems to have run ahead of its fundamentals; it quotes at a trailing 12 month price-to-earnings ratio of 46 times as against its three-year average of 28 times. Also, the company is laden with high inventory, half of it in the luxury segment. With the realty sector yet to show concrete signs of full recovery, investors may be better off booking profits at this juncture.

Oberoi Realty is a Mumbai-based real-estate player focused on residential, retail, hospitality and office space. Residential projects contributed to 70 per cent of overall revenues for the company in 2016-17, while lease rentals and hospitality contributed another 18 per cent and 12 per cent respectively.

Demonetisation and RERA impacted the company. In 2016-17, the company reported 54 per cent y-o-y dip in sales volume to 0.6 million square feet (msf) — a multi-year low. The poor sales trend continued during the first half of 2017-18, when sales volumes were down by 16 per cent y-o-y to 0.27 msf. While sales revenues should prop up once some of the key projects hit revenue recognition status in 2018-19, sales are expected to remain muted in 2017-18. Real estate companies typically report sales of project, once the ‘revenue recognition status’ is achieved — when the project manages to sell 25 per cent of overall saleable area.

Also, the pre-sales (bookings) figures of the company have also been weak. In 2016-17, the company reported pre-sales of little less than 0.6 msf as against 1.3 msf a year before. In the first half of 2017-18, bookings were down by 5 per cent to 0.3 msf.

Besides, the company is increasingly focussing on suburban projects .While moving towards suburban and relatively affordable locality is a sensible strategy, especially when the luxury segment is ridden with huge inventory, it will have repercussions on average realisations and sales over the next two to three years.

Oberoi Realty is also laden with high inventory, a significant portion of which is in the luxury segment. It had inventory of 4.6 msf, as of October 16, 2017, — about eight times the sales volume reported in 2016-17. About 43 per cent of the inventory is from a single luxury project — Three Sixty West at Worli, a premium residential area.

At an average sale price of ₹Rs 50, 647 per square foot, the company is finding it difficult to sell it . As of Oct 16, 2017 it has managed to sell only about 16 percent of its total saleable area of 2 msf. And in the first half of 2017-18, it sold about 60,000 sf of area of Three Sixty West – half of what it did a year before. With the Mumbai realty market showing little signs of broad-based revival, the company might find it difficult to offload its high-value properties.

Currently, the company operates Oberoi Mall, Commerz-I, the new Commerz-II (Phase I) and The Westin Hotel. The first three assets are used in the leasing business. In 2016-17, the lease rental revenues grew 8.4 per cent y-o-y to ₹193 crore. During the first half of 2017-18, it was up by 23 per cent on a y-o-y basis to ₹113 crore.

Revenues from the lease rentals were up largely on the back of higher revenues coming from its new commercial property — the Commerz-II (Phase I). Revenues from Commerz-I were down by about a crore to ₹46 crore in 2016-17 compared to a year before, while that of Oberoi Mall was up 6 per cent to ₹100 crore. In the second quarter of 2017-18, while the occupancy ratio of Oberoi Mall was 99 per cent , it was 82 per cent for Commerz-I. While Commerz-II managed to increase occupancy ratio from 13 per cent in the first quarter of 2016-17 to 45 per cent in the second quarter of 2017-18, ramping up occupancy could be challenging, especially in Mumbai, where there is an oversupply of commercial space.

Oberoi Realty posted sales of ₹1,113 crore in 2016-17, down 21 per cent compared with the previous year. The poor sales momentum continued in the first half of 2017-18, with sales down by 1.4 per cent on a y-o-y basis to ₹564 crore.

The profit for 2016-17 was down 12 per cent to ₹374 crore compared with the previous year. However, during the first half of 2017-18, the net profit was up by a marginal 1.9 per cent on a y-o-y basis to ₹196 crore.

The company’s debt-to-equity ratio is about 0.12 times. The debt as on March 2017 was ₹868 crore. Post-RERA, its trade receivablesincreased by 220 per cent (in a span of six months) to ₹336 crore as of March 2017; this is a concern. According to the management, it went up because of RERA regulations that imposed restrictions on the extent of collections that could be made. The management expects the number to moderate soon.