Oberoi Realty - Realty Loses Its Grip

With the real estate development sector not attracting investors as it used to before the recessionary phase, this particular IPO may best be avoided.

The primary market has witnessed a good amount of activity in the last two to three weeks. Quite a good number of IPOs tapped the primary market floor and the response was pretty good. Now joining the league is Mumbai-centric real estate development firm Oberoi Realty (ORL) which is tapping the primary market by offering 3.95 crore equity shares within a price band of Rs 253-260. If we take a look at the performance of the realty index in the secondary market in 2010, it is quite pathetic. It is clearly seen that while in 2010 the Sensex has moved up sharply by more than 17 per cent, the BSE Realty Index has hardly moved anywhere.

Further, two realty IPOs tapped the primary market in 2010 and the performance has been rather poor. Both DB Realty and Nitesh Estates are still trading below their respective issue prices of Rs 468 and Rs 54. This clearly indicates a cold shoulder response to the real estate companies by the investors in the primary as well as the secondary market. In such a scenario ORL is tapping the primary market and investors must be confused about whether to go for the IPO or avoid it. The confusion is obvious with many realty counters available in the secondary market itself.

Here we are of the opinion that there is no fancy for the realty stocks at the current level and hence we feel investors can avoid the ORL issue. Further, after the listing its market capitalisation will be Rs 8,500 crore which we feel is a bit on the higher side for a realty company when the other pan-India players with better land banks are available at lower valuations. Further, it is Mumbai-centric and hence will face constraints for growth. The company has already put in all the resources of land (which they purchased at lower price) for development. The additional land bank will come at a higher cost which will impact the margins going ahead. Hence we recommend the investors to avoid the issue.

However, there are certain positive factors too. The first and the foremost factor is the higher net present value than the offer price. While the offer price is between Rs 253-260, the NPV for the 20.25 million square feet saleable area stands at Rs 290. So the issue is being offered at a discount. Secondly, while the other realty companies are reeling under debt pressure, ORL is a debt-free company. Rather, as on June 30, 2010 it had a cash balance of Rs 121.71 crore. Also, the acquired land is already fully paid for and so there will be no outgo for land. In addition to this, the premium charged by the company on account of quality construction and its presence in elite areas is an added advantage.

About the company
As regards the business of the company, as mentioned earlier it is into real estate development with exposure to residential, commercial, retail, and hospitality projects with a total saleable area of 20.25 million sq feet. This area is almost equally divided into ongoing (10.12 million sq feet) and planned projects (10.13 million sq feet). The majority of land is in the suburbs of Mumbai like Andheri, Goregaon, and Mulund. It also has land in prime locations like Worli where it has a 50:50 joint venture with Oasis Realty. It also has some exposure in Pune. But here the company has a 31.67 per cent stake in a project called Sangam City Township. The project is expected to yield returns only after 2012-13.

As regards the segment-wise distribution of the total saleable area, 60.91 per cent is residential, 19.92 per cent is office space, 1.98 per cent is retail, 7.43 per cent is hospitality, and 9.77 per cent is social infrastructure such as schools, hospitals, education societies, etc. Its social infrastructure projects are adjacent to its residential developments and the company gets transferable development rights (TDR) against the same.

Ongoing Projects
Currently, there are 13 ongoing projects with saleable area of 10.12 million sq feet. Here 57.50 per cent is for residential, 36.16 per cent is office space, 1.20 per cent is retail, 2.13 per cent is hospitality, and 3.02 per cent is social infrastructure.  

Planned Projects
The 11 planned projects of 12.13 million sq feet comprise 64.31 per cent in residential, 3.69 per cent in office space, 2.76 per cent in retail, 12.73 per cent in hospitality, and 16.51 per cent in social infrastructure.

Issue Objectives
As regards the issue objectives, the company plans to raise Rs 1,000 crore in the lower price band and Rs 1,028 crore in the higher price band. Out of the total proceeds, Rs 741 crore will be used for construction of its ongoing projects and Rs 225 crore will be utilised for the acquisition of land. The rest will be used for general purposes.

Financial Performance
The financial performance of the company has been good with consistent growth in topline in the last five years. Regarding the bottomline, a temporary blip was there in FY09 when the profitability declined a bit. But with realty prices increasing in 2010 the performance has improved again. In FY10, the company posted a topline of Rs 805.49 crore and bottomline of Rs 457.62 crore as against Rs 454.89 crore and Rs 252.33 crore respectively in FY09. The June quarter results have also been good with the company posting a topline of Rs 165.82 crore and bottomline of Rs 79.79 crore.

The margins are higher as the company gets deduction under Section 80 IB and the interest cost is not there. But we feel this section will not be available for its future projects which may bring down the margins. Considering certain factors like discount to NPV, debt-free status, clean title of land, and better financial performance, one may find the issue to be good. But due to factors like lack of attraction towards the realty business and higher valuations, our recommendation to investors is to avoid the issue.