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Mumbai-based Oberoi Realty's stock price fell sharply by seven per cent on the first quarter results that were largely below most analysts' expectations. While net profit was slightly below projections, a decline in sales volume spoiled the show. Two of its business segments (projects, hospitality) saw a fall in sales volume of three to 40 per cent, while rental segment was up three per cent, the both compared to the March 2013 quarter. Revenues were down 28 per cent across segments, sequentially. However, on a year-on-year basis, these were up nine per cent. Analysts put this performance down to approval delays, lower inventory and lack of demand, given the slowdown.
Say Saurabh Kumar and Gunjan Prithyani of JP Morgan: "Limited inventory, price increases and a weak macro seem to have adversely affected Oberoi's pre-sales (under construction) trends." The result is lowest unit sales and cash collections in the past 10 quarters. Ambit Capital's Rakshit Ranjan and Pratik Singhania put this down to delays in receiving regulatory clearances to restart construction in Oberoi Esquire (1 million sq ft of unsold area), availability of only high-ticket-sized inventory in Oberoi Exquisite (0.5 million sq ft of unsold area), and exhausted inventory in completed projects Splendor and Splendor Grande over the past six months. All these projects are in the Mumbai suburbs of Andheri and Goregaon.
Net profits at Rs 101 crore (up one per cent year-on-year, down 29 per cent sequentially) were slightly lower than analyst estimates.
While approvals will be key to sales growth for the company going ahead and there are no immediate triggers, most analysts have a buy on the Oberoi Realty as it is one of the few realty companies sitting on cash (about Rs 900 crore) and is near zero debt, which could see upsides once launch activity improves. The stock (at Rs 202), which has corrected by over 30 per cent since the start of the year due to the slowdown, is trading at seven times its FY15 earnings estimates with target prices ranging from Rs 270 to Rs 300. However, investors should not expect immediate gains given the weak demand scenario and economic growth as well as RBI's recent move to tighten liquidity.
Slowing sales
There has been a slowdown in the company's sales, especially in its projects of Esquire and Exquisite in Goregaon suburbs. Sales volume for the June quarter was down by half in these projects, compared to the previous quarters. Vikas Oberoi, the company's chairman and managing director, says the company is not pushing aggressively given the regulatory bill on real estate and the impact of the same on the projects. The firm, according to Oberoi, is not much worried about the residential space as there is a strong demand for completed projects compared with the under construction ones. His main concern is the commercial space, which he feels is struggling. The company's Commerz II project is nearly complete, but the project has been a bit of drag, he says.
Prior to the results, the Street was looking for clarity or progress on the company's Mulund and Worli projects, delays in Esquire project as well as on how the company intends to use its cash to fund projects and go beyond its parcels of Goregaon, Mulund and Worli. While the company said it had recommenced construction on the Esquire project, it was awaiting a judgement (environment clearance) on the Mulund project from the Supreme Court and was ready to launch (pre sales) its Worli project. Analysts though hope action to pick up in the second half. On land acquisition, Oberoi said the company has enough land for the next four to five years and was on the lookout for more deals. While a large chunk of growth in the medium-term is expected to come from Mumbai itself, any move to accelerate its foray into the national capital region and Bangalore regions could also help.
