Thane land deal raises Oberoi Realty's prospects

The Rs 555-cr deal with GSK Pharma came at a steep discount

On a day the markets fell for the second consecutive session, Mumbai-based Oberoi Realty was up three per cent after the company acquired a 60-acre land parcel in Thane (total saleable area of 8.3 million square feet) for Rs 550 crore from GlaxoSmithKline Pharma. The pharma multinational’s stock ended flat.

The reason for investors' interest in Oberoi Realty is the steep discount of the deal and growth visibility it gets with the acquisition. The latest deal values the per acre price at under Rs 9.3 crore, while the circle rate and recent transactions peg it closer to Rs 30 crore. JM Financial’s Abhishek Anand said the reason for this was the size of the land parcel, lack of key approvals and higher regulatory costs.

What made Oberoi undertake such a move was that, unlike the more leveraged players, the company’s balance sheet is strong with debt-to-equity of 0.1 times, which allows it to go for large outright purchases. Further, given that the land in question has not received clearance from the urban land ceiling Act, and that conversion from industrial to residential use might take over a year, it may have been a spoiler for other bidders. Lack of significant price increases and higher regulatory costs (premium floor space index charges; up 35 per cent over the last four years) could be the other reasons for the discounted deal. But, Oberoi with its track record seems better-placed to deliver.

The key triggers for Oberoi over the next year, according to HDFC Securities, are higher sales from its Mulund project, launch of Goregaon phase-III and subsequent phases of the Borivali project. Moreover, a sharp reduction in property supply is expected with the implementation of the real estate regulation Act and should benefit organised players such as Oberoi. In this context, the increased supply, given its execution track record (projects reaching final stages), could be a competitive advantage.

The Thane land is expected to add Rs 40 per share, if Oberoi is able to get realisations of Rs 14,000 per square feet (Rs 60 per share at Rs 16,000 per square feet). JM Financial’s Anand cautioned the high inventory levels (expected to take 30-35 months to sell at the current rate) in the Thane micro-market will be a key execution risk, which coupled with delay in approvals, will extend the execution timeline.

Overall, given the growth visibility over the next few years, most brokerages have a ‘buy’ rating and could change their targets once the Thane land sale process is completed.