Established in 1983, Oberoi Realty is engaged in real-estate development largely in Mumbai, with a focus on premium developments. ORL undertakes construction of residential space, offices, retail, hospitality and social-infrastructure projects in single and mixed-use segments. The company follows an outsourcing model with emphasis on quality and design. For instance, it works with well-known architects and contractors. A case in point is the company’s seven-year long relationship with Larsen and Toubro, which carries out construction of ORL’s projects.
ORL is tapping the capital market to raise up to Rs 1,029 crore. Almost three-fourths of this amount will be spent on construction and development of the company’s projects , while the balance proceeds will be used to acquire land and development rights. The IPO will result in the promoter’s stake declining to 78 per cent as against 89 per cent at present.
Strong positioning
ORL’s current zero-debt status and strong cash position of Rs 442 crore makes its balance-sheet strong. That can be leveraged, if necessary, to tap emerging opportunities. Focus on premium projects coupled with strong pricing enables ORL to maintain high margins. Around 61 per cent of its total projects cater to the residential segment, which has bounced back from its lows over the last 18 months as compared to the commercial segment which is still reeling under some pressure due to oversupply issues. Although, the company follows an outright sale model for residential projects, it also earns rental income (Rs 83.4 crore in 2009-10) which is expected to rise sharply starting 2012, after the commissioning of some new projects.
| IN GOOD SHAPE | |||
| In Rs crore | FY08 | FY09 | FY10 |
| Sales | 511 | 425 | 784 |
| Ebitda (%) | 49.6 | 41.9 | 40.4 |
| Net profit | 295 | 252 | 458 |
| Source: Company RHP | |||
| ISSUE DETAILS | |
| Price band (Rs) | 253-260 |
| Size (Rs cr) | 1001-1029 |
| Opened on | 6-Oct |
| Closes on | 8-Oct |
| Crisil grading | 4/5 |
Execution delays a concern
So far, the company has completed 33 projects (developed about 5 million sq ft) since its inception. But, over the next three-five years, it plans to complete 24 projects (20.3 million sq ft). While this should further strengthen its profitability and cash flows, the task is not easy given its past track record.
Also, barring the Sangam City project in Pune, all of ORL’s projects are located in Mumbai, exposing it to a single-market risk. In addition, any delay in the commencement of planned projects or the company’s inability to augment its land bank could impact its valuations. Delays are not rare for realty companies and ORL too has faced delays in the past (like in its Mulund and Juhu projects in Mumbai and one in Pune).
Valuations
ORL’s total income has grown at a compounded rate of 76 per cent and the net profit at 91 per cent over 2006-2010. At the upper end of the price band of Rs 253-260, ORL is available at a PE of 18-18.6 times its 2009-10 earnings on a post-IPO capital, which is lower than 20-23 enjoyed by its peers. The company’s post-IPO net asset value is estimated sbetween Rs 280 and Rs 287 per share by analysts, which again is at a discount of 9-12 per cent but largely in line with the industry.
While the past track record, experienced management, strong balance sheet and business model look good, timely execution and macro events (like demand and supply, pricing) remain key risks. Investors with a medium-term perspective can subscribe.