Strong earnings growth ahead for Oberoi Realty

New launch pipeline & progress on current projects should help grow net profit by over 80% annually

Oberoi Realty posted betterthan-expected results for the September quarter on the back of higher sales from its Esquire project in Mumbai’s Goregaon. Reported revenue at ~303 crore were up 20 per cent year-on-year (y-o-y) given that about ~175 crore of the Esquire project was recognised in the quarter. Sales were also boosted by higher rentals and occupancy at phase-II of its Commerz office project, also located in Goregaon. The strong growth in revenue led to a 30 per cent jump in operating profit (costs were 10 per cent y-o-y) at ~163 crore. Net profit, increased by 24 per cent to ~104 crore, pegged back by a 61 per cent fall in other income.

On the operational front, the company booked sales of 173,000 sq ft in the quarter, valued at ~353 crore. Sales volumes were up 77 per cent on a sequential basis and 23 per cent in value terms, led by the Sky City (Borivali, Mumbai) and Esquire projects, which accounted for 58 per cent of volumes. Collections in the quarter, however, remain muted at ~150 crore as against the quarterly run rate of ~300- 400 crore. The company attributed the lower collection to the impact of the Real Estate (Regulation and Development) Act (Rera), as agreements had to be modified, resulting in delays. The company expects the situation to come back to normal by the March 2018 quarter.

On the whole, most analysts are bullish about the company’s prospects given the medium-term visibility of revenues and projects that the company is expected to start work on. Over FY17-19, analysts at IDFC Securities expect net profits to grow 87 per cent annually. This is on the back of ~5,180 crore of revenue recognition which is pending, coupled with a growing number of projects (Mulund, Borivali and Worli) reaching the revenue recognition threshold during this period. Further, near-complete residential inventory valued at ~2,800 crore should accelerate cash collection, which is expected to double from its current levels over the next two years.

It is the strong cash flow position and execution which helped the company to invest and grow, while other developers struggle to clear inventory. Adhidev Chattopadhyay of ICICI Securities says with Rera implementation across many states picking pace, there is a discernible shift from unorganised to organised players. Developers with strong balance sheets, such as Oberoi, are in pole position to augment their land bank at reasonable valuations. An example of this is the recent acquisition of the 60-acre land parcel in Thane with a potential saleable area of 8 million sq ft. The company is expected to launch the project in the second half of FY19 and would monetise it over the next few years.

At the current price, the stock is trading at about 12 times its FY19 estimates and could be a good bet over the medium term.