How Oberoi Realty bucked the downtrend

Last Updated: Wed, Oct 26, 2011 18:40 hrs

He loves his “adrenalin surge” by jumping off a plane at 10,000 feet above ground level, or scuba diving in Maldives, but when it comes to his firm, Vikas Oberoi says it is a “patient company”.

The chairman and managing director of Oberoi Realty is walking the talk. Despite a sharp decline in property values and having around Rs 1,400 crore cash on its books (Oberoi Realty is perhaps the only zero debt company in the realty pack), Oberoi says the company is in no hurry to buy new land and is waiting for good deals to come up.

Oberoi Realty recently jumped three places to become the second largest real estate company by market capitalisation, overtaking Unitech, promoted by the Delhi-based Chandras.

The “patient” strategy has also helped it to preserve cash during the property boom of 2005-08, when most of the companies bought land aggressively and piled on huge debt on their books, Oberoi remained largely conservative in buying land, similar to a strategy followed by other developers such as Peninsula Land and Hiranandani in Mumbai.

At a time when developers such as DLF, HDIL are selling land parcels and development rights to reduce debt, Oberoi is well poised to “deploy cash in right acquisitions,” says Pujit Aggarwal, managing director and chief executive of Mumbai-based developer Orbit Corporation.

Oberoi recently bought back the 50 per cent stake from ICICI Venture in the GSK, Worli project for around Rs 300 crore, which has seen a thumbs up from analysts and investors as it provides cushion for project pipeline. Though the Brihanmumbai Municipal Corporation (BMC) wanted to levy hefty transfer fees on the project, the recent Supreme Court order has quashed the BMC’s bid.

Doesn't it make sense to invest when you have lots of cash and markets are down? “I have 78 per cent in the company and I am the most significant party if this company grows. I am in this business to create value and we will do good acquisitions,” says the 42-year old Oberoi, sitting in the glitzy Westin Hotel in Goregaon, the western suburb of Mumbai, home to company's many projects.

One of such “good” acquisition has been Oberoi's purchase of 60-acre land in Goregaon from pharmaceutical company Novartis for nearly Rs 100 crore in 2002. If one has to buy the same quantum of land in Goregaon, he has to shell out Rs 1,200-1,400 crore, says a veteran realty developer.

Apartment prices in Goregaon has gone up four times since 2002. Today, apartments are sold at around Rs 10,000-12,000 a sq ft in Goregaon East. Goregaon land has potential to develop 10 million sq ft and the company has developed 2.5 million sq ft till now.

After Goregaon, Oberoi bought another land parcel in Andheri in 2005 and Worli in 2009. Though the company had bank borrowings of over Rs 200 crore in 2007, the company repaid all its debt through cashflows generated mainly from Goregaon and Andheri projects.

“It all depends on how disciplined you are. Cash is the king now when banks are not lending and equity markets are down. Many realty companies had money but deployed money wrongly. Most of his (Oberoi's) acquisitions have been right,” says a senior executive of a foreign investor who has invested in the company.

The market is impressed. Though all realty stocks have lost their values in the last one year, the Oberoi stock is among those which have seen a much lesser fall. While Oberoi Realty has lost 23 per cent since its listing, the BSE Realty Index, which tracks realty stocks, has lost over 50 per cent in value in the last on year. Parsvnath, which gained 13 per cent, and Godrej Properties, which has lost six per cent, were the only other steady performers.

“Broadly, real estate stocks have not done well, but it (Oberoi) is one of the better companies which has not seen much erosion in the value,” says Manish Sonthalia, vice president and fund manager, Motilal Oswal Asset Management.

On Oberoi's surge to teh second most valuable firm, a realty analyst with a Mumbai-based brokerage says not too much shoudl be read into this as Oberoi's market cap is at almost same levels but others like Unitech have fallen. While Unitech's market capitalisation has gone down 3.3 times to Rs 7,024 crore in the last one year, Oberoi's market cap has fallen 0.7 times to Rs 7,450 crore, helping it to climb the ladder.

Oberoi agrees with that point. “I would prefer we growing in value rather than others falling in their value and looking small,” he says.

Oberoi Realty, which announced its results last Monday, posted a 17 per cent jump in its net profit at Rs 117 crore, beating analyst estimates which had predicted its profits to be around Rs 95 crore. The company also saw its revenues jumping 31 per cent year on year. Indiabulls, Godrej Properties and Brigade, which have announced their results so far, have seen an average 32 per cent fall in profits.

According to Param Desai, research analyst with stock brokerage Nirmal Bang says the company has reported a 11.6 per cent quarter-on-quarter drop in volumes to 186,036 square feet in the second quarter, which is almost in line with slowdown in Mumbai property market, but it conitnues to outperform the Mumbai property registration.

“We maintain our buy rating on Oberoi Realty with a target price of Rs 283, given the higher valuation visibility, higher return ratios and zero debt, which will help the company in aggressive land acquisition,” said Desai.

Oberoi has sold 90 apartments in Q2 of FY 2012 or an apartment a day, something which it used to do during the corresponding period last year also.

Home sales have fallen by over 40 per cent year-on-year in the past few months in Mumbai Metropolitan Region (MMR) where Oberoi operates, signalling a sharp decline in the property market since 2008-09 when home sales had seen such a slump.

“I would love to do two apartments, but given the current environment, it is what we have achieved,” Oberoi says.

A report from Standard Chartered Securities said the company's “execution pipeline looks strong” with sales of over Rs 1350 is yet to be recognised for three projects –Exquisite, Esquire and Splendor Grande in the coming quarters, equivalent to 21 months of revenue.

“They want to capture markets which are premium to semi premium in nature. They deliver good quality products and that is what market and consumer looks at and does not mind paying a premium,” says Aggarwal of Orbit Corporation.

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