HSBC maintains ‘buy’ on Oberoi Realty, raises target price to Rs 520 from Rs 490

As Q2 sales reach pre-Covid levels, management painted a bullish picture on return to normalcy and new launches. The company intends to launch three new projects and a platform for commercial office portfolio to unlock value. Maintain ‘buy’, raise target price to Rs 520 (from Rs 490).

Bullish commentary as Q2 sales reach pre-Covid levels, sales momentum appears to have returned for Oberoi Realty, with management indicating a strong October as well. We believe this is partly a result of preference for strong branded developers like Oberoi and partly on account of stamp duty concessions offered by the government, supported by some pent-up demand during lockdown and low mortgage rates pushing sales in the medium term.

The company indicated that it intends to launch three projects (another phase at Borivali and Goregaon and new launch at Thane) in the current fiscal year. If this materialises, it could result in the company exceeding its FY20 sales run rate. Operationally, it still needs to ramp up. Collections from residential projects remain at almost half the previous year’s same quarter run rate. The company has negotiated 50% rentals with its mall tenants for the entire year and still reported an ebitda loss for its hotel business, albeit there was sequential improvement.

Platform deal — a new fad, or genuine value unlocking or de-risking? According to the company on its conference call, the annuity portfolio is worth more than the entire market cap of the listed company. On our valuation, it is almost 83% of market cap. If investors assign value to the annuity portfolio equivalent to market cap and the company is indeed able to unlock value in its office platform, we believe this can drive valuation by c10%. If they are positive about long-term value creation from office portfolio, we think there is more value to be had by waiting for those assets to complete rather than selling under- construction. However, it is a good strategy to de-risk its investments in office space.

While the company intends to use the money raised to drive growth in its office portfolio, we believe with a strong balance sheet, raising capital should not have been a challenge. Investment view: ORL’s existing portfolio of premium housing, a limited number of projects and its conservative strategy of capital deployment have been a drag on its stock price in the current environment. However, its business model has become robust with a greater emphasis on annuity assets, entrance into the middle income residential segment, becoming more agile by offering schemes to attract customers, and gains in incremental development potential, stemming from transit-oriented development policy. Maintain ‘buy’, raise TP to Rs 520: We now assume the Goregaon project launches in FY21 vs FY22 before, driving our 1-8% estimate changes in FY21-23e. We continue to believe the stock deserves to trade 1 std deviations above its historical mean relative to NAV as on Mar’21, which implies a 13% discount. We now value at Dec’20 (earlier Sep’20) giving a fair value TP of Rs 520 (earlier Rs 490). We see near-term catalysts in the form of new launches and platform deal and rate the stock ‘buy’. Key downside risks, fall in rentals; slower land acquisition; and correction in real estate pricing.