Oberoi Realty Rating ‘Add’; deal value’s small in overall NAV

Oberoi Realty has agreed to acquire their JV partner’s stake in the Ritz Carlton for an asset value of Rs 10.4 bn (Rs 47 mn/key) that appears very rich though it should be seen in the context of prime city location as well as a superior and near-completed hotel property. While not enthused by the consideration paid, the quantum is small in the overall NAV of Oberoi Realty. Real estate sales have revived faster-than-anticipated, and Oberoi Realty with a larger share of completed inventory and a liquid balance sheet is well positioned to capitalise on the consolidation theme. Maintain Add with revised FV of Rs 570 (Rs 450 earlier).

Part-stake acquired in Ritz Carlton
We find the buy at a premium, though the share of Rs 5 bn is less significant in overall scheme of things, with hotels accounting for only 4% of the gross asset value.

High proportion of completed inventory will aid improving sales trajectory
Oberoi Realty will likely benefit from improved sales trajectory owing to a higher proportion of completed inventory with several projects likely to receive occupancy certificate over the next twelve months. In the near-term, Oberoi will also benefit from reduced stamp duty owing to its presence almost entirely in Mumbai. We note that it will likely have unsold inventory of Rs 156 bn as of March 2021 from on-going projects that could yield cash flows of Rs 127 bn. We currently factor in sales of Rs 61 bn from on-going projects over the next three years.

Potential stake sales for commercial portfolio could aid cap-rate compression
Oberoi Realty has an extant commercial portfolio of 1.7 mn sq. ft that yielded an Ebitda of Rs 3.5 bn in FY2020. It is currently executing another project of 2.8 mn sq. ft at Commerz III that will likely be commissioned by FY2023, and another 2.6 mn sq. ft across two projects. We currently value the commercial portfolio at a capitalisation rate of 8%, while the under-construction portfolio is valued on normalised earnings discounted back to December 2022. Oberoi’s ability to transact the potential stake sale at lower capitalisation rates will lead to potential re-rating of the annuity assets.

Near-term performance could be soft
Oberoi Realty’s stock performance could be soft in the immediate term as investors will likely be less enthused by the acquisition of the balance stake in the hotel property even as valuations for the extant portfolio offer limited upside. Our positive stance essentially factors in (i) improved sales and cash flows trajectory from the on-going residential projects; (ii) low leverage that allows Oberoi Realty to capitalise on aggressive business development; and (iii) potential re-rating as well as re-cycling of capital through stake sale in the annuity business. Our revision in fair value estimate to Rs 570 (from Rs 450) stems from roll-forward to December 2022 (from March 2022) as well as lowered balance capex for completion of commercial projects.