MUMBAI: Oberoi Realty was the largest loser in the realty pack shedding five per cent as the Street was disappointed with its December 2013 quarter (Q3) results on Saturday. The stock, with the other Mumbai-based company Godrej Properties, had made gains on Friday after the Supreme Court struck down orders relating to encroached forest lands in areas surrounding the Sanjay Gandhi National Park in Mumbai. While there are gains as projects in the affected areas in Mumbai can go ahead, the weak results for the Mumbai-based companies and pan-India developers have led to weakness, with the BSE Realty index falling two per cent.
Regulatory delays, high-priced inventory and slower off-take were responsible for the performances of Oberoi Realty, Godrej Properties and Sobha Developers. Analysts at Edelweiss continue to be bearish on the sector saying slow demand has impacted sales.
While Sobha has revised its FY14 forecast downwards, Oberoi was cautious on near-term prospects. Godrej, however, is confident on a pick-up and expects CY2014 to be the best for launches. While analysts have mixed views on it, most are positive on Sobha and Oberoi, given their strong balance sheets, land bank and strong execution.
The key trigger for Oberoi is the launch of the Mulund project after the Supreme Court judgment, while that for Sobha are a strong launch pipeline and cutting debt. While the Supreme Court judgment, its asset-light model and brand name are positives for Godrej, the stock is trading at 10 times FY15 earnings, on a par with Oberoi and at a premium to Sobha (seven times earnings).
Slow quarter, muted forecast
Oberoi and Godrej reported weaker-than-expected results with the underperformance of the former sharper. Oberoi’s net sales for Q3 were down 10 per cent year-on-year and 40 per cent sequentially. In addition to a weak market, the problem for Oberoi has been sales have come from a single project; there have not been any launches and the inventory being sold is at a premium. With lower revenues and expenditure remaining flat, earnings before interest, taxes, depreciation and amortisation (Ebitda) margins fell 700 basis points to 52.7 per cent year-on-year. Kotak Institutional Equities’s Samar Sarda says sales in the March quarter are expected to be weak for Oberoi, with a pick-up expected in FY15.
Oberoi has indicated they would be launching the Mulund project in four months. HDFC Securities' Adhidev Chattopadhyay says the parcel has a saleable area of 3.2 million square feet (MSF) purchased at Rs 220 crore in CY05. The key monitorable, he says, is the ability to launch the project in FY15, keeping in mind the slow pace of approvals across Mumbai and suburbs.
Sarda says the other trigger would be the tying up of a hotel partner for its Oasis project in Worli, and increased construction at Esquire project in Goregaon, Mumbai. The stock could see more upside if the company adds to its land parcel. The management has indicated it was on the lookout and was not averse to leveraging if it got the right opportunity.
Godrej, too, had a muted quarter, given the delays in launches and pre-sales and increase in net debt due to lower collection and higher land cost. While revenues fell nine per cent year-on-year, net profit grew five per cent. While JP Morgan analysts are positive and expect pre-sales and cash flows to see a significant scaling over FY15/16, given the strong pipeline of high-value projects in Mumbai, Jefferies’ Anand Agarwal and S S Ghosh are not as confident. They say spends on new project acquisitions, uncertainty on launches, given the approval delays and the slow pace of liquidation of the older commercial projects remain key concerns. The monetisation of its land bank after the judgment could be a trigger.
Bangalore-based Sobha’s numbers were broadly in line with expectations, with sales growing 27 per cent year-on-year but a steeper rise in operating costs saw profits grow 11 per cent. Though it has revised the forecast for FY14 downwards (3.75 MSF and sales of Rs 2,400 crore against 4.2 MSF and Rs 2,600 crore), Karvy’s Parikshit Kandpal and Varun Chakri say the company is on a strong wicket, given launches of 11 MSF, healthy balance sheet and strong competitive positioning.