Brand Building for Real Estate Companies

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					equityresearch@bonanzaonline.com                                       Subscribe                                            IPO Coverage

 OBEROI REALTY LIMITED                                                                                                    6 October, 2010




                        Oberoi Realty Ltd
    Issue size (no. of shares)              39,562,000
    Face Value                                Rs 10.0
    Equity Shares outstanding
    prior to the Issue                      288,671,262
    Equity Shares outstanding
    after the Issue                         328,233,262
    Issue opens                             6 Oct 2010
    Issue Closes                            8 Oct 2010
    Price band                           Rs. 253 - Rs. 260
                                                                            Post-IPO



  Company background
  Oberoi Realty Ltd, since its inception, has evolved into a real estate developer focused on premium developments in Mumbai.
  Originally the company was named as Kingston Properties Private Limited. With nearly 3 decades of experience at showcasing
  the best of design layouts and construction quality, Oberoi Realty has come a long way in the Indian Realty Industry.
  The company has established a strong brand and a successful track record in the real estate industry by developing innovative
  projects through its emphasis on contemporary architecture, strong project execution and quality construction. While its focus is
  on residential projects, it has a diversified portfolio of projects covering key segments of the real estate market, which target the
  upper end of the respective income or market segment. It develops residential, office space, retail, hospitality and social
  infrastructure projects in mixed-use and single-segment developments.
  Oberoi Realty currently follows a sale model for its residential projects and a lease model for a portion of its office space and
  retail projects as it believes this provides the company with stable cash flows. In hospitality projects, it currently follows an
  operating agreement model, whereby the hotel is owned by the company and operated by a hotel chain.
  The company currently has 13 Ongoing and 11 planned projects, which it expects to provide a total Saleable Area of
  approximately 20,254,814 square feet.

  Oberoi Realty Ltd debt to equity is almost zero with huge cash and cash equivalents of Rs. 482.5 cr. as on June 2010.
Business Operations

The company covers all the key segments of the real estate market namely residential, office space, retail, hospitality and social
infrastructure.

     Residential Projects – Currently, they have five Ongoing and four Planned residential projects, which are expected to
      provide a total Saleable Area of approximately 123 lakh square feet comprising 60.91% of the total Saleable Area of all
      their total Ongoing and Planned projects.

     Office Space Projects – Currently, they have five Ongoing and two Planned office space projects, which are expected to
      provide a total Saleable Area of approximately 40.3 lakh square feet comprising 19.92% of the total Saleable Area of all
      their Ongoing and Planned projects.

     Retail Projects – Currently, they have one Ongoing and one Planned retail project, which are expected to provide a total
      Saleable Area of approximately 4 lakh square feet comprising 1.98% of the total Saleable Area of all their Ongoing and
      Planned projects.

     Hospitality Projects - Currently, they have one Ongoing and one Planned hospitality project, which are expected to
      provide a total Saleable Area of approximately 15 lakh square feet comprising 7.43% of the total Saleable Area of all their
      Ongoing and Planned projects.

     Social Infrastructure Projects - Currently, they have one Ongoing and three Planned social infrastructure projects, which
      are expected to provide a total Saleable Area of approximately 19.7 lakh square feet contributing 9.77% of total Saleable
      Area of all their Ongoing and Planned projects

Corporate Structure of the company

                                                                        Oberoi Constructions

                                                                        Private Ltd
                                                                        Oberoi Mall Private Ltd



                                                                         Kingston Property

                                                                         Services Private Ltd
    Oberoi Realty Limited                                                Kingston Hospitality and

                                                                         Developers Private Ltd
                                                                         Expressions Realty
                                                                         Private Ltd

                                                                         Triumph Realty Private
                                                                         Ltd

                                                                         Perspective Realty Private

                                                                         Ltd
Objectives of the issue
The Company intends to utilise the Issue Proceeds, after deducting the underwriting and issue management fees, selling
commissions and other expenses associated with the Issue (the “Net Proceeds”) for the following objects:

  Construction of Ongoing projects – The Company proposes to deploy a part of the proceeds of the Issue towards
   construction and development of its all ongoing projects ( that includes Oberoi Exquisite – I, Goregaon (E), Mumbai,
   Commerz II – Phase I, Goregaon (E), Mumbai and Oberoi Splendor - Commercial I, Andheri (E), Mumbai).

  Acquisition of land or land development rights – For a real estate company, land is the basic raw material and acquisition of
   attractive parts of land or land development rights on a continuous basis is critical for the growth of their business. Thus
   availability of financial resources at the time of such acquisition opportunity is a big competitive advantage for any real estate
   developer. Therefore the company intend to utilise the entire amount earmarked for the acquisition of land or land
   development rights from Fiscal 2011 to Fiscal 2014, i.e. within a period of 48 months commencing from the date of receipt of
   the Net Proceeds by the Company

  General Corporate Purposes. - The proceeds of the Issue will be first utilised towards the construction of ongoing projects
   and for the land acquisition and the balance is proposed to be utilised for general corporate purposes including strategic
   initiatives and acquisitions, brand building exercises and strengthening of company’s marketing capabilities subject to
   compliance with the necessary provisions of the Companies Act


Industry Highlights
The real estate sector in India involves the development of residential housing, commercial buildings and office space, industrial
facilities and warehouses, hotels, restaurants, cinemas, trading spaces such as retail outlets and the purchase and sale of land and
land development rights.

Key characteristics of the Indian real estate sector

      Highly fragmented market dominated by regional players: Rapid growth in the last decade has contributed towards the
       emergence of larger players that have differentiated themselves through superior execution and branding. These players have
       been able to capitalise on their early mover advantage with high market shares, though generally they remain confined to
       local or regional markets. While the larger regional players are now initiating efforts to develop a broader geographic
       presence, their home markets continue to generate a majority of their profitability.

      High transaction costs: The real estate sector has traditionally been burdened with high transaction costs as a result of
       stamp duty payable on transfers of title to property, the amount of which varies from state to state. The government is
       making efforts to reduce the transaction cost.

      Enhanced role of mortgage financing: Over the past few years, a significant portion of new real estate purchases in India,
       particularly in the larger cities, have been financed through banks and financial institutions. This has been aided by a decline
       in interest rates and the broader availability of financing products, generally due to aggressive marketing and product
       development by financial institutions.

     Sector governance issues: As a result of high transaction costs, real estate transactions in India often require large amounts
      of cash to bring transparency in the structuring. In addition, the complex regulatory conditions and lack of clarity in land
      titles lead to a greater risk that real estate participants will try to improperly influence government officials.


Driven by a robust demand, property prices have surged by an average 25-30 per cent in most cities in India in the last one year. In
some of the metros like Mumbai and Delhi and in the NCR regions, prices have reached the peak levels that were last seen in 2007-
08.
Net sales of the real estate industry shot up by 78.3 per cent in the June 2010 quarter. While a surge in volume of transactions and
property prices has benefited the industry, the stupendous rise in sales in the June 2010 quarter should be perceived in context of a
very low base last year.
Demand for property across India is expected to surge in the coming 2-3 months on account of festive season, when developers
achieve the highest sales volumes. If real estate companies refrain from raising property rates very sharply, they are expected to
register a robust growth in sales in the December 2010 quarter.


Financial Highlights

           Consolidated Profit & Loss Statement                                                                 (Rs crores)
                            Particulars                      FY08         FY09          FY10       Q2FY10        FY11E
           Income
           Operating Income
           Income from Projects                               510.85        351.66       700.30        126.90       1010.29
           Income from Rooms, Restaurant, Banquet                                                        6.90         51.55
           Rent
           & Other Services                                    0.338          73.7         83.3            26        180.41
           Total Operating Income                             511.19        425.36       783.60        159.80      1,242.25
           Non Operating Income                                 47.3          29.4         21.8          5.90         46.39
           Total Income                                       558.49        454.76       805.40        165.70       1288.64
           Expenditure
           Cost of Construction / Development /Hotel          248.10        159.60       302.50         66.50        515.46
           Expenses Cost
           Employee                                             3.30          8.60         6.90          5.00         38.66
           Administration Expenses                              2.30          9.70         6.80          3.80         28.99
           Interest and Finance Charges                         0.02          0.35         0.03          0.09          0.71
           Depreciation / Amortization                          1.90          7.20         9.00          4.50         33.50
           Total Expenses                                     255.62        185.45       325.23         79.89        617.32
           PBT                                                302.87        269.31       480.17         85.81        671.32
           Provision for Tax                                    6.90         17.70        22.60          6.00         45.10
           PAT                                                295.97        251.61       457.57         79.81        626.21




Peer Comparison

                                      MCAP        Face        Net        EPS           P/E        Return on     Debt/Equity
                                                  value     Sales(Rs     FY10        (Times)         Net           Ratio
                                                             in cr.)     (Rs)                      Worth
                                                                                                     (%)
          Oberoi Realty Ltd              8500          10    783.60        13.94        18.64*         24.55             0.05
          Peer Group
          DLF Ltd.                   66453.34           2   7422.87         9.84          39.71           6.1             0.7
          Unitech Ltd.                  23504           2   2931.34         2.75          23.15           9.9             1.1
          HDIL                       11445.26          10   1502.15        15.95          17.10          9.98            0.72
        *P/E at upper price band
Risks & Concerns

  The company’s business is heavily dependent on the performance of the real estate market in Mumbai. Various factors such as
   prevailing local economic, income and demographic conditions, availability of consumer financing, changes in governmental
   policies relating to zoning and land use, changes in applicable regulatory schemes and the cyclical nature of demand for and
   supply of real estate are outside the control of company’s management. These factors may result in fluctuations in real estate
   prices and the availability of land, which may negatively affect the demand as well as the value of their projects, and may
   result in delays to or the cancellation of some of their projects
  Limited availability of land in Mumbai, combined with increased demand for residential, office space and retail properties, has
   also resulted in, and is expected to continue to result in, increased competition to acquire land for the purposes of development
   in Mumbai.
  Company’s operations could be adversely affected by changes to the Floor space index (FSI) and Transferable Development
   Rights (TDR) regime in Mumbai.
  Due to its limited land bank, the company may have to acquire land at high prices in highly competitive Mumbai’s real estate
   market, which could pressurize its margins. Inspite of robust operating margins, the company’s RoE (return on equity) is
   suppressed due to non-deployment of cash and minimal debt.


Valuation & Recommendation
CRISIL has assigned a CRISIL IPO Grade '4/5' to the proposed initial public offer (IPO) of Oberoi Realty Ltd. The company has
developed 33 projects under various promoter group entities under the brand name “Oberoi”. It enjoys a very strong brand name due
to its track record for good quality construction. On account of its firm market position, ORL commands a premium over its
competitors and has been able to sell its projects at attractive prices, thus enjoying a competitive advantage in the market .The EPS
for FY10 of the company works out to Rs 13.94. At the offer price band of Rs 253 - Rs 260 per share, PE works out to 18.14 –
18.64 times. Further, company enjoys higher profit margin and stability due to minimal debt. However, due to its limited land bank,
the company may have to acquire land at high prices in highly competitive Mumbai’s real estate market, which could pressurize its
margins. Overall, the issue is attractively priced, taking into consideration the brand image and profit margin of the company.
Therefore offers an opportunity for listing gains and those looking for steady growth can also subscribe for long term.

				
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