Oberoi Realty Q3 Review: Rising Residential Optimism II Jefferies sets target price at Rs 668

Oberoi Realty Q3 Review: Jefferies has raised FY21/22/23 earnings by 17%/4%/6% on higher sales. Jefferies set their target at NAV of Rs 668 (Rs 682, remove platform upside). It has maintained BUY on Oberoi Realty with new launches and price increments as triggers. Oberoi Realty's multi-year-high sales and P&L performance in Q3 has boosted management's confidence in the residential business with pricing improvement and new launches likely over the next year. Jefferies raised their sales estimates and built-in record sales by FY23. The deferral of lease asset platform creation is a negative though as it reduces immediate monetisation visibility. Maintain BUY with Oberoi Realty well positioned to benefit from the residential cycle pick-up.

Oberoi Realty Strong sales performance should sustain:

Oberoi Realty management said that the strong Q3 sales performance (residential sales up 3x QoQ/YoY to Rs 9.7 bn, best ever for a no-launch quarter) comes on the back of end-user demand, triggered by stamp-duty cuts in Mumbai and also focus on larger / quality homes post COVID. With Rs 121 bn in inventory in completed / close to completion projects and its strong relative positioning in the industry, Oberoi Realty is well-placed to tap this demand.

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Oberoi Realty Optimistic on pricing environment:

Oberoi Realty management sounded optimistic on price increases in residential real estate soon, after 5+ years of flat pricing. Reduced supply, due to industry consolidation, higher commodity prices and improving demand are the drivers of higher pricing. Jefferies agree with pricing improvement, likely visible from 2HFY22 and build in 10-12% price increases over FY22/23 already.
Oberoi Realty New launches, cycle improvement, project completions to aid demand:

Oberoi Realty's 0.5 mn sf of area sold in Q3 was 8% of its inventory. The inventory in the top-selling Skycity-Borivali and Esquire-Goregaon projects now down to 28%/13% of project area. Inventory decline and demand confidence should lead to new phase launches here. Oberoi Realty management guided for 5 mn sf of new launches spread across Borivali, Goregaon and Thane projects from Q4. The new launches are expected to come with attractive pricing and unique financing schemes (e.g., 35-65 with no price differential to base), taking advantage of Oberoi Realty's strong balance sheet (0.16x net gearing). Building on the Q3 performance and good launch pipeline, Jefferies raised their FY21 sales estimate by 55% to Rs 18.4 bn, 5 year high and another 1-2% for FY22/23.

Further cash collection improvement by Oberoi Realty:

Oberoi Realty cash collections at Rs 7.4 bn in Q3, though at all-time high, had trailed sales were 24% lower than sales. Management expects cash flows to rise over Q4/Q1 as the sales spurt seen over late Q3 is yet to fully pay-up (30-60 day lag). Meanwhile, normalized construction pace will drive regular instalment flow.