Oberoi Realty: plum land deal but high inventory may stymie sales
A prized land deal improves the earnings visibility for real estate developers. In this context, Mumbai-based Oberoi Realty Ltd’s successful bid for GlaxoSmithKline Pharmaceuticals Ltd’s 63-acre land parcel comes at an attractive valuation. Besides, being in Thane, the deal could see the firm leapfrog into affordable housing construction. And it’s good timing, given the government’s sops for this segment.
However, some unanswered questions at this juncture could weigh on investor appetite. To begin with, Oberoi Realty will have to seek regulatory approvals to convert the industrial land into a residential region. Approvals like the Urban Land Ceiling clearance are also pending.
Besides, the firm will have to chalk out a winning marketing strategy in the Thane belt that falls outside the Mumbai Metropolitan Region, where it has relatively less experience. So far, it has been a formidable participant in the premium luxury housing segment and the Mumbai suburbs where the game is different.
That’s not all. Importantly, Oberoi Realty does not have the first-mover advantage in the region’s residential property market. Several companies like Tata Housing, Wadhwa Group and Kalpataru Group have invaded this belt over the last three-four years. So there is bound to be stiff competition, at a time when thanks to the Real Estate (Regulation and Development) Act, the cost of compliance and approvals may have increased.
A report by JM Financial Services Ltd that took stock of the existing projects in the Thane belt points out that while 1,099 units spread over 1.31 million square feet have been launched recently, the unsold inventory is a high 913 units totalling 1.03 million sq. ft.
However, there are positives too. The sweet spot in the land deal is the reasonable cost of acquisition. Analysts say that the stated bid price of about Rs555 crore works out to a discount of nearly 50% to the price paid earlier by other developers. One reason could be Oberoi Realty’s ability to strike an outright purchase that few developers are able to do at this juncture and fewer even willing to do so, given that the market is weighed down by significant unsold inventory of houses.
Perhaps the low cost of land will help carve out decent profitability and improve the company’s earnings in the medium term. This explains why the Oberoi Realty stock has held out in spite of the uncertainties in monetizing the land. Further, the company has a healthy debt-to-equity ratio of about 0.1 that would not be strained due to the deal.
True, Oberoi Realty’s sales have also borne the brunt of the slowdown in the residential market. However, it is its rental income that aids cash flows and its healthy balance sheet is an advantage compared to peers in the listed universe.
The contours of this land deal, and the pace and nature of monetization is sure to influence investor sentiment for the stock.