Oberoi Realty Is A 'Buy' For Axis Securities As It Initiates Coverage With 21% Upside

Axis Securities Report

We are Initiating Coverage on Oberoi Realty Ltd., with a Buy recommendation and a target price of Rs 2,560/share, which implies an upside of 21% from the current market price. Our recommendation is supported by:

1. dominant position in Mumbai’s luxury market,

2. strong annuity setup,

3. foray in key micro markets; healthy pipeline,

4. strong cashflows and low leverage.

The company is valued using a six-year DCF and a net asset value premium-based valuation for its residential business, with a projected compound annual growth rate of 41% for its project cashflows.

The leasing business is valued with a cap rate of 8% on net operating income for FY27, and the hospitality business is valued based on Ebitda, with an enterprise value/Ebitda multiple of 20X FY27E.

Key Assumptions:

1. We have used a weighted average cost of capital of 11% to discount the cash flows.

2. A cap rate of 8% for its annuity business

3. An EV/Ebitda multiple of 20 times for it’s hospitality business.

Key risks

• Geographically Concentrated: The company is predominantly present in the MMR region, with a focus on luxury offerings. Any political or geographical concerns affecting the MMR region could impact the pace of growth for the company. Additionally, any shift in market dynamics from the luxury segment to the value segment could hinder its performance.

• Regulatory Changes: Delays in approval processes could adversely affect cash flows.

• New Geographies: The company is expanding into the Delhi/NCR region with an upcoming project in Gurgaon. Any regulatory issues or approval delays in new geographies may impact its performance.

• Property Litigation: A common issue in India that could lead to project delays and increase costs is bureaucratic red tape and regulatory hurdles. Delays in obtaining necessary approvals and permits from various government agencies can significantly prolong project timelines and raise associated costs.

• Product Variation: The company focuses solely on the luxury market in Mumbai, with average realizations higher than most brands. This may hinder its performance if the consumer base shifts toward more reasonably priced and value-oriented products.

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