Oberoi Realty: Look at it only from a long-term perspective

Oberoi Realty’s June quarter earnings declined by 30% quarter on quarter and were flat year on year. It was the slowest quarter for the Mumbai realtor in the last four years as the company had limited sellable area due to fewer projects. Its pre-sales activity declined by 55% due to limited inventory and weak macro.

The company’s stock has already corrected by 25% in the last three months and 33% in the last six months as investors anticipated the weak financials and the softening demand for realty in Mumbai.

While the current market price may seem tempting, investors should bear in mind that the company’s numbers are likely to remain subdued for the next two-three quarters till it recognises revenues from its Goregaon and Worli (suburbs in Mumbai) projects.

Usually, the revenue recognition happens only once 25% of the project is complete. According to analysts, it is unlikely to happen for Oberoi in the current financial year.

Besides, its commercial project has also seen a very weak response. Analysts expect the company’s FY14 profit after tax to be around Rs 360 crore, almost 30% lower year on year. Also, the company’s operational cash flows are likely to remain negative for a few more quarters.

Because of lower sales due to limited inventory, and higher expenditure on on-going projects, the sales of which have already been done in the previous quarters, the company’s operational cash flows were negative for the second consecutive quarter in the April to June period, resulting in the company’s cash and equivalents to decline by 18% or by 200 crore to Rs 900 crore.

Although most analysts have given a buy on the stock, with a target 40-50% higher than the current market price, investors should keep in mind that the company’s numbers are likely to improve only next year onwards. While the sharp correction and strong balance sheet provides some comfort, investors should look at this stock only from a long-term perspective.