The real estate market has started witnessing customer interest on the back of the prevailing favourable macroeconomic environment, low home loan rate offers and steady but attractive property prices.
Orbit Corporation Ltd, a niche real estate developer with major focus on the high-end residential segment, would benefit from this revival in demand.
Business:
Incorporated in 2000, Mumbai-based Orbit is engaged in the design, construction and development of real estate properties in the Mumbai Metropolitan region (MMR).
The majority of the company’s projects are in south Mumbai areas like Lower Parel, Napeansea Road, Malabar Hill and Nana Chowk. These target the super elite, high networth individuals and top ranked corporate executives. Orbit is also expanding to other areas such as Bandra-Kurla Complex, Santacruz, Andheri and Mandwa to target commercial and the slightly less affluent.
Since its inception, Orbit has completed four projects with total saleable area of around 2.5 lakh square feet (sqf). It focuses primarily on re-development of properties — 66% of its projects in terms of saleable area fall in this category, while 34% is developed in open areas. The company has expertise in identifying sites for redevelopment, liaisoning and negotiating with land owners and tenants.
Currently, Orbit has eight ongoing projects in MMR with 17 lakh sqf of saleable area under various stages of completion.
Investment rationale:
With the focus on redevelopment projects, Orbit is able to acquire land easier and cheaper when compared with buying open land parcels that are rather rare in south Mumbai.
The company has a strong pipeline of projects that provides revenue visibility over the next 3-4 years. Apart from the eight projects under various stages of completion, the company has identified at least seven for development in coming years. These include two residential projects and a road development project in the NapeanSea Road area; redevelopment projects in Santacruz and Lalbaug, and gated township in Mandwa (near Alibaug).
The company has acquired around 200 acres in Mandwa to build high-end luxury villas. The management expects to start work in 2-3 months with the entire township expected to be completed in 6-7 years. Orbit expects revenues to start coming in FY11.
Around 82% of Orbit’s projects are residential, where the cash inflows start coming in the form of sales while construction is still on. The company had a strong Q2 FY10, where it sold 62,650 sqf as compared to 23,768 sqf sold in Q1FY10 and 40,120 sqf sales in FY09.
Demand is expected to remain strong due to the extension of discounted home loan rate schemes, coupled with steady property prices. The 10-15% rise in property prices in Mumbai over the last few quarters has also improved realisations.
Orbit had Rs 403.10 crore of sales backlog, which provides good future revenue visibility. After having raised funds through a qualified institutional placement (QIP) of Rs150 crore last quarter, Orbit has a comfortable debt (including compulsorily convertible debentures) to equity ratio of 0.97x. The company intends to maintain minimum cash reserves of Rs100-150 crore at all times to ensure timely execution of projects.
Concerns:
Any downturn or weaker-than-expected economic recovery may lead to demand reducing for premium properties leading to reduction in sales for Orbit. Any major interest rate hike in corporate and home loans due to inflationary pressures in economy may also hurt sentiments.
Also, the company faces inherent business-related risks like difficulties in land acquisition for redevelopment, delay in project execution or increase in construction costs, which would put pressure on revenues and margins.
Valuations:
OCL’s strong projects’ pipeline and revival in demand for high-end properties in premium locations provides good visibility for revenue growth over next 3-4 years. Also, its redevelopment of land model and good project mix ensures margins will remain strong.
Orbit’s revenues are expected to grow at CAGR of 44% over FY09-FY11E and net profit at CAGR of 85% over the same period. At the current market price of Rs 201.85, it trades at a P/E of 12.18x & 8.53x its FY10E & FY11E earnings respectively.
In view of its strong order pipeline, OCL can be looked at current levels from medium-to-long term perspective.
Disclaimer: The writer does not hold any shares in the company
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