Oberoi Realty IPO Analysis and Review- Indian Real Estate Stock not really compelling without being bad

Real Estate Companies have been trying to raise money from the primary markets for a long time.The depressed markets and the negative sentiment about the real estate sector had prevented that from happening.Realty companies are known for their “creative accounting” shenanigans and their financial statements are not even trusted by Fund Managers.However the Current Bull Run has sparked renewed interest in all sectors even depressed ones like Realty.This has presented a golden opportunity for Real Estate Companies to do IPOs.While the last 2 Real Estates issues Jaypee Infratech and Nitesh Estates were disasters,this ones looks better than the last 2 lemons.Oberoi Realty has good profits,cash flows and zero debt.This makes their issue much better,however the Realty Sector is a dangerous one to play because of the corruption that pervades the entire industry.So you make an investment here not really knowing what you are getting into.Not a Warren Buffet Investment by a long shot.The upside is limited with huge amount of downsides in  the form of unknowns.Here are some of the features of Oberoi Realty

1) Mumbai Based Concentration Risk – The Company’s Projects have all been in India’s Financial and Commercial Hub of Mumbai with future projects also based mostly in this city.Mumbai is the most expensive real estate market in the world.This makes the company susceptible to a economic slowdown.The Lehman crisis had led to a massive 80% fall in the Company’s business though it has rebounded now.

2) Good Cash Flows,Margins and Profits – The Company has managed good profits of around $100 mm in the last year with correspondingly strong Free Cash Flows as well.The Company’s margins of 59% are very high.This also bring the sustainability of the margins into question.While the company can manage to sustain the margins 3-4 years into the future based on its cheap land bank ,I don’t think they can manage it going after the land bank is exhausted

3) Decent Rental Income – The Company has managed an annualized Rs 100 crore net income from rental properties which provides some insurance from sharp slowdown in sale of properties.

4) Valuation not Cheap – The Company is asking for pre IPO 5x P/B which is comparable to India’s top Realy Company DLF and is more expensive than Unitech and other small players.The Valuation is not cheap on a P/E basis at around 16x post IPO (discounting the cash on the balance sheet) either.

5) Legal Cases and Auditor Qualifications – As as the case with the Realty Sector,the Auditor has qualified the Company’s account for distorting the profits through depreciation.The Company also has numerous legal cases against it . The financial statements for Real Estate is always cagey.

Summary

Oberoi Realty looks like a Good Company from the DRHP that it has submitted to the SEBI but financial statements of the Realty Sector are totally untrustworthy.The Company is not pricing itself cheaply though it has a lot of Concentration Risk.The Margins are unsustainable in the long run therefor the Upside is Limited.The downside risks are quite high as the company operates in a slowdown sensitive sector.I would prefer to avoid the issue as there are much better sectors and companies in India to invest in.