Old Game, New Challenges
Given new competition and its huge debt, Orbit needs to venture out and explore new markets to stay ahead in the game, says Shrutika Verma from Businessworld.
"Enjoy the luxury of living in space” — screams a hoarding hung over a signal in south Mumbai. It quickly catches your attention since ‘luxury,’ ‘living’ and ‘space’ are words that are hard to come across in a city like Mumbai. The billboard is an advertisement by the Rs 487-crore (2009-10) real estate developer Orbit Corporation that has clocked an average sales growth of a whopping 1,370 per cent in the past four years, topping the Welterweights category (below Rs 500 crore).
The company has cocooned itself in Mumbai. “We understand Mumbai much better,” says CEO and MD Pujit Aggarwal, who hails from Haryana. “The opportunities that Mumbai offer are not available in most other parts of the country or the world,” he claims.
And when he says opportunities, he is quickly putting Mumbai’s high demand for formal housing over Hyderabad or Delhi’s better regulatory environment. So, even though acquiring land and getting regulatory approvals might be tough in Mumbai, the huge demand for high-end housing makes the city a safe bet.
Orbit, whose customers include corporate houses and high net worth individuals (HNIs), focuses on redevelopment of existing properties and building high-end residences and ‘built-to-suit’ commercial properties. The company has recently shifted to a 90:10 mix of residential and commercial projects from the initial 70:30 due to an oversupply in the commercial space.
Orbit’s strategy is simple — to cash in on the huge demand for luxury living in the city. It helps that most people with a majority of their life’s earnings invest in real estate. The other reason why the company seems to have done better is that it made most of its sales when property prices were at their peak — during 2007 and early 2008 — just before the economy went into recession. Call it luck or serendipity, but the company seems to have benefited from its timing.
Orbit, which went public in 2007, calls itself the Mercedes of the real estate world where it sells at a higher price over its peers, cashing in on the brand and user experience it has built in the past 22 years. “In a market like Mumbai, we get a better price realisation over our peers and we are able to sell across each and every segment. So even if it is a Rs 75-lakh house, I will be getting a 20-30 per cent pop over my peers today and that is what has kept us pushing as we go ahead,” he adds.
So what makes Orbit a more expensive player in the space? First, the company has developed most of its portfolio in south Mumbai, which is a prime residential location. Since there are not many players competing in this area, the company is able to sell at higher prices. Experts suggest that Orbit had first-mover advantage (before 2004-05), which enabled it to acquire land banks at prime locations in Mumbai at a much lower value. It has several projects at Napeansea Road and Gamdevi, where real estate prices are sky high. In Mumbai, it competes with players such as the Lodha Group, Indiabulls Real Estate, Raheja Developers, etc., most of whom have entered the market after Orbit.
Though revenues have been rising steadily over the past several years, it could not escape the economic turmoil of 2008-09. “2007-08 was a phenomenal year,” recalls Aggarwal. “Availability of capital was phenomenal and then came 2008-09, which again was a watershed year. Everybody just froze and wanted to conserve cash and, hence, there was a lack of demand and our sales dipped.”
The past few quarters haven’t been good either. The stock has been underperforming the realty sector index since August 2010 and the Sensex since January 2010. However, the street is expecting real estate stocks to improve as the market picks up, and analysts believe that if there is a good market rally, Orbit will outperform peers such as DLF in the longer term due to the volatile nature of the stock.
“If you see the past six months, the realty sector has been getting a beating due to several reasons such as lack of trust in developers due to project delays, cash flow situation or regulatory issues,” explains Kaustav Roy, executive director, Cushman & Wakefield India.
Roy, who expects the competition in Mumbai to grow in coming years, adds, “I am worried about the sustainability of the high prices as the number of such houses that are coming up is higher than the demand.”
Orbit currently has 22 to 23 projects in the pipeline of which 14 to 15 are already under process. These include a couple of clustered development schemes at Malabar Hill (Rs 40,000 to 45,000 per sq. ft), one at Napean Sea Road (Rs 70,000-80,000 a sq. ft) and a slum re-development project at SV Road, Santacruz (Rs 20,000-25,000 per sq. ft).
However, Orbit is expecting a growth of at least 40 per cent CAGR on the top line over the next three to four years and foresees profit after tax (PAT) margins to grow more than its topline, says Aggarwal.
“The revenues that you are seeing today are based on just 1 or 1.2 million sq. ft of space, which has been sold. The space in the production pipeline is 6-7 times of that. So, you can imagine the kind of revenues that we are talking about over the next 3-4 years,” he adds.
Bank lending rates have been a dampener for most real estate companies like Orbit. Aggarwal believes squeezing of lending rates by banks and a tightened regulatory environment have affected sales in the past two to three months. The company, which was expecting to post a 40 per cent year-on-year growth in its top line this year, is now eyeing only modest growth of 5-10 per cent or similar revenues. However, given the current pipeline, it foresees a 30-40 per cent growth trajectory next fiscal.
Hurdles in this growth? Orbit says political uncertainty at the Centre wherein the present UPA government loses its majority could affect the company as it could lead to changees in the regulatory environment.
Analysts say that Orbit will face greater competition especially in central Mumbai, a market the company has started to look at. In places like Lower Parel, there are established players like the Rahejas, Lodhas, Indiabulls and DB Realty, which are going to give the company tough competition.
And if it plans to remain in Mumbai, Orbit needs now to start focusing on the suburbs such as Bandra. Orbit had the time advantage when it started building in south Mumbai, but now the competition is likely to catch up and it needs to gear up to sustain.
- Early mover advantage
- Has most projects in south Mumbai where there is not much competition
- Competition is likely to get fierce
- High interest rates and high inflation are inevitable
- Several projects lined up for the next 3-4 years
- Foray into other cities in the next 2-3 years
This story was published in Businessworld Issue Dated 23-05-2011