The Glitzy Oberoi Mall in Mumbai’s suburb of Goregaon is pretty much the only shopping mall worth its real estate on the road stretching from Bandra in the south to Dahisar in the north. The 500,000 sq. ft. retail destination, built by Oberoi Realty in 2008, isn’t the largest in Mumbai, but has enjoyed a near monopoly in the area since it opened.

Despite steady footfall, Oberoi Realty isn’t afraid to toss things up once in a while. Coffee shop Starbucks, which was near the entrance, was shifted to the first floor and its earlier premises given to Calvin Klein and Tommy Hilfiger; multi-brand apparel retailer Central, one of the anchor tenants on the ground floor, made way for Zara; Forever 21 exited the building in favour of Marks & Spencer; and toy store Hamleys replaced Home Centre, a furniture and home décor retailer.

“Churn is important. Customers want churn. We want the mall to be the centre of attraction and not any individual store,” says Vikas Oberoi, chairman and managing director of Oberoi Realty. “I am very clear on one thing: The customer is my master. I only serve my customer and everything revolves around him.”

This is the business ethos with which Oberoi, 49, has built on the foundation laid down by his father Ranvir Oberoi, who founded the company in 1980. In doing so, he has built India’s second most valued realty firm with a market value of more than Rs 17,000 crore. OberoiRealty, which posted revenues of Rs 1,160.92crore in FY17, was ranked 218 on the Fortune India Next 500 for 2018. It earned a total operating revenue of Rs 1,215 crore in 2017-18.

After Oberoi took over the reins of the company in 2007, Oberoi Realty has built and delivered projects in diverse parts of the city, including Goregaon East (the site of its flagship mixed-use development called Oberoi Garden City) and Andheri East. The company, which reported a net profit of Rs 460 crore in 2017-18, has 28 million sq. ft. of ongoing and planned projects across the residential, commercial, retail, and hospitality verticals. But Oberoi isn’t stopping there. It has ambitious plans—including for a new township in Thane, more retail projects, and entering relatively affordable homes—as it seeks to quadruple in size over the next few years.

In Oberoi’s own words, his company’s success is the result of building the business “brick by brick”, an apt analogy for a real estate company. Oberoi Realty takes up projects in a phased manner and has built a strong brand in Mumbai’s real estate market, allowing it to charge a substantial premium compared to other projects in the same area. According to property search portal, a three-bedroom apartment measuring 1,491 sq. ft. in Oberoi Esquire in Goregaon East commands a price tag of Rs 5.70 crore; a similar apartment by another builder in the same area is selling for Rs 4.80 crore.

Exquisite, a residential project in Oberoi Garden City, Mumbai. 
Exquisite, a residential project in Oberoi Garden City, Mumbai. 
Image : Oberoi Realty

Oberoi Realty has also benefited from certain strategic decisions over the past few years. For instance, long before the Real Estate (Regulation and Development)Act, 2016 (RERA) came into effect in April 2017,the company was following best practices, which later became the law. These included bringing a project into the market only after securing all necessary approvals and using cash generated from sales of apartments in one project to fund the construction of that specific project.Customers have come back to the developer for more. Suresh Pareek, a Mumbai-based businessman, first bought a house in Oberoi Woods in Goregaon East in 2004. He has since bought another flat in Oberoi Exquisite, in the same neighbourhood, and one each in Oberoi Realty’s under-construction projects in Mulund and Borivali. “Oberoi’s properties generally appreciate more than others and there is good demand for rentals as well,” says Pareek.Customers such as Pareek have helped Oberoi Realty keep its nose above water despite a depressed real estate market. Demonetisation and GST, along with dim prospects of job creation, low salary hikes and unaffordability due to high ticket prices, have cast a shadow over homesales. After declining in 2016, sales of housing units rose a mere 3% year-on-year to 62,256units in calendar year 2017, while new launches dropped 32% to 23,253 units.

It isn’t as if Oberoi Realty hasn’t been affected by the sluggish market. According toan April ICICI Direct research report, the areasold by the developer fell from 1.3 million sq. 2015-16 to 0.6 million sq. ft. in 2016-17, and remained at the same level in 2017-18. But the strategy of holding only as much land as needed to execute planned projects and low leverage have given Oberoi Realty a lean balance sheet and the ability to tide over the lull. “We don’t do land banking and don’t have the problem of timing the market. For us land is raw material,which we process and sell,” says Oberoi. When it comes to leverage, Oberoi Realty’s net debt stands at Rs 1,561 crore with a conservative debt to equity ratio of 0.28.

“The long-term winners in the current real estate market will be those companies that are fiscally disciplined and maintain a low leverage,” says Pankaj Tibrewal, senior vice-president at Kotak Asset Management. “With a strong brand, a real estate firm can still hold its own in this market with right pricing.”

Sunil Singhania, founder of Abakkus AssetManager and former chief investment officer of Reliance Capital’s equities business, says many real estate companies in India have made money on account of appreciation of land, but not by selling real estate. This, according to him, is the wrong model because it has also led many of them to become overleveraged. “A real estate player should either hold rental-yielding assets in its portfolio or develop apartments and sell them.”

The challenges of the past two years notwithstanding, analysts expect sales to gain momentum in 2018-19 and 2019-20 on account of new projects in Goregaon, Mulund, and Borivali in Mumbai. “Oberoi scores high on operational transparency and disclosures—key differentiators in the sector,” say analysts Param Desai andAarti Rao of Elara Securities in a research report. “With around Rs 5,800 crore of revenue recognition (sales from existing projects that can only be accounted for in the profit and loss account upon completion of a certain proportion of the project) pending and a growing number of projects (Mulund, Borivali and Worli)reaching revenue recognition threshold, we expect a 75% earnings CAGR (compound annual growth rate) over FY18-20.”

Oberoi’s willingness to adapt to altered market realities makes analysts optimistic. For the first time, the realty firm announced flexible payment plans for its new projects. At the Eternia and Enigma projects in Mulund, for instance, buyers can pay 10% and book their home, pay another 15% at the end of one year, and the remaining 75% at the time of possession. Similarly, at its projects Exquisite and Esquire in Goregaon, a customer can pay 25% and move into his new home immediately and pay the rest over the next three years.

The response has been phenomenal, says Oberoi. “I only wish we had done this earlier,” headds. So why didn’t he? “Earlier we were small.Today we have a lot more developments coming into the market and we need to adapt to the way the market works.” At the end of 2017-18, the total estimated area of Oberoi Realty’s residential projects under development was 13.65 million sq. ft., more than double that at the end of 2014-15’s figure of 6.25 million sq. ft.

A real estate industry source, speaking on condition of anonymity, indicates that Oberoi Realty sold more units in between April and June than it did in the entire last fiscal year.Around 80-85% of Oberoi Realty’s sales come from apartments priced between Rs 2.5 crore and Rs 4.5 crore. Then there is a super-premium project coming up in Mumbai’s Worli area called ‘360 West’, which will feature high-end residences and a hotel managed by Ritz Carlton. Though sales have been slow at this project, it has attracted interest from some marquee buyers. Some of them are reported to be Bollywood actors Amitabh Bachchan and Akshay Kumar;industrialists Niraj and Madhur Bajaj; and the Chauhan family of Parle Agro.

But Oberoi, an alumnus of the Owner/President Management programme at Harvard Business School, knows his ambitions demand massand that can only come from buyers scouting for properties with a ticket size of Rs 1 crore to Rs1.5 crore. To cater to them, Oberoi Realty has decided to come up with a new brand of residences called Aspire. Though it will come up in various parts of Mumbai, Aspire’s largest destination will be in Thane, where Oberoi Realty is in the process of acquiring a 60-acre land parcel from GlaxoSmithKline Pharmaceuticals for Rs 555 crore. “These apartments will be lower on specifications but not lower on quality,” says Oberoi.The sales from Aspire could potentially equal Oberoi Realty’s current residential sales, he adds.

Acquiring land at reasonable rates and extracting its full potential over a period of time has been one of Oberoi Realty’s specialties. A fund manager who has tracked Oberoi Realty for years says much of the developer’s growth is on account of a land parcel itbought from pharmaceuticals company Novartis in 2002 for around Rs 100 crore (on which Oberoi Garden City stands); its development potential is pegged at around Rs 15,000 crore.The land acquisition in Thane could prove to be similarly fortuitous as it offers Oberoi Realty the scope to develop another township along the lines of Oberoi Garden City.The other pillar on which Oberoi Realty’s future growth strategy stands is its retail business. After tasting success with Oberoi Mall,the company is looking at a five-fold increase in its retail business by building 1 million sq.ft. of retail real estate space each in Worli and Borivali. Though Oberoi Mall accounts for a little less than 10% of Oberoi Realty’s turnover,it is a highly profitable business with an Ebitda margin of close to 95%.The real estate market in the country might still be depressed, but Oberoi Realty has managed to buck the trend. Based on prevailing market rates, the 28 million sq. ft. of real estate the company is developing has are venue potential of Rs 40,000 crore. Clearly, Oberoi has neatly stacked the bricks of his company on a robust foundation; and like the houses he builds, his company too commands a premium.

(This was originally published in the June 15 - September 14 special issue)

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