Godrej Properties: Plots of promise

The real estate sector is in a recovery mode under the new Goods and Service Tax (GST) and Real Estate Regulatory Authority Act (RERA) regimes. Select players in the sector are witnessing strong traction in the residential segment, with brand value too playing a significant part in the revival. In this regard, Mumbai-based developer Godrej Properties Limited (GPL) can be a good bet for long-term investors.

GPL has an asset-light model of development (it enters into joint ventures with land owners), which has helped it maintain strong sales momentum, despite market softness over the past three to four years. The strength of its brand and quality land banks in prime locations, have also enabled GPL to command a leading position in the market among other Mumbai-based peers.

Investors with a two to three-year investment horizon can buy the stock and accumulate on declines.

Though the stock has corrected over 25 per cent since April, valuations are not cheap. At the current market price of ₹664, the stock trades at 34 times its likely per share earnings for FY20.

But, it has traded at PE multiples in excess of 50 times in the past. As earnings are expected to sustain their steady upward trajectory, there is reasonable scope for significant capital appreciation in the next few years. The company is comfortably placed on the debt front.

Focused approach

GPL has strong presence across 12 major cities, but now plans to exit many non-core markets such as Kochi and Mangalore as part of its strategy to focus on four key cities — the National Capital Region (NCR), Pune, Mumbai and Bengaluru. It has already exited the Hyderabad market and would soon move out of the Kochi market as well.

The streamlining of its operations to focus only on the top markets would favour the company, as higher migration to these financial and IT hubs for jobs will result in greater housing demand and generate traction in the commercial real estate segment. Nearly 85-90 per cent of GPL’s revenue comes from the sale of residential properties.

The company has added two new residential projects (during the September quarter) with saleable area of about 2.9 million square feet at Sector 43, Noida and at Ghodbunder Road, Thane.

The average realisation for residential projects in Ghodbunder is around ₹6,000-10,000 per sq ft, according to a report from real estate consultant, Knight Frank. GPL is able to derive on an average over ₹7, 200 per square feet.

GPL has high potential to expand its commercial real estate operations. Bengaluru and Pune have single-digit vacancy levels, at 3.5 and 5.7 per cent, respectively, according to Knight Frank.

Healthy pipeline

GPL has rolled out two new projects — Godrej Reflections and the phased launch of Golflinks — that generated ₹146 crore and ₹67 crore, respectively, to sales booking during the September quarter. Though the company reported a decline in pre-sales, the overall sales growth during the recent three-month period was robust at 36 per cent Y-o-Y. The operating margins have improved slightly to 15 per cent.

With the company’s plans to focus on higher-margin projects, profitability should improve. GPL has multiple projects nearing completion and has planned about 23-25 projects in the coming years. According to the management, the pace of project additions would accelerate in the second half of FY19 as the company has two additional projects in the pipeline for which development agreements are finalised, and a large number of deals for which term sheets have been executed.

The company has a debt-equity ratio of 0.6 times and strong cash flow, which aids in its development plans. Between FY13 and FY18, the company registered sales and profit CAGR (compounded annual growth rate) of 18 and 11 per cent, respectively.

Strong market position

GPL has been able to consistently demonstrate its pricing power in key markets such as NCR in the past. The asset-light model of development (revenue or profit sharing model) helps the company shield itself from land price fluctuations. But as land prices correct, GPL could gain, as lower land prices would reduce the project cost and improve affordability among buyers, resulting in better volumes. For cities such as Mumbai and the NCR, land prices form a significant component of overall property costs.

Also, access to Godrej group’s land banks, in key areas such as Vikhroli (Mumbai) could help in faster project launches. Project development in such prime locations would increase the company’s growth prospects and market share.

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