Stock Fundamentals

Godrej Properties: Laying the ground

Muthukumar K | Updated on January 17, 2018 Published on August 13, 2016


The Trees project should help revive margins in the next couple of years

Over the last two years, the financials of Godrej Properties have not been as robust as in earlier years, due to poor operating margin of its commercial business.Meanwhile, the stock has rallied sharply.

At the current market price of ₹362, the stock is up 35 per cent from its one-year low touched in February 2016. It quotes at a price-to-earning multiple of about 33 times, much higher than the three-year average of 25 times. Profit growth slowed in the June quarter and new bookings are also showing signs of slackening after hitting a high last year. However, revenue recognition of its premium ‘The Trees’ project in Vikhroli, Mumbai, is expected to give a fillip to the company’s operating margins in 2017-18. Investors can hold the stock at this juncture.

Godrej Properties’ income grew by 42 per cent in 2015-16 and a higher 45 per cent year-on-year in the recent June quarter. However, net profit growth fell to 9 per cent in the June quarter as against the 21 per cent witnessed in FY ’16.

Slipping financials

With about half its income in 2015-16 coming from its low-margin commercial project Godrej BKC, the operating margin at 14.3 per cent in 2015-16 was much lower than 25.3 per cent in 2014-15.However, for the June quarter of 2016-17, operating margin improved to 21.3 per cent. Godrej BKC is being developed by the company as a joint venture with Jet Airways, which owns the land; the profit is shared equally.

The company’s debt-to-equity ratio, at 1.7 times as of June 2016, is lower than what it was a year ago at 1.9 times, but still higher compared to 1.1 times three years back. The Godrej BKC project has the challenge of selling a considerable size of commercial space in a not-so-conducive market. Unless the company offloads the office inventory, it would not be able to reduce debt of the Godrej BKC project. The booking figures for its new residential projects are also showing signs of slowing down. After reporting a record booking of ₹5,038 crore in 2015-16, the first quarter of 2016-17 saw fresh bookings of ₹387 crore — a 69 percent drop from the corresponding quarter of the previous year. Last fiscal, the bookings got a leg up with the launch of ‘The Trees’ project(₹1,224 crore), that is 24 per cent of its overall booking revenues.

However, with new projects in 2016-17 planned in not-so-premium locations in Bengaluru, NCR and Mumbai, the booking value is expected to be lower. Moreover, the Mumbai High Court order restraining the civic body from approving any new construction from March 2016 and the passage of the Real Estate (Regulation and Development) Act, 2016 is expected to delay launches in the sector with more approvals needed.

The operating margin of Godrej Properties has shrunk in the last two financial years as well as in the first quarter of 2016-17. However, once the commercial inventory at Godrej BKC is cleared and The Trees project reach revenue recognition stage, the margins are expected to improve .

Asset light model

Godrej Properties enters into revenue or profit sharing with land owners where the land cost is more than 20 percent of property value. With a good track record in execution as well as a strong brand, the company has managed to buck the weak trend in the realty sector.

Published on August 13, 2016
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