Godrej Properties: BUY. On a launch pad

Most listed property developers have had limited success with expanding beyond their home geography. An exception to this has been Mumbai-based Godrej Properties Limited (GPL). The company has established a strong presence in other large markets such as the National Capital Region, Bengaluru and Pune, besides Ahmedabad. A steady launch pipeline along with a large and geographically diversified portfolio of residential and commercial projects in prime locations should help the company’s prospects.

The company has an asset-light model of development, wherein it enters into joint development with land owners. GPL is also the preferred development manager for its parent Godrej & Boyce’s land bank. These factors, along with the strength of its parent brand name, have enabled the GPL stock command a premium over its Mumbai-based peers. Compared with the 15-20 times at which Oberoi Realty and Mahindra Lifespace Developers commanded, the GPL stock traded at 30-35 times the company’s earnings until 2014.

But in the last year, the stock was weighed down by concerns over launches, sluggish sentiment in Mumbai and high debt. These led to a de-rating, with the stock’s trading multiple falling to 20 times earnings. These concerns have now eased and the stock has rallied briskly by nearly 75 per cent over the past year, compared with the 40 per cent rise in the BSE Realty index. At ₹283, the stock now trades at 30 times its trailing 12-month earnings — in line with its historical trading band. Yet, there may be scope for an upside.

The company’s earnings growth prospects seem bright. Revenue should get a boost from new projects and pick-up in the commercial segment. Also, profitability should improve with a higher share of residential projects. Besides, the debt situation is likely to ease as projects near completion.

After a lull in launches last year, GPL now has a robust pipeline of new residential projects and also additional phases in its existing projects. New launches include a development project in Chembur, Mumbai, a 63-floor high-rise tower in Byculla, Mumbai and a large residential project in Pune. New phases of development in Bengaluru, Ahmedabad, Gurgaon, Mumbai and Chennai are also set to be launched over the next couple of quarters. The company has residential projects in 12 cities spanning over 40 million square feet.

The company has been the development partner for its parent’s sizeable land bank in Vikhroli, Mumbai. In December 2014, it entered into a partnership with Godrej & Boyce for a mixed-use project development, with saleable area of 1.2 msf, in return for a 10 per cent share of revenue.

The company’s revenue growth remained robust, even amidst the slowdown in the real estate market in the three quarters in 2014-15. Revenue grew 48 per cent and profits increased 26 per cent in the nine months of 2014-15 over the same period a year ago. In the December 2014 quarter, revenue more than doubled year-on-year to ₹538 crore, thanks to commercial property sales. Overall sale area increased 37 per cent compared to the same quarter a year ago. Average sale price of its residential projects remained stable with cities such as Pune showing robust improvement in realisations.

After recording no sales in its under-construction commercial project, Godrej BKC, with saleable area of 1 msf in the last two quarters, it made a sale in the December 2014 quarter. About 69,000 sq ft was sold at an average price of ₹28,000 per sq ft. This is at or below break-even cost, according to the company’s management.

While the sale helped revenue, earnings growth hinges on improvement in sale price. With the project on track to be completed in a year, demand and price are likely to pick up over the next few quarters.

Residential property sale typically comes with higher margins and the pick-up in BKC sales, along with a higher share of residential sales, should support margins.

The company’s total debt has increased steadily in 2014-15, from ₹4,150 crore as of March 2014 to over ₹5,000 crore as of December 2014. The funds were used primarily for its commercial projects in Mumbai. Net debt-to-equity ratio deteriorated to 1.35 times in December 2014 from 0.95 times in March 2014. The company’s high debt is likely to ease as its commercial projects near completion and sale area increases. In the near term, the management expects the leverage to remain between 1-1.5 times. The company’s cost of borrowing has been stable at around 11.3 per cent.

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