Stock Call. What makes Godrej Properties a good bet over long term

The Indian real-estate market, particularly the residential segment, has already been struggling, with demand slowing down for 3-4 years when the Covid-19 outbreak hit, aggravating the situation.

While the Central and State governments have taken several initiatives to boost the residential segment, near-term headwinds remain.

However, developers with strong balance sheets can tide over the challenges better.

Godrej Properties is a leading Mumbai-based developer with a strong brand recognition and quality land bank in prime locations.

Even during turbulent market conditions, the company was able to achieve 71 per cent y-o-y growth in new bookings (value terms) in the June quarter and was able to launch a new project.

While the company reported weak earnings due to slow construction activities, it outperformed other Mumbai-based players in the June quarter. Given buyers’ preference towards quality developers, Godrej Properties is well placed to benefit when demand recovers.

To aid the real-estate sector, the government of Maharashtra has reduced stamp duty for property purchases till December this year to 2 per cent from 5 per cent.

This should work in favour of Godrej Properties.

The stock has corrected about 7 per cent since January this year, while stocks of other developers (from Mumbai) have corrected nearly 30 per cent, indicating the former’s resilience in volatile markets.

Further, it has presence across the residential segment — middle income, premium and luxury — aiding the company’s revenue across market cycles.

While long-term prospects are sound, near-term challenges in construction activities and pricey valuation can limit the upside.

At the current market price, the Godrej Properties stock trades at 52 times its likely per-share earnings for FY22.

Investors can hold on to the stock.

Strong market position

The company is present across 12 major cities with multiple projects under way. But it is mainly focussed on four key markets — Mumbai, NCR, Pune and Bengaluru. In the recent June quarter, too, the company was able to launch one new project in Bengaluru and was able sell 2.5 lakh sq ft at about ₹109 crore.

Further, the company’s presence in the middle-income housing segment has worked in its favour. For the June 2020 quarter, most of its new bookings came from the ₹50 lakh-1 crore property segment. This indicates the company’s strong market position along with the advantage of property locations, to attract buyers even during the lockdown period. This trend is likely to continue , especially with the festival season around the corner.

Despite the slowdown in the realty market, the company is able to command good pricing for its projects. For instance, the average selling price in Bengaluru market is ₹4,080 per sq ft, while the average selling price of Godrej Properties in the same market is around ₹5,366 per sq ft. According to the management, the company is expected to sustain such pricing.

Though Godrej Properties derives nearly 85-90 per cent of its revenue from the residential segment, it has presence in commercial segment as well. In the June quarter of FY21, the company was able to lease two lakh sq ft of office space in Mumbai (Vikhroli) to Maersk. The company has about six on-going commercial projects and six more coming up in the next 1-2 years. The lockdown measures imposed in the country from March-end till June has impacted construction activities.

Though construction activities have resumed (to about 60 per cent) across all projects, they are yet to operate in full capacity.

The management expects a weak year in terms of operating cash flows and profit due to slow progress in construction.

Similarly, the new launches, too, have taken a knock, but the management expects to keep up with the launch pipeline for this financial year. The demand destruction due to the pandemic also provides Godrej Properties with an opportunity to gain market share.

However, the company, like other developers, could be exposed to cancellation of bookings and postponement of big-ticket purchases by prospective home buyers.

Stable financials

The revenue of Godrej Properties fell nearly 88 per cent to ₹72 crore in the FY21 June quarter; it reported a loss of ₹20 crore during the same period. This was mainly due to stoppage of construction activities, resulting in slower collections.

However, the company has a debt-equity ratio of 0.37 times, giving enough room for expansion.

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