Nomura: downgrade Godrej Properties to NEUTRAL

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 Action
We downgrade Godrej Properties to NEUTRAL with a revised price target of
INR733 per share. The stock has run up 54.9% since its IPO in December 2009,
against a 20.4% rise in the BSE Sensex on land accretion expectations in Mumbai.
We believe upside is now over and the focus will be on execution, even if further
projects are added in future.
 Catalysts
A faster-than-expected pace of sales and execution could lead to upside, while
failure to clinch the land deal in BKC, Mumbai, could be a risk.
Anchor themes
CY10-12F will be a crucial period for developers, as they need to sell higher
volumes, not only to deleverage themselves, but also to justify the large landbanks
they hold. If volumes are not substantially higher from here by CY12F, then
developers may not be able to get full value for their large land holdings.


Land accretion upside over
 Sharp run-up in stock price leads to fair valuation
Godrej Properties’ stock is up 54.9% since its IPO in December 2009,
outperforming the BSE Sensex by 34.5%. This is on expectation of
land reserve accretion, especially from a parcel of land in Bandra-
Kurla Complex (BKC), Mumbai, currently owned by Jet Airways. The
stock now trades at a 45% premium to our revised NAV of INR524 per
share and while this can be justified given the valuable nature of
expected land accretion in Mumbai, anything more than this would
need to follow execution. We increase the premium to our NAV from
20% to 40% to account for the expected land deal in BKC.
 Will premiums increase if there is further land accretion?
While Godrej will continue to enter into fresh joint development
agreements (JDA), the company will need to deliver on sales and
execution before valuations can move up in response to new JDAs.
To generate value from new land, this would need to be monetised
and this is where execution and demand limitations come to the fore.
Godrej is working on 93mn sqft of projects to be delivered in the next
10 years, on our estimate. This is against a delivery of 9mn sqft of
projects in its entire history. A considerable jump in execution
capabilities is required to achieve this target and addition of further
projects could result in existing projects being pushed back. We
believe further land accretion will not result in increasing valuations.

 Target price raised 25%, resulting in 4% downside
We have tweaked our estimates a bit while rolling over NAV to
September 2011 from March 2011, which results in NAV moving up
by 7%. We have also increased the premium to NAV to 40% from
20%, resulting in our PT moving up by 25%. At this point, we would
prefer stocks that have a better risk-reward ratio and are trading
below NAV, such as HDIL and Puravankara.