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UBS Investment Research
Godrej Properties
Muted Q3 but strong pre-sales momentum
„ Slower execution but expect rampup in Q4
Revenues of Rs 682 million (-18% QoQ, +44% YoY); EBITDA margins of 39%
(vs. 61% in Q2). Net Income declined 53% QoQ, 12% YoY to Rs 155 million.
This was due to mismatch in revenue recognition; we believe pre-sales momentum
was strong & remain comfortable with progress and expected rampup in execution.
Net debt increasing to 0.78x, is also a function of likely rampup in construction.
„ Strong pre-sales responses in Q3 highlight business on track
Strong pre-sales momentum with 0.8 msf booked including Gurgaon (0.55 msf),
Kolkata (0.18msf) and other key resi. launches at Chennai, Bangalore, Ahmedabad
and Mumbai (0.1 msf). Further, with strong pre-sales response to Garden City,
Kolkata launch in Q4 (0.4 msf), we believe pre-sales momentum will continue to
be strong in Q4. With visible pipeline of launches (~5msf)in Ahd (Phase III), NCR,
Hyderabad and Kochi over next six months, we expect cashflows to remain strong
„ Key catalysts— New projects, focus on cash flow, visibility on group assets
1) Announcements on new joint devt. deals in Mumbai & Bangalore; 2) focus on
higher cash flow given strategy of monetising assets to maximise returns, mitigate
risks & increase scale. 3) Greater visibility on any group asset developments
„ Valuation: Maintain Buy Rating and Rs 890 PT
We think the stock is attractive at a 54% discount to our NAV of Rs1,275 as we
believe the embedded value of its developing group assets (Rs671) is available
cheap. Our 30% discount to NAV factors in higher risks of slow progress on new
project wins and the development of the group’s assets in the current environment.
Valuations in attractive zone
We believe Godrej Properties’ thrust on the joint-development model (77% of
land reserves), emerging pan-India presence, likely access to the group’s primelocation land assets, and deleveraged balance sheet differentiates the company.
Given its prime land assets and development spread across timeframes, NAVbased valuation methodology is the most appropriate, in our view.
We see the company being grouped as a Tier II developer, and factoring in the
business model risks, we find stock trading at attractive valuations of 45%
discount to NAV vs our target discount of 30%. We see stock’s recent
underperformance as a good opportunity to accumulate. We foresee upside
potential from new project wins and increased development visibility of Group
land assets and key triggers to stock performance
Our price target of Rs890 is based on 30% discount to our September
2011E NAV of Rs1,275. Our discount largely factors in 1) concentration risks
and absorption challenges in Ahmedabad; 2) a higher discount for attributed
NAV from group assets given limited visibility; 3) regulatory and policy risks;
and 4) its thrust on capital efficiency with prime-land assets in Mumbai and
other cities. Our base-case NAV estimate of Rs1,275 involves the following
assumptions: 1) developmental volume of 49msf; 2) 21msf from the group’s
land reserves at Vikhroli over 10 years and 5msf from the MOUs with other
group assets; 3) no price escalations; 4) average cost of capital of 13%; and 5) a
tax rate of 28%.
Post the stock’s recent underperformance, we believe embedded option value for
group assets is available cheap. The group’s strong ‘Godrej’ brand franchise, its
MOU with L&T for execution, and long track record of value creation are other
advantages.
Bull-case and bear-case NAVs
With NAVs likely to remain volatile during recovery cycles, we highlight our
bull-case and bear-case scenarios for Godrej’s NAV. The bear case 1) factors in
5-year development visibility (20msf, 39% of NAV); 2) values the balance as
undeveloped land reserves of 28msf (4% of NAV); and 3) builds in 500 acres of
developable land in Vikhroli (57% of NAV). The bull case builds in: 1) a
potential 1,000 acres developable in Vikhroli; 2) a 10% price rise across
projects; and 3) a faster absorption cycle for other developments. We believe
this provides a good perspective on NAV downside risk and upside potential.
Q Godrej Properties
Godrej Properties Limited (GPL) is the real estate development arm of the
Godrej Group. Godrej Industries Limited, the parent company, owns 69.43% of
the equity capital in GPL. The company focuses on residential, commercial and
integrated township developments. GPL has completed 16 residential and seven
commercial projects, aggregating 5.13msf since its incorporation in 1990.
Q Statement of Risk
Key risks to Godrej Properties are exposure to Ahmedabad, litigation risks and
rising interest rates
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