Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Properties Limited (GODR.BO; Sell): Expensive valuations
Investment view
We initiate coverage on Godrej Properties with a Sell rating and 12-m
target price of Rs527 (set at par with our FY12E RNAV). We believe the
stock appears expensive on all valuation parameters:
GPL is trading at a 14% premium to our FY12E- based NAV of Rs527,
which we believe is unjustified.
The stock is trading at FY2012E P/B of 4.1X vs a sector average of
1.4X and a FY2012E P/E of 25.9X vs a sector average of 11.1X.
We estimate FY12E RoE of GPL at 17% vs industry average of 11%.
Our view on business model is constructive, but we believe current
valuations are expensive.
Brand equity: We believe GPL benefits from the use of the ‘Godrej
brand’. A strong brand helps GPL in multiple ways: (1) having a
base of 400mn daily users of Godrej products immediately helps
GPL establish itself in new locations, and (2) Godrej group's
reputation and good track record in land acquisitions helps in new
land wins.
Revenues. We expect a revenue CAGR of 42% between FY10-
FY13E largely driven by expansion into new cities. GPL has ongoing
residential projects in seven cities with five cities, namely NCR,
Chennai, Ahmedabad, Mangalore and Kolkata getting added in the
past six quarters.
Focus on JV/JDAs likely to result in higher RoE. Key factors that
will likely help GPL get more JDAs, in our view, are: (1) a good track
record with landowners, (2) premium brand image of the Godrej
group which will likely result in higher realizations for landowners,
(3) relationship with contractors such as L&T.
Other issues
Private equity deals. GPL has sold 49% stake in various launched
projects to PE investors such as HDFC PMS, Motilal Oswal, Red Fort
and Milestone. This will likely lead to large minority interest in
FY12E-FY14E.
Margin risk. We are estimating gross margins to pick up from
current 10% level to around 30% in FY13E. We think JDA projects
could show higher margin volatility as the entire construction cost is
borne by GPL.
Key risks to our thesis
Higher-than-expected pricing
New land deals and additional land transactions with Godrej group.
Expansion into new cities to drive revenue growth
We expect 42% revenue CAGR between FY10-FY13E driven primarily by a low base and
expansion into new cities. We discuss various revenue drivers as below:
Residential real estate. GPL has ongoing residential projects in seven cities with five
cities, namely NCR, Chennai, Ahmedabad, Mangalore and Kolkata, getting added in the
past six quarters. As revenue booking from these projects accelerates, we expect revenue
booking to increase from Rs1.1 bn in FY2010 to Rs8.7 bn in FY13E.
Commercial real estate. We expect commercial real estate revenue booking primarily
from two projects in Kolkata- Godrej Waterside and Genesis. Both projects have seen large
construction progress and are now open for sale.
Sale of investments. As revenue booking from real estate projects picks up, we expect
profit from sale of investments to decline to Rs0.5 bn in FY2012E from Rs1.2 bn in FY2011E
and Rs1.4 bn in FY2010. These revenues accrue from sale of minority stake into various
SPVs.
Our view on business model is constructive
GPL plans to grow by forming Joint Ventures (JVs) and through the Joint Development
Agreement (JDA) model. Both of these minimize land investments and hence will likely
enhance returns, in our view. A JDA entails an agreement with a landowner, with sharing
of revenues from sale of projects while the entire construction cost is borne by GPL. We
note that GPL generally ensures that its agreements with partners provide it with
significant control over all aspects of the development and sales of the project. Key factors
that will likely help GPL get more JDAs, in our view, are: (1) good track record with
landowners, (2) possibility of higher realizations for landowners owing to premium brand
image of the Godrej group, (3) relationship with contractors such as L&T, and (4) large
tracts of land owned by group companies.
This model will likely help GPL earn higher capital return than peers, in our view. As a
result, we expect RoE to trend up from 13% in FY2011E to 22% by FY2013E. RoE for
FY2011E is low as equity capital raised from IPO (in Dec 2009) is currently under
deployment and will start yielding returns over the next 4-6 quarters.
We see significant growth in business
GPL has made significant progress in both the residential as well as commercial business
over the past six quarters. GPL’s residential presence has expanded to seven cities from
two cities with cumulative launches of 5.9 mn sqft comprising Chennai (1.1 mn sqft),
Mangalore (0.53 mn sqft), Ahmedabad (1.76 mn sqft), Kolkata (1.2 mn sqft) and Gurgaon
(1.05 mn sqft). Similarly, its commercial presence has increased to four cities from two
cities with launches in Mangalore (0.34 mn sqft) and Chandigarh (0.68 mn sqft).
Exhibit 66 and 67 summarize details of GPL’s ongoing/forthcoming residential and
commercial projects, respectively.
However, valuations are expensive
The stock is currently trading at FY2013E P/B of 4.1X vs a sector average of 1.4X and a
FY2012E P/E of 25.9X vs a sector average of 11.1X. GPL appears expensive when
compared with our coverage universe as well as regional peers. We believe the stock is
pricing in continuous land transfers from the Godrej group and /or higher growth in
profitability. We highlight key issues that will constrain PAT growth over FY11E-FY13E.
EBITDA margins. EBITDA margins in recent quarters have been boosted by stake sales in
various SPVs. GPL has shown EBITDA margin of sub-11% in the past quarters with a key
reason being lower margins from the Godrej Waterside project (see Exhibit 68). We
estimate EBITDA margins from projects under execution to increase significantly to around
30% in FY13E driven by better scale of operations and higher realizations.
Sale of investments. GPL has earned around Rs3.1 bn from sale of stake in various
ongoing projects (Exhibit 69). We expect minority interest to increase to Rs450 mn in
FY2013E from Rs50 mn in FY2011E as these projects get completed.
Interest capitalization. As at end-September 2010, GPL along with its subsidiaries had
gross debt of Rs9 bn. Interest expensed against these loans is minimal since either it is
capitalized at project level or adjusted against interest to be received from advances given
for JDAs. Interest capitalized at project level will lead to lower gross margins for future.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Properties Limited (GODR.BO; Sell): Expensive valuations
Investment view
We initiate coverage on Godrej Properties with a Sell rating and 12-m
target price of Rs527 (set at par with our FY12E RNAV). We believe the
stock appears expensive on all valuation parameters:
GPL is trading at a 14% premium to our FY12E- based NAV of Rs527,
which we believe is unjustified.
The stock is trading at FY2012E P/B of 4.1X vs a sector average of
1.4X and a FY2012E P/E of 25.9X vs a sector average of 11.1X.
We estimate FY12E RoE of GPL at 17% vs industry average of 11%.
Our view on business model is constructive, but we believe current
valuations are expensive.
Brand equity: We believe GPL benefits from the use of the ‘Godrej
brand’. A strong brand helps GPL in multiple ways: (1) having a
base of 400mn daily users of Godrej products immediately helps
GPL establish itself in new locations, and (2) Godrej group's
reputation and good track record in land acquisitions helps in new
land wins.
Revenues. We expect a revenue CAGR of 42% between FY10-
FY13E largely driven by expansion into new cities. GPL has ongoing
residential projects in seven cities with five cities, namely NCR,
Chennai, Ahmedabad, Mangalore and Kolkata getting added in the
past six quarters.
Focus on JV/JDAs likely to result in higher RoE. Key factors that
will likely help GPL get more JDAs, in our view, are: (1) a good track
record with landowners, (2) premium brand image of the Godrej
group which will likely result in higher realizations for landowners,
(3) relationship with contractors such as L&T.
Other issues
Private equity deals. GPL has sold 49% stake in various launched
projects to PE investors such as HDFC PMS, Motilal Oswal, Red Fort
and Milestone. This will likely lead to large minority interest in
FY12E-FY14E.
Margin risk. We are estimating gross margins to pick up from
current 10% level to around 30% in FY13E. We think JDA projects
could show higher margin volatility as the entire construction cost is
borne by GPL.
Key risks to our thesis
Higher-than-expected pricing
New land deals and additional land transactions with Godrej group.
Expansion into new cities to drive revenue growth
We expect 42% revenue CAGR between FY10-FY13E driven primarily by a low base and
expansion into new cities. We discuss various revenue drivers as below:
Residential real estate. GPL has ongoing residential projects in seven cities with five
cities, namely NCR, Chennai, Ahmedabad, Mangalore and Kolkata, getting added in the
past six quarters. As revenue booking from these projects accelerates, we expect revenue
booking to increase from Rs1.1 bn in FY2010 to Rs8.7 bn in FY13E.
Commercial real estate. We expect commercial real estate revenue booking primarily
from two projects in Kolkata- Godrej Waterside and Genesis. Both projects have seen large
construction progress and are now open for sale.
Sale of investments. As revenue booking from real estate projects picks up, we expect
profit from sale of investments to decline to Rs0.5 bn in FY2012E from Rs1.2 bn in FY2011E
and Rs1.4 bn in FY2010. These revenues accrue from sale of minority stake into various
SPVs.
Our view on business model is constructive
GPL plans to grow by forming Joint Ventures (JVs) and through the Joint Development
Agreement (JDA) model. Both of these minimize land investments and hence will likely
enhance returns, in our view. A JDA entails an agreement with a landowner, with sharing
of revenues from sale of projects while the entire construction cost is borne by GPL. We
note that GPL generally ensures that its agreements with partners provide it with
significant control over all aspects of the development and sales of the project. Key factors
that will likely help GPL get more JDAs, in our view, are: (1) good track record with
landowners, (2) possibility of higher realizations for landowners owing to premium brand
image of the Godrej group, (3) relationship with contractors such as L&T, and (4) large
tracts of land owned by group companies.
This model will likely help GPL earn higher capital return than peers, in our view. As a
result, we expect RoE to trend up from 13% in FY2011E to 22% by FY2013E. RoE for
FY2011E is low as equity capital raised from IPO (in Dec 2009) is currently under
deployment and will start yielding returns over the next 4-6 quarters.
We see significant growth in business
GPL has made significant progress in both the residential as well as commercial business
over the past six quarters. GPL’s residential presence has expanded to seven cities from
two cities with cumulative launches of 5.9 mn sqft comprising Chennai (1.1 mn sqft),
Mangalore (0.53 mn sqft), Ahmedabad (1.76 mn sqft), Kolkata (1.2 mn sqft) and Gurgaon
(1.05 mn sqft). Similarly, its commercial presence has increased to four cities from two
cities with launches in Mangalore (0.34 mn sqft) and Chandigarh (0.68 mn sqft).
Exhibit 66 and 67 summarize details of GPL’s ongoing/forthcoming residential and
commercial projects, respectively.
However, valuations are expensive
The stock is currently trading at FY2013E P/B of 4.1X vs a sector average of 1.4X and a
FY2012E P/E of 25.9X vs a sector average of 11.1X. GPL appears expensive when
compared with our coverage universe as well as regional peers. We believe the stock is
pricing in continuous land transfers from the Godrej group and /or higher growth in
profitability. We highlight key issues that will constrain PAT growth over FY11E-FY13E.
EBITDA margins. EBITDA margins in recent quarters have been boosted by stake sales in
various SPVs. GPL has shown EBITDA margin of sub-11% in the past quarters with a key
reason being lower margins from the Godrej Waterside project (see Exhibit 68). We
estimate EBITDA margins from projects under execution to increase significantly to around
30% in FY13E driven by better scale of operations and higher realizations.
Sale of investments. GPL has earned around Rs3.1 bn from sale of stake in various
ongoing projects (Exhibit 69). We expect minority interest to increase to Rs450 mn in
FY2013E from Rs50 mn in FY2011E as these projects get completed.
Interest capitalization. As at end-September 2010, GPL along with its subsidiaries had
gross debt of Rs9 bn. Interest expensed against these loans is minimal since either it is
capitalized at project level or adjusted against interest to be received from advances given
for JDAs. Interest capitalized at project level will lead to lower gross margins for future.
No comments:
Post a Comment