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Godrej Properties
Initiation
Underweight
GODR.NS, GPL IN
Too Much, Too Soon. Initiate with UW
Initiate with UW, Mar-12 PT Rs605: Godrej Properties’ (GPL) stock
price has risen ~30% over the last one year, outperforming the broader
market (by 20%) and realty sector (by >50%). At valuations of FY13E
19.6x P/E, 3.7x P/B, and 20% premium to forward NAV, GPL is one of the
most expensive stocks in the realty sector, although its earnings growth
profile is similar to local peers (FY 11-13E EPS growth c.30%). While
GPL’s ROEs are superior to the sector (FY12- 17% vs. sector avg. of
10%), we believe this does not justify a 2.5x P/B premium. We believe the
market has priced in optimism and is attributing substantial value
(Rs315/share or ~50% of the share price, on our calculations) to potential
portfolio growth from the Godrej group’s Vikhroli land (prime Mumbai
suburb). This is even when GPL does not have explicit development rights
on these parcels and an overall plan is, as yet, in nascent stages.
• JDA model enables superior ROEs albeit margins remain
vulnerable - GPL’s business strategy relies on joint development (JD)/
Joint venture (JV) model, which minimizes initial capital risk and
enables superior ROEs relative to peers (vs. outright purchase model).
GPL’s FY12E/13E ROE at 17%/21% compare favorably with the rest of
sector (at 10-11% ROE). This, however, makes GPL highly susceptible
to raw material inflation (as it incurs land owner’s share of construction
cost as well). Further, given a mid income housing focus, any significant
increase in cost could disproportionately hurt company’s margins.
• Pre-sales have been healthy, bucking the market trend and driven by
Ahmedabad project launch (1.6msf in FY11). GPL’s FY11 bookings at
Rs10.7B/3.2msf have more than doubled vs. FY10 (low base effect, mid
income housing focus). For FY12, we expect volumes to remain largely
flat (3.4 msf) and bookings (in value) to register 15% Y/Y growth (given
better mix, ASPs) with 40% of sales coming from Ahmedabad.
• Price target, key risks. Our SOTP based Mar-12 PT of Rs605/share is
based on 12x stabilized FCFE (20% premium to mid cap RE) and
includes an option value of Rs260 for Vikhroli land parcel (50%
probability assuming 1msf execution pa). Visibility on development
rights over group land parcels is a key upside risk to our rating/PT.
Share price performance and key catalysts
a) Progress on MoUs with group companies and further project additions
via group companies - Godrej group owns sizeable prime land parcels
across the country especially in prime Mumbai suburb (Vikhroli). Further,
GPL has a MoU for development of 200 acres with group companies. Any
visibility on the development plans of the group’s land and execution of
JDA agreements in favor of Godrej could be a big positive catalyst, in our
view.
b) Redevelopment opportunities in Mumbai – GPL has recently formed a
SPV to undertake redevelopment opportunities in Mumbai. The company
seems to be scouting for redevelopment projects in prime Mumbai
locations. Any announcement in this regard would be a positive.
c) Sales momentum under Ahmadabad project (Godrej Garden City) and
overall real estate market trends in Ahmedabad.
d) Newsflow on any stake sale in projects to private equity investors thereby
providing a boost to profit and cash flows.
e) Response to new launches. Company has number of mid income projects
launches planned in Chennai, Hyderabad, Mumbai and Kochi etc.
Key risks to our view and rating
1. Lack of clarity on development plans for group land parcels is the key
risk to our PT/rating. We have included an option value (50% probability)
of Rs260/share for Vikhroli land parcel in our valuations.
2. Dual impact of commodity price inflation risk - GPL’s affordable focus
and JDA model makes it highly susceptible to raw material inflation. Not
only is it difficult to pass on an increase in commodity prices to the end
users in mid income projects, GPL also has to bear the increased
construction cost of its JDA partner (give revenue share/area share model).
3. High leverage – GPL has aggressive growth plans in terms of new project
additions. It intends to fund initial deposits for new JDA agreements via
incremental debt raising and sales of commercial assets under construction.
Co’s FY11 net gearing at 0.8x is one of the highest in the sector. High
leverage & potential equity dilution remain a risk in medium term.
4. Concentration risk in Ahmadabad- Ahmadabad accounts for 40% our of
sales bookings estimate over FY12/13. Any slowdown in Ahmadabad
market would adversely impact GPL’s financials/valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Properties
Initiation
Underweight
GODR.NS, GPL IN
Too Much, Too Soon. Initiate with UW
Initiate with UW, Mar-12 PT Rs605: Godrej Properties’ (GPL) stock
price has risen ~30% over the last one year, outperforming the broader
market (by 20%) and realty sector (by >50%). At valuations of FY13E
19.6x P/E, 3.7x P/B, and 20% premium to forward NAV, GPL is one of the
most expensive stocks in the realty sector, although its earnings growth
profile is similar to local peers (FY 11-13E EPS growth c.30%). While
GPL’s ROEs are superior to the sector (FY12- 17% vs. sector avg. of
10%), we believe this does not justify a 2.5x P/B premium. We believe the
market has priced in optimism and is attributing substantial value
(Rs315/share or ~50% of the share price, on our calculations) to potential
portfolio growth from the Godrej group’s Vikhroli land (prime Mumbai
suburb). This is even when GPL does not have explicit development rights
on these parcels and an overall plan is, as yet, in nascent stages.
• JDA model enables superior ROEs albeit margins remain
vulnerable - GPL’s business strategy relies on joint development (JD)/
Joint venture (JV) model, which minimizes initial capital risk and
enables superior ROEs relative to peers (vs. outright purchase model).
GPL’s FY12E/13E ROE at 17%/21% compare favorably with the rest of
sector (at 10-11% ROE). This, however, makes GPL highly susceptible
to raw material inflation (as it incurs land owner’s share of construction
cost as well). Further, given a mid income housing focus, any significant
increase in cost could disproportionately hurt company’s margins.
• Pre-sales have been healthy, bucking the market trend and driven by
Ahmedabad project launch (1.6msf in FY11). GPL’s FY11 bookings at
Rs10.7B/3.2msf have more than doubled vs. FY10 (low base effect, mid
income housing focus). For FY12, we expect volumes to remain largely
flat (3.4 msf) and bookings (in value) to register 15% Y/Y growth (given
better mix, ASPs) with 40% of sales coming from Ahmedabad.
• Price target, key risks. Our SOTP based Mar-12 PT of Rs605/share is
based on 12x stabilized FCFE (20% premium to mid cap RE) and
includes an option value of Rs260 for Vikhroli land parcel (50%
probability assuming 1msf execution pa). Visibility on development
rights over group land parcels is a key upside risk to our rating/PT.
Share price performance and key catalysts
a) Progress on MoUs with group companies and further project additions
via group companies - Godrej group owns sizeable prime land parcels
across the country especially in prime Mumbai suburb (Vikhroli). Further,
GPL has a MoU for development of 200 acres with group companies. Any
visibility on the development plans of the group’s land and execution of
JDA agreements in favor of Godrej could be a big positive catalyst, in our
view.
b) Redevelopment opportunities in Mumbai – GPL has recently formed a
SPV to undertake redevelopment opportunities in Mumbai. The company
seems to be scouting for redevelopment projects in prime Mumbai
locations. Any announcement in this regard would be a positive.
c) Sales momentum under Ahmadabad project (Godrej Garden City) and
overall real estate market trends in Ahmedabad.
d) Newsflow on any stake sale in projects to private equity investors thereby
providing a boost to profit and cash flows.
e) Response to new launches. Company has number of mid income projects
launches planned in Chennai, Hyderabad, Mumbai and Kochi etc.
Key risks to our view and rating
1. Lack of clarity on development plans for group land parcels is the key
risk to our PT/rating. We have included an option value (50% probability)
of Rs260/share for Vikhroli land parcel in our valuations.
2. Dual impact of commodity price inflation risk - GPL’s affordable focus
and JDA model makes it highly susceptible to raw material inflation. Not
only is it difficult to pass on an increase in commodity prices to the end
users in mid income projects, GPL also has to bear the increased
construction cost of its JDA partner (give revenue share/area share model).
3. High leverage – GPL has aggressive growth plans in terms of new project
additions. It intends to fund initial deposits for new JDA agreements via
incremental debt raising and sales of commercial assets under construction.
Co’s FY11 net gearing at 0.8x is one of the highest in the sector. High
leverage & potential equity dilution remain a risk in medium term.
4. Concentration risk in Ahmadabad- Ahmadabad accounts for 40% our of
sales bookings estimate over FY12/13. Any slowdown in Ahmadabad
market would adversely impact GPL’s financials/valuations.
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