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GODREJ PROPERTIES
UW: Clarity at the cost of valuation
GPL’s announcement that it will act as development
manager for Godrej Group’s entire Vikhroli land improves
clarity on its role in Group’s most lucrative land parcel
However, the 10% revenue share fee agreed upon will lower
GPL’s value from the land parcel by c75%
We cut our TP to INR490 (INR514); consensus downgrades
will, in our view, act as catalysts in the near term
GPL will now act as development manager and not a developer. GPL has signed an
agreement with Godrej & Boyce (G&B) for the developing the latter’s entire land parcel
in Vikhroli. GPL will now act as the development manager and will be entitled to a 10%
share of total revenues. While design and construction cost will be borne by G&B, GPL
will pay for the sales and marketing. (Note: GPL is also developing a 36 acre land parcel
in the same location with G&B, though acting as a developer with 60% profit share)
Clarity does not compensate for the valuation loss. GPL’s premium valuation relative
to peers, in our view, was primarily due to investors attributing a very substantial value
for the company’s Vikhroli land parcel (c400acres), despite limited clarity from
management on the income share and development scale. While the current agreement
improves clarity on GPL’s share in the project, the 10% revenue share implies GPL will
earn only 6% net profit margin as a development manager as against the 22% net profit
margin it would have earned as a project developer (refer to figure 2 on page 3). Hence,
we now value the c400 acre Vikhroli land parcel for GPL at INR69 per share (100%
development probability with 10% revenue share) as against INR95 (one-third
development probability with 60% profit share) previously.
Retain UW(V) rating; TP of INR489 (changed from INR514). We now value GPL at
INR490 (INR514 previously), which is comprised of INR420 for its current projects plus
INR69 for its Vikhroli land agreement. We agree that GPL deserves to trade at a premium
to its peers given its stronger ROE, asset light business model (although it is changing)
and track record, but the current 150% premium seems excessive. We expect consensus
downgrades after the news flow to act as a downside catalyst in the near term.
Retain UW rating with a revised TP of INR490 (INR514)
Investment summary
GPL is a nationwide developer that has traditionally adopted an asset-light business model. We think this
is changing, as some of its new projects are expected to be investment properties rather than joint
developments. This should keep its gearing at 1.2x, the highest within its peer group. The company may
have to dilute equity to sustain growth.
About 20% of GPL’s GAV is in India’s seventh-largest city, Ahmedabad, the financial capital of the
Gujarat state. Housing demand in Ahmedabad has been much stronger than in many other second-tier
cities over the past two years. However, we believe most of this demand is speculative and not supported
by commercial demand. With the ratio of residential to commercial volumes in the city at 66x, versus 3-
12x in other tier-two Indian cities, we don’t think current demand levels are sustainable and sales
volumes may disappoint consensus.
Our FY12-14 EPS estimates are 21-35% below consensus. Our weak demand outlook for the Indian
residential sector is reflected in our low sales volume forecasts for GPL and we expect the company to
disappoint consensus, with fewer than expected new project launches during FY12 driven by a slowdown
in the pace of regulatory project approvals across most Indian cities.
Valuation
We have valued GPL in two parts: 1) for its existing projects, development MOUs and JD agreements;
and 2) for the agreement to develop plots owned by the Godrej Group companies in Vikhroli. Our target
price of INR514 (DCF based using risk free at 8%, risk premium at 5.5%, Stock beta at 1.2x, Cost of
equity at 14.6%, WACC at 12.8%) is comprised of INR420 for its current projects, plus a value of INR69
(for earning development manger fees on the entire developable Godrej Group land in Vikhroli over
FY2016-40). While GPL deserves to trade at a premium to its peers owing to its less risky business
model, higher ROE, and strong brand equity, its 150% valuation premium over peers seems excessive, in
our view. Even on a PB basis adjusted for capitalized interest, GPL is trading at a huge premium, at 4.1x
FY2013e book value versus c0.5-1.2x for its peers. While this is partly justified by a higher ROE, at
c16% for FY12-14 versus 7-10% for its peers, this ROE is accompanied by higher leverage, at 1.2x
versus 0.6x for its peers, which may only normalize after a likely equity dilution.
Our TP of INR490 implies a potential return of minus 24.1% (including an expected dividend yield of
0.6%). For Indian stocks, HSBC considers the average cost of equity to be 11%. A non-volatile Indian
stock with a potential one-year return of 5ppt on either side of 11%, i.e., within a band of 6 to 16%, merits
a Neutral rating. As the potential return on GPL shares is lower than the Neutral band, we are maintaining
our Underweight rating.
Risks
Our NAV estimates are highly sensitive to volume and realizations. Better than expected volume growth
could accelerate cash flows by 12 months, raising our NAV estimate by c13%. In addition, we find a 1%
increase in our property price assumption raises our NAV estimate by 7.8%. Better-than-expected volume
also poses risks to our earnings estimates, which are 21-35% below consensus.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GODREJ PROPERTIES
UW: Clarity at the cost of valuation
GPL’s announcement that it will act as development
manager for Godrej Group’s entire Vikhroli land improves
clarity on its role in Group’s most lucrative land parcel
However, the 10% revenue share fee agreed upon will lower
GPL’s value from the land parcel by c75%
We cut our TP to INR490 (INR514); consensus downgrades
will, in our view, act as catalysts in the near term
GPL will now act as development manager and not a developer. GPL has signed an
agreement with Godrej & Boyce (G&B) for the developing the latter’s entire land parcel
in Vikhroli. GPL will now act as the development manager and will be entitled to a 10%
share of total revenues. While design and construction cost will be borne by G&B, GPL
will pay for the sales and marketing. (Note: GPL is also developing a 36 acre land parcel
in the same location with G&B, though acting as a developer with 60% profit share)
Clarity does not compensate for the valuation loss. GPL’s premium valuation relative
to peers, in our view, was primarily due to investors attributing a very substantial value
for the company’s Vikhroli land parcel (c400acres), despite limited clarity from
management on the income share and development scale. While the current agreement
improves clarity on GPL’s share in the project, the 10% revenue share implies GPL will
earn only 6% net profit margin as a development manager as against the 22% net profit
margin it would have earned as a project developer (refer to figure 2 on page 3). Hence,
we now value the c400 acre Vikhroli land parcel for GPL at INR69 per share (100%
development probability with 10% revenue share) as against INR95 (one-third
development probability with 60% profit share) previously.
Retain UW(V) rating; TP of INR489 (changed from INR514). We now value GPL at
INR490 (INR514 previously), which is comprised of INR420 for its current projects plus
INR69 for its Vikhroli land agreement. We agree that GPL deserves to trade at a premium
to its peers given its stronger ROE, asset light business model (although it is changing)
and track record, but the current 150% premium seems excessive. We expect consensus
downgrades after the news flow to act as a downside catalyst in the near term.
Retain UW rating with a revised TP of INR490 (INR514)
Investment summary
GPL is a nationwide developer that has traditionally adopted an asset-light business model. We think this
is changing, as some of its new projects are expected to be investment properties rather than joint
developments. This should keep its gearing at 1.2x, the highest within its peer group. The company may
have to dilute equity to sustain growth.
About 20% of GPL’s GAV is in India’s seventh-largest city, Ahmedabad, the financial capital of the
Gujarat state. Housing demand in Ahmedabad has been much stronger than in many other second-tier
cities over the past two years. However, we believe most of this demand is speculative and not supported
by commercial demand. With the ratio of residential to commercial volumes in the city at 66x, versus 3-
12x in other tier-two Indian cities, we don’t think current demand levels are sustainable and sales
volumes may disappoint consensus.
Our FY12-14 EPS estimates are 21-35% below consensus. Our weak demand outlook for the Indian
residential sector is reflected in our low sales volume forecasts for GPL and we expect the company to
disappoint consensus, with fewer than expected new project launches during FY12 driven by a slowdown
in the pace of regulatory project approvals across most Indian cities.
Valuation
We have valued GPL in two parts: 1) for its existing projects, development MOUs and JD agreements;
and 2) for the agreement to develop plots owned by the Godrej Group companies in Vikhroli. Our target
price of INR514 (DCF based using risk free at 8%, risk premium at 5.5%, Stock beta at 1.2x, Cost of
equity at 14.6%, WACC at 12.8%) is comprised of INR420 for its current projects, plus a value of INR69
(for earning development manger fees on the entire developable Godrej Group land in Vikhroli over
FY2016-40). While GPL deserves to trade at a premium to its peers owing to its less risky business
model, higher ROE, and strong brand equity, its 150% valuation premium over peers seems excessive, in
our view. Even on a PB basis adjusted for capitalized interest, GPL is trading at a huge premium, at 4.1x
FY2013e book value versus c0.5-1.2x for its peers. While this is partly justified by a higher ROE, at
c16% for FY12-14 versus 7-10% for its peers, this ROE is accompanied by higher leverage, at 1.2x
versus 0.6x for its peers, which may only normalize after a likely equity dilution.
Our TP of INR490 implies a potential return of minus 24.1% (including an expected dividend yield of
0.6%). For Indian stocks, HSBC considers the average cost of equity to be 11%. A non-volatile Indian
stock with a potential one-year return of 5ppt on either side of 11%, i.e., within a band of 6 to 16%, merits
a Neutral rating. As the potential return on GPL shares is lower than the Neutral band, we are maintaining
our Underweight rating.
Risks
Our NAV estimates are highly sensitive to volume and realizations. Better than expected volume growth
could accelerate cash flows by 12 months, raising our NAV estimate by c13%. In addition, we find a 1%
increase in our property price assumption raises our NAV estimate by 7.8%. Better-than-expected volume
also poses risks to our earnings estimates, which are 21-35% below consensus.
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