GPL continues to build its project portfolio through
the partnership and acquisition route. The balance
sheet should improve thanks to the recently
concluded Rs7 bln rights issue. However, the
sluggish macro climate, gradual ramp-up, and full
valuations keep us EW on the stock.
Our new March 2014e NAV is Rs626/share… We
incorporate new project launches and the acquisition of
new projects (Joint Development / DM model). We have
updated project prices and the execution schedule in
line with current market conditions. See Exhibit 2.
We have also cut our F14 and F15 EPS estimates by
45% each, driven by slower-than-expected sales at the
Ahmedabad and Commercial projects, delay in planned
new launches, and new revenue recognition guidelines.
…and we derive our new price target of Rs407/share
by deepening our target discount to NAV to 35%:
The change from a 15% target discount is to account for
group de-rating (52% discount to NAV) and the current
adverse macro climate. This is offset by positives,
including quality brand name, prospects for operational
scale-up, and strengthening of the balance sheet.
Scale up in operation required to unlock value: GPL
stock is down 33% YTD (vs. 41% drop in Realty Index)
and its discount to forward NAV is now 42%. To us,
valuations appear full on a P/E basis – 17x for F14e and
13x for F15e (~25% understated due to high interest
cost capitalization). Liquidation of unsold inventory of
commercial assets, faster pre-sales and execution, and
deployment of excess capital should be the key value
drivers.
��
the partnership and acquisition route. The balance
sheet should improve thanks to the recently
concluded Rs7 bln rights issue. However, the
sluggish macro climate, gradual ramp-up, and full
valuations keep us EW on the stock.
Our new March 2014e NAV is Rs626/share… We
incorporate new project launches and the acquisition of
new projects (Joint Development / DM model). We have
updated project prices and the execution schedule in
line with current market conditions. See Exhibit 2.
We have also cut our F14 and F15 EPS estimates by
45% each, driven by slower-than-expected sales at the
Ahmedabad and Commercial projects, delay in planned
new launches, and new revenue recognition guidelines.
…and we derive our new price target of Rs407/share
by deepening our target discount to NAV to 35%:
The change from a 15% target discount is to account for
group de-rating (52% discount to NAV) and the current
adverse macro climate. This is offset by positives,
including quality brand name, prospects for operational
scale-up, and strengthening of the balance sheet.
Scale up in operation required to unlock value: GPL
stock is down 33% YTD (vs. 41% drop in Realty Index)
and its discount to forward NAV is now 42%. To us,
valuations appear full on a P/E basis – 17x for F14e and
13x for F15e (~25% understated due to high interest
cost capitalization). Liquidation of unsold inventory of
commercial assets, faster pre-sales and execution, and
deployment of excess capital should be the key value
drivers.
Why Equal-weight?
• The macro climate is adverse.
• Operational scale-up is slow.
• Valuations appear full on a P/E basis
– 17x for F14e and 13x for F15e
(~25% understated due to high
interest cost capitalization)
• We are still not outright bearish in
view of brand upside and prospects of
execution ramp-up in ensuing years
due to bunching of delayed projects.
Key Value Drivers
• Steady absorption in large projects –
Ahmedabad / Hyderabad
• Land bank accretion through JDA
projects in good locations
• Launch of lucrative projects – Okhla,
Chembur, Ghatkopar.
Potential Catalysts
• Development clearance by Bombay
Port Trust on Godrej Industries
Limited-owned land in Wadala
• Good pre-sales in Godrej BKC and
ramp-up in commercial sales in
Kolkata and Chandigarh
Key Upside Risks
• Solid turnaround in key property
markets like Ahmedabad
• Pre-sale of commercial space in BKC
• Improvement in macro conditions
(moderation in interest rate and
improvement in growth outlook)
Key Downsideside Risks
• The macro climate could worsen
• Regulatory delays could persist
• The pace of construction starts could
remain sluggish
• Other fundamentals risks include low
involvement in Group MoUs in Mohali
/ Bangalore (such as Development
Manager role), project-level PE
infusions at high hurdle rates,
protracted redevelopment projects
We Retain Our Equal-weight Rating on GPL
Three Key Themes
• Adverse macro environment – Inflation and interest
rates remain persistently high, and GDP growth
prospects are slow. Morgan Stanley’s economist for
India, Chetan Ahya, estimates growth of 4.1% for F14
and 5% for F15.
• Slow operational scale-up coupled with margin
pressures (ex-Group sales in Vikhroli) – This could
continue to hurt profits.
• Valuations appear full – P/E is 17x for F14e and 13x for
F15e, based on our reduced estimates. Note: our
earnings projections do not include the impact of
leverage, since the company capitalizes a meaningful
part of its interest expense, which understates P/E
multiples roughly by 25%. Discount to forward NAV is
now 42%; our target discount is now 35%.
Model Update
We arrive at our March 2014 NAV estimate of Rs626/share
(Rs631/share for March 2013e NAV): We have updated our
model to incorporate the following changes:
1. Updated land bank to include new JDA (joint
development agreement) and DM (development
manager) projects taken up / signed by GPL.
2. Updated prices based on those recently observed
3. Increased discount rate from 14% to 15% to account for
persistent adverse macro conditions resulting in an
environment of high interest rates.
4. Rollover of NAV from March 2013 to March 2014.
5. Included Rs7bn raised through rights issue in F2Q14
Consequently, we have cut our EPS estimates by 45% for
both F14 and F15 (Exhibit 1): This includes the effect of the
recently concluded rights issue of Rs7bn (21.5mn shares
issued at Rs325/share). Key reasons for the estimate cuts are
detailed below:
1. Sluggish pace of absorption – including in key markets
such as Ahmedabad.
2. Delay in launching planned projects, overdependence
on slow markets – Ahmedabad / Kolkata.
3. Low operating margins – (excluding Group sales in
Vikhroli and Godrej BKC sales). This reflects material
revenue dependence (30-60%) on relatively low-margin /
revenue share projects (Garden City, Frontier, Prakriti,
Kolkata and Chandigarh commercial) in the ensuing years.
4. Protracted commercial absorption: We have assumed
a slow / back-ended take-up (over 3-4 years) for
commercial projects in Mumbai (Godrej BKC), Kolkata,
Chandigarh, Vikhroli in view of the soft office demand in
these markets.
Our EPS estimates now stand at Rs21.0 for F14 and Rs27.3
for F15. We expect Godrej BKC sales to come up for
recognition in F15. We introduce F16 EPS estimate of Rs33.7
(F13-F16 CAGR of 24%); major revenues coming from Godrej
BKC and Godrej Summit.
We apply a deeper target discount to NAV of 35% (was
15%) to reach our price target of Rs407): In addition to
adverse macro conditions, this reflects overall de-rating of the
property group (see Exhibits 3-4). Our new price target implies
13% upside potential and P/Es of 19x for F14e and 15x for
F15e.
Valuation and Price Target
Real estate valuation = existing land bank + MoUs
signed with Group + new projects (JDA upside)
Our Mar-2014 NAV estimate for GPL is Rs626 per share
(implying Rs62.3bn in value terms): We have valued GPL’s
real estate business, comprising these elements:
• Present land bank (87.6msf including partner’s share) –
Rs32.3bn
• Upside from new JDA projects (5msf GPL share) –
Rs7bn),
• Value of Group MoUs (Rs6bn). This includes a few of the
land parcels presently owned by Godrej group.
• Present value of potential Development Manager Fees
(primarily sales & marketing responsibility) in Vikhroli
(Rs8bn). This assumes total development potential of ~
500 acres.
We then add balance sheet adjustments and subtract net debt.
Our NAV calculation methodology is detailed later in the section.
Exhibit 2
GPL: NAV and Price Target Computation
NAV / PT Computation New Old
NAV date Mar-14 Mar-13
Real Estate Value (Rs bn)** 35,782 32,253
MoUs signed with Group (Rs bn) 6,413 6,413
Present Value of DM Fees from Vikhroli (Rs bn) 8,048 8,293
Add: Balance Sheet Adjustments, Rs bn# 18,456 19,492
Less: Net Debt, Rs bn 6,403 13,496
NAV (Rs bn) 62,296 52,955
NAV (Rs/sh) 626 631
Discount % 35% 15%
PT (Rs / sh) 407 536
Source: Company Data, Morgan Stanley Research
** We have valued 5msf (GPL share) of new JDA.
# Balance Sheet advance comprises Deposits to land owners + Construction inventory +
Sundry Debtors – Sundry Creditors – Customer Advances.
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