J.P. Morgan -Godrej Properties

Godrej Properties (GPL IN) Moving in the right direction. Maintain OW		Overweight Price: Rs214.90 05 May 2014 Price Target: Rs230.00 PT End Date: 30 Mar 2015

GPL’s strategy of scaling up new launch activity, shift in project mix toward higher value/profitable structures (Development management, JV) and monetization of old commercial assets is yielding positive results. The company achieved its highest ever quarterly pre sales in Q4 and the outlook for F15 is also positive, given strong launch pipeline. Monetization of commercial portfolio adversely impacted margins in Q4 although it helps the company unlock the capital invested. Ex-commercial sales, margins have been improving for the company aided by better project mix. Net debt increased by Rs1.7B Q/Q to Rs17B primarily due to approval/FSI payments for new projects. As high realization new launches start to contribute, we expect GPL to deliver strong earnings CAGR of 40% over F14-16E.

· Q4 Earnings beats expectations - GPL’s Q4 earnings of Rs 0.5B beat estimates (JPME Rs 0.4B) on higher revenues. EBITDA margins of 18% (vs. 35% last Q), however, were adversely impacted by loss on sales of commercial project in Kolkata (Waterside project), which accounted for ~40% of revenues. Tax rate for the Q (at 19%) was also low due to loss on the commercial portfolio. Adjusted for commercial sale, EBITDA margins for the Q were better at 35% levels, given higher contribution from development management fees. The company took write-offs of Rs4B in its reserves on account of amalgamation of subsidiaries, primarily to reflect mark-to-market of commercial portfolio and goodwill adjustment for residential project (Chennai).

· Achieves highest ever pre sales in Q4. Strong launch pipeline ahead - Pre sales for the Q4 at Rs10.7B (+150% Q/Q, +77% Y/Y) were the highest ever reported by the company since its listing. This takes full-year pre sales to Rs24.4B (GPL share – Rs12B, JPMe). Pre sale performance in Q4 was driven by strong off-take in its prime Mumbai project launch (Chembur). Response to its recently soft launched Panvel township project has also been fairly good, despite overall weak demand environment. Going into F15, the company has a robust launch pipeline with high realization prime projects planned in Mumbai (Panvel, Chembur, Vikhroli etc) and Gurgaon. This should continue to drive pre sale performance over F15/16.

· Progress on monetization of commercial assets is encouraging – During last Q, the company sold its completed commercial project in Kolkata (Waterside) for Rs1.7B (0.4msf), thereby unlocking the capital invested in the project. We estimate that GPL has additional ~Rs 3B locked in two low-margin commercial projects in Kolkata/Chandigarh. Sales herein should improve cash flows and return profile.

· Net debt increases on land/FSI payments - Net debt at Rs17B (Net D/E – 1x as of Mar-14) increased by Rs1.7B Q/Q due to: a) land/FSI payments of Rs1B for Vikhroli land parcel and regulatory payments for Chembur redevelopment project; b) Rs0.5B deposits for new land ties ups done over the last quarter. The company added 4 new projects with 10msf (F14-13.4msf) of area across Mumbai/Chennai/Bangalore; c) Advance tax payment of Rs0.4B. Gearing levels for the company are expected to stay at 1-1.5x net D.E range given focus on new land tie ups, approval/ FSI payments for planned new launches and capex on BKC project.

Table 1: GPL: Q4/F14 Results Table

Rs MM	4QFY13	3QFY14	4QFY14	% ch Q/Q	% ch Y/Y	FY13	FY14	% ch Y/Y
Sales	2,796	2,140	3,862	81%	38%	9,400	10,749	14%
Operating income	323	280	430	53%	33%	972	1,043	7%
Total Revenues	3,119	2,420	4,292	77%	38%	10,371	11,792	14%
Expenditure
Cost of Sales	(1,946)	(1,409)	(3,379)	140%	74%	(6,916)	(8,381)	21%
Employee Cost	(47)	(60)	(79)	32%	69%	(177)	(253)	43%
Admin expenses	(141)	(97)	(75)	-22%	-47%	(421)	(332)	-21%
Total Expenditure	(2,134)	(1,565)	(3,534)	126%	66%	(7,513)	(8,966)	19%
EBITDA	984	854	758	-11%	-23%	2,858	2,826	-1%
EBITDA margin (%)	32%	35%	18%	-18%	-14%	28%	24%	-4%
Depreciation	(12)	(15)	(16)	5%	37%	(44)	(58)	32%
EBIT	973	839	742	-12%	-24%	2,814	2,768	-2%
EBIT margin (%)	31%	35%	17%	-17%	-14%	27%	23%	-4%
Other income	20	120	65	-46%	222%	104	750	618%
Interest and finance charges	(9)	(8)	(20)	143%	115%	(30)	(45)	50%
PBT	983	950	786	-17%	-20%	2,889	3,474	20%
Tax	(271)	(347)	(146)	-58%	-46%	(916)	(1,111)	21%
Tax rate (%)	28%	37%	19%	-18%	-9%	32%	32%	0%
PAT before MI	713	603	641	6%	-10%	1,973	2,363	20%
Minority interest	(180)	(229)	(157)	-31%	-13%	(588)	(768)	31%
PAT	532	374	483	29%	-9%	1,385	1,594	15%
PAT margin	17%	15%	11%	-4%	-6%	13%	14%	0%
Adjusted PAT	532	374	483	29%	-9%	1,385	1,326	-4%

Source: Company reports and J.P. Morgan estimates.

 

Investment Thesis

GPL’s strategy over the last two years of: a) rationalizing debt levels via a capital raise, b) shift in project acquisition strategy to asset light/ better margin models (development management/ JV); c) focus on new project additions and launches in high value markets (Mumbai/ Gurgaon); and d) monetization of low-margin commercial projects (full exit will take time) seems to be the right one. We expect FY15/16 to see a meaningful pick-up in pre sales, cash flows and margins, as impending high value launches in Mumbai start to contribute.

Valuation

Our Mar-15 PT of Rs230 is based on 10x forward cash EBITDA. A 10x multiple is at a 20% premium to multiple used for other mid-cap players given strong brand name and management track record.

Risks to Rating and Price Target

Key risks to our PT and rating are: a) delay in new launches remains they key risk to pre sale assumptions; b) large land/FSI payments for new project acquisitions thereby resulting in higher debt levels.

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