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UBS Investment Research
Godrej Properties
M ixed 1Q, but see long-term catalysts
Event: Q1 below expectations, but operationally still healthy
PAT and EBITDA declined 55% YoY and 28% YoY, while sales grew 83% YoY
– we believe this is due to a mismatch in revenue-cost recognition, higher costs, no
PE sale and increased debt Rs9.4bn (D/E of 1). Operationally, however, pre-sales
(0.56msf) were healthy, construction progressed well, and there are more launches
on the anvil.
Impact: Lowered FY12-13E on cost pressures, but expect pick-up in 2H
We have reduced our earnings by 9% for FY12-13E on increasing cost pressures,
and higher interest costs in 1Q. However, we expect growth to pick up on the back
of better pre-sales, product mix revenue recognition in 2H. That said, the absence
of gains from private equity sales could raise the downside risk to our estimates.
Action: Reiterate BUY on superior quality and long-term catalysts
We think the company is best-positioned, with a strong brand, superior corporate
governance and a capital-efficient model. Though it has outperformed the Sensex
by 25% in the last three months, we see further upside on news flow of: 1) new
joint-development deals; 2) Mumbai re-development project wins; and 3) increased
visibility to access and develop group’s prime land reserves – viewed as a longterm
catalyst.
Valuation: Raise PT to Rs960 on higher visibility to develop group assets
The stock is trading at a 36% discount to NAV of Rs1,275; however, we raise our
TP to Rs960 on the basis of a 25% discount (vs. 30% earlier) to NAV factoring
higher visibility of GPL’s ability to develop the group’s land reserves – two recent
JVs reinforce our belief – and we believe the embedded value for group assets
(Rs671/share) is available cheaply.
Operationally, doing well
Pre-sales in 1Q were 0.56msf generating potential cashflows of Rs 2.3bn (vs
1.6msf in Q4FY11, and 0.8msf in 1HFY11). Godrej Garden City,
Ahmedabad primarily drove pre-sales with 0.24msf sold in Q1.
New deals Godrej Properties (GPL) signed YTD in FY12:
— Signed a new joint development agreement with Capsulation Services to
develop 0.1 msf of residential space in Chembur, Mumbai. GPL will
share 47.5% on area-sharing basis.
— Announcement of two new JVs with Godrej & Boyce (G&B) to develop
residential projects in Hyderabad and Thane. The specific details of the
JV are: 1) Hyderabad – It will develop 9.16acres in Moosapet, which is
likely to result in 2msf of developable area. As per the JV arrangement,
GPL will have a profit share of 35% from the project. This is one of the
projects GPL had entered into a MoU for land owned by its Group
companies; 2) Thane - It will develop a 3-acre land with approx. saleable
area of 0.26msf, and in which GPL’s profit share will be 32%. This was a
new project, which was not a part of the MoU signed early on.
Plans are under way to pursue several new business and redevelopment
opportunities across Mumbai and Pune in FY12. Has scheduled launches of
new projects in Hyderabad and Kochi in next 12 months.
Results Analysis
Revenues grew 83% YoY to Rs 1.3bn. We estimate execution picked up in
Q1, driving strong top-line growth, with Ahmedabad and Kolkata
contributing 28% and 41% of revenues in 1Q.
EBITDA of Rs243mn declined 28% YoY as higher operating costs impacted
operating profits. Higher construction cost recognition of Rs1.1bn primarily
impacted margins of 18%; we expect this to even out over next nine months.
Net Income of Rs 101mn declined 55% YoY. We estimate higher
construction cost recognition and higher interest costs drove earnings lower.
Additionally, the absence of any gains from private equity stake sale (vs.
Rs300mn in 1QFY10) further impacted earnings.
Net debt increased to Rs 9.4bn in Q1. Net D/E was 1.0x in Q1 vs. 0.85x in
Q4FY11 – we believe this is driven by increased construction activity on its
to be leased upcoming commercial property in Vikhroli (‘The Trees’).
Change in estimates
We lower our FY12E/13E estimates by 9%/9% respectively to factor increasing
cost pressures, and higher interest costs. However, we expect growth to pick up
on back of better pre-sales, product mix revenue recognition in 2H. That said,
absence of gains from private equity sales could raise downside risk to our
estimates.
Valuations still attractive; Raising TP to Rs960
We find the stock attractive trading at a 36% discount to NAV, despite its 25%
outperformance to Sensex in the last three months. We foresee upside potential
from new project wins and increased development visibility of Group prime
land assets.
These two new JVs with Group company may not significantly enhance our
NAV of the company, as we already ascribe 53% of our NAV (Rs1,275) as
value for its Group land reserves, with a large part being its potential Vikhroli
land (~750acres), factoring very conservative assumptions of 1) FSI of 1.33 with
no loading on saleable area, 2) assume 50% revenue share, 3) developed over a
10-yr period with no price/cost escalations’. However, we view these
developments as a big positive for sentiment on the company. We believe these
new JV deals reinforce our belief and increase the visibility of GPL’s ability to
access and develop Group’s prime land reserves in Vikhroli, Mumbai
(~750acres), and other key cities (Bangalore, Mohali), which were being
ignored by the market. We see subsequent newsflow on more such deals as a
long-term catalyst for the stock.
We have raised our price target to Rs960 ascribing a lower 25% discount (vs.
30% earlier) to NAV, factoring higher visibility of GPL’s ability to develop
group’s land reserves, post the recent two JVs with Group companies. We
believe embedded option value for group assets is available cheaply. The group’s
strong ‘Godrej’ brand franchise, its MOU with L&T for execution, and long track
record of value creation are other advantages
Bull-case and bear-case NAVs
With NAVs likely to remain volatile during recovery cycles, we highlight our
bull-case and bear-case scenarios for Godrej’s NAV. The bear case: 1) factors in
five-year development visibility (20msf, 39% of NAV); 2) values the balance as
undeveloped land reserves of 28msf (4% of NAV); and 3) builds in 500 acres of
developable land in Vikhroli (57% of NAV). The bull case builds in: 1) a
potential 1,000 acres developable in Vikhroli; 2) a 10% price rise across
projects; and 3) a faster absorption cycle for other developments. We believe
this provides a good perspective on NAV downside risk and upside potential.
Godrej Properties
Godrej Properties Limited (GPL) is the real estate development arm of the
Godrej Group. Godrej Industries Limited, the parent company, owns 69.43% of
the equity capital in GPL. The company focuses on residential, commercial and
integrated township developments. GPL has completed 16 residential and seven
commercial projects, aggregating 5.13msf since its incorporation in 1990.
Statement of Risk
Key risks to GPL include exposure to Ahmedabad, slowdown in economy, and
rising interest rates
