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Godrej Properties Limited :: Rich Valuations Outweigh Strong Brand – Initiate at EW
GPL has a strong brand equity and pan-India land
bank, 83% acquired through asset-light Joint
Development Agreements. However, the stock
appears rich at 35x F12e EPS and a 3% discount to
forward NAV vs. 30-50% for peers. The present land
bank and pipeline projects appear to be priced in.
We may turn more positive when visibility improves
(Bull Case Rs879) on execution scale-up (especially in
large projects like Ahmadabad/Hyderabad and group
MoU projects), commercial absorption (~5msf
developable area, mainly in Kolkata), new project
acquisitions and potential upside from the group land
bank (notably 500 acres in Vikhroli).
Why not Underweight? (Bear Case Rs465) GPL has
brand upside (good record of JDA project acquisition), a
new joint development in Vikhroli (timelines not specified
by company), and solid earnings growth (42% EPS
CAGR from FY11-14e) due to geographic diversification
(about four cities in FY11 to 11 cities in FY14).
Key Debates: 1) Why is leverage high despite the JDA
model? We believe it stems from ongoing commercial
development (~5msf – projects mainly debt-funded with
~Rs5bn of available credit lines) and will subside after
FY12 as projects complete. 2) Are present volumes in
GPL’s Garden City Ahmedabad sustainable? We expect
GPL’s absorption to moderate after strong pre-sales in
the initial year (~3.2msf in the past 15 months).
Long-term absorption linked to contrasting factors –
entry of large services players (IT/ITES) in Ahmadabad
driving demand vs. a large supply pipeline (~120msf)
over GPL’s development period. 3) How big is the
Vikhroli opportunity? We see limited potential (30-40
acres) due to execution hurdles (incumbent workers /
plants on site) and competing Group supply. 4) Is the
JDA model less attractive during an up-cycle? Our
analysis shows weak correlation between JDA
economics and price inflation.
Investment Case
Initiating at EW, PT Rs637/share
Why Equal-weight? GPL has a strong brand with a presence
across 11 cities and a differentiated asset-light business model
(83% JDA projects - see Company Background, Exhibit 37).
The company enjoyed good pre-sales in FY11 (3.2msf vs. 1.4
msf in FY10), but sales may slow in ensuing quarters owing to
possible sluggishness in the Ahmadabad market (~45% of
FY11 pre-sales) and weak take-up of Kolkata commercial
projects (~ 3msf developable area, 65% complete, mostly
unsold). This could hurt the company’s near-term cash flow
and put pressure on a relatively geared balance sheet (net
gearing ~0.9x as of March 2011).
A fair bit in the price: Our price target of Rs637 (10% discount
to March 2012 NAV) implies 7% downside to the current stock
price. The present land bank (84msf of developable area, or
DA), 185 acres of memoranda of understanding (MoUs) signed
with Group companies (see Exhibit 24 for details) along with a
potential joint development in Vikhroli appear to be in the price.
Valuation appears expensive: The stock is trading at a 3%
discount to our March 2012 forward NAV of Rs708/share (vs.
its peer-group 30-50% discount). On a P/E basis, it trades at
35x F12E EPS and 18x F13E EPS. We expect most projects
(including commercial) to start contributing meaningfully to
FY13 earnings.
The stock trades at 4.8x F12e book (Exhibit 1: historical mean
~ 4.5x), which, in our opinion, cannot be compared directly with
the sector P/B (~1.3x), in view of GPL’s differentiated
asset-light business model (83% of projects are JDAs, with low
upfront capital requirements) enabling higher ROEs (>20%).
We arrive at our base-case NAV (Rs708/share) by adding
the value of the existing land bank of 84msf developable area
(Rs393/share), Group MoUs (Rs256/sh) and new projects
(Rs43/share), then adjusting for balance sheet items
(Rs222/sh) and net debt (Rs163/sh). We calculate our price
target of Rs637 per share by ascribing a 10% discount to our
March 2012 NAV estimate of Rs708.
What will drive our bull case?
GPL will have to deliver on its strengths to approach our Bull
Case valuation of Rs879 (28% upside from current stock price).
These include the following:
(i) Sustained pre-sale momentum in the key market of
Ahmadabad over the next few quarters (~3.2msf sold over
the past 15 months). This could give us comfort about a
shorter development cycle in Ahmadabad (~13-15 years);
(ii) Additional joint-development with the Group for 70-80
acres in Vikhroli on partnership terms akin to existing
developments (vs. 30-40 acres assumed in base case);
(iii) Faster ramp-up of land bank through 6msf of new JDA
projects (vs. 3msf in base case) in FY12 due to positive
developments on the Jet Airways BKC land, Port-trust
clearance on Group-owned land in Wadala or
redevelopment opportunities converted by the newly
formed Special Purpose Vehicle (SPV)
Earnings Forecasts
We expect strong earnings growth in the next few years (42%
EPS CAGR from FY11-14) thanks to geographic diversification
from the four main current locations (Ahmadabad, Gurgaon,
Kolkata, Bangalore) to 11 by FY14 (including Mumbai, Pune,
Hyderabad, Chennai, Chandigarh, Mangalore and Kochi).
Our EPS estimate for FY12 is 23% below consensus while
FY13 and FY14 estimates are 9% and 14% above consensus,
respectively, implying that the consensus expects aggressive
revenue recognition in the near term.
Key Risks
Key downside risks to our EW rating are as follows:
1. Project risk due to termination/delays in partnership
model (83% of GPL’s land bank under JDAs);
2. Execution risk in Group MoUs due to relocation of
workers, offices and industrial units from existing
locations; in our bear case, we have factored in a 2-3 year
delay in the ongoing Vikhroli project.
3. Cannibalization of demand due to competing group
projects on the same land parcel (G&B has launched and
delivered six towers and will be launching another four
towers in FY12 in the Vikhroli land parcel)
4. Project absorption risk due to prolonged slowdown in
key markets like Ahmadabad and Hyderabad (a 3-year
delay in the development period for these locations is
factored in our bear case);
5. No major value-accretive land purchases;
6. Sector risks include a prolonged high inflation/interest
rate environment, a further slowdown in economic growth
expectations and adverse regulatory changes
(environmental/floor space index related, etc).
Key upside risks to our EW rating are as follows:
1. Sooner-than-expected launch of group projects in
Hyderabad and Mohali (FY13 in base case);
2. Larger-than-forecast joint development project MoU
in Vikhroli;
3. Positive movement on pending issues: JDA on Jet
Airways land in BKC, which could be a lucrative joint
development project in Mumbai’s Central Business
District; development clearance by Bombay Port Trust on
GIL-owned land in Wadala, which could open up further
joint development opportunities with the Group in Mumbai.
GPL’s Positioning
Physical Market – GPL’s land bank is spread across super
metros (Mumbai, NCR – National Capital Region), metros
(Bangalore, Hyderabad, Kolkata) and Tier I cities (mainly
Ahmadabad). We believe that these city markets are at
different stages in the property cycle – Mumbai (major
slowdown after sharp property price increase), NCR (volumes
still not slowing, although prices have risen past previous peak)
and metros (both volumes and prices are steady). Thus, we
believe that GPL’s geographical spread minimizes its risk and
should cushion slowdowns in certain markets.
Morgan Stanley Coverage Universe – We prefer exposure to
mid-cap stocks – Oberoi Realty Limited (OEBO.BO, Rs234,
OW), Sobha Developers Limited (SOBH.BO, Rs,259, OW) – in
view of relatively better balance sheets, steady execution
scale-up visibility and inexpensive valuations. GPL does not
make this list because of its rich valuations. In the larger caps,
we are Overweight on DLF Limited (DLF.BO, Rs215) due to its
positioning as a pan-India play and Indiabulls Real Estate Ltd
(INRL.BO, Rs109) because of its deep valuation discount, but
their stock performance could take 1-2 quarters until the local
macro environment improves (inflation and interest rate) and
the companies scale up operations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Properties Limited :: Rich Valuations Outweigh Strong Brand – Initiate at EW
GPL has a strong brand equity and pan-India land
bank, 83% acquired through asset-light Joint
Development Agreements. However, the stock
appears rich at 35x F12e EPS and a 3% discount to
forward NAV vs. 30-50% for peers. The present land
bank and pipeline projects appear to be priced in.
We may turn more positive when visibility improves
(Bull Case Rs879) on execution scale-up (especially in
large projects like Ahmadabad/Hyderabad and group
MoU projects), commercial absorption (~5msf
developable area, mainly in Kolkata), new project
acquisitions and potential upside from the group land
bank (notably 500 acres in Vikhroli).
Why not Underweight? (Bear Case Rs465) GPL has
brand upside (good record of JDA project acquisition), a
new joint development in Vikhroli (timelines not specified
by company), and solid earnings growth (42% EPS
CAGR from FY11-14e) due to geographic diversification
(about four cities in FY11 to 11 cities in FY14).
Key Debates: 1) Why is leverage high despite the JDA
model? We believe it stems from ongoing commercial
development (~5msf – projects mainly debt-funded with
~Rs5bn of available credit lines) and will subside after
FY12 as projects complete. 2) Are present volumes in
GPL’s Garden City Ahmedabad sustainable? We expect
GPL’s absorption to moderate after strong pre-sales in
the initial year (~3.2msf in the past 15 months).
Long-term absorption linked to contrasting factors –
entry of large services players (IT/ITES) in Ahmadabad
driving demand vs. a large supply pipeline (~120msf)
over GPL’s development period. 3) How big is the
Vikhroli opportunity? We see limited potential (30-40
acres) due to execution hurdles (incumbent workers /
plants on site) and competing Group supply. 4) Is the
JDA model less attractive during an up-cycle? Our
analysis shows weak correlation between JDA
economics and price inflation.
Investment Case
Initiating at EW, PT Rs637/share
Why Equal-weight? GPL has a strong brand with a presence
across 11 cities and a differentiated asset-light business model
(83% JDA projects - see Company Background, Exhibit 37).
The company enjoyed good pre-sales in FY11 (3.2msf vs. 1.4
msf in FY10), but sales may slow in ensuing quarters owing to
possible sluggishness in the Ahmadabad market (~45% of
FY11 pre-sales) and weak take-up of Kolkata commercial
projects (~ 3msf developable area, 65% complete, mostly
unsold). This could hurt the company’s near-term cash flow
and put pressure on a relatively geared balance sheet (net
gearing ~0.9x as of March 2011).
A fair bit in the price: Our price target of Rs637 (10% discount
to March 2012 NAV) implies 7% downside to the current stock
price. The present land bank (84msf of developable area, or
DA), 185 acres of memoranda of understanding (MoUs) signed
with Group companies (see Exhibit 24 for details) along with a
potential joint development in Vikhroli appear to be in the price.
Valuation appears expensive: The stock is trading at a 3%
discount to our March 2012 forward NAV of Rs708/share (vs.
its peer-group 30-50% discount). On a P/E basis, it trades at
35x F12E EPS and 18x F13E EPS. We expect most projects
(including commercial) to start contributing meaningfully to
FY13 earnings.
The stock trades at 4.8x F12e book (Exhibit 1: historical mean
~ 4.5x), which, in our opinion, cannot be compared directly with
the sector P/B (~1.3x), in view of GPL’s differentiated
asset-light business model (83% of projects are JDAs, with low
upfront capital requirements) enabling higher ROEs (>20%).
We arrive at our base-case NAV (Rs708/share) by adding
the value of the existing land bank of 84msf developable area
(Rs393/share), Group MoUs (Rs256/sh) and new projects
(Rs43/share), then adjusting for balance sheet items
(Rs222/sh) and net debt (Rs163/sh). We calculate our price
target of Rs637 per share by ascribing a 10% discount to our
March 2012 NAV estimate of Rs708.
What will drive our bull case?
GPL will have to deliver on its strengths to approach our Bull
Case valuation of Rs879 (28% upside from current stock price).
These include the following:
(i) Sustained pre-sale momentum in the key market of
Ahmadabad over the next few quarters (~3.2msf sold over
the past 15 months). This could give us comfort about a
shorter development cycle in Ahmadabad (~13-15 years);
(ii) Additional joint-development with the Group for 70-80
acres in Vikhroli on partnership terms akin to existing
developments (vs. 30-40 acres assumed in base case);
(iii) Faster ramp-up of land bank through 6msf of new JDA
projects (vs. 3msf in base case) in FY12 due to positive
developments on the Jet Airways BKC land, Port-trust
clearance on Group-owned land in Wadala or
redevelopment opportunities converted by the newly
formed Special Purpose Vehicle (SPV)
Earnings Forecasts
We expect strong earnings growth in the next few years (42%
EPS CAGR from FY11-14) thanks to geographic diversification
from the four main current locations (Ahmadabad, Gurgaon,
Kolkata, Bangalore) to 11 by FY14 (including Mumbai, Pune,
Hyderabad, Chennai, Chandigarh, Mangalore and Kochi).
Our EPS estimate for FY12 is 23% below consensus while
FY13 and FY14 estimates are 9% and 14% above consensus,
respectively, implying that the consensus expects aggressive
revenue recognition in the near term.
Key Risks
Key downside risks to our EW rating are as follows:
1. Project risk due to termination/delays in partnership
model (83% of GPL’s land bank under JDAs);
2. Execution risk in Group MoUs due to relocation of
workers, offices and industrial units from existing
locations; in our bear case, we have factored in a 2-3 year
delay in the ongoing Vikhroli project.
3. Cannibalization of demand due to competing group
projects on the same land parcel (G&B has launched and
delivered six towers and will be launching another four
towers in FY12 in the Vikhroli land parcel)
4. Project absorption risk due to prolonged slowdown in
key markets like Ahmadabad and Hyderabad (a 3-year
delay in the development period for these locations is
factored in our bear case);
5. No major value-accretive land purchases;
6. Sector risks include a prolonged high inflation/interest
rate environment, a further slowdown in economic growth
expectations and adverse regulatory changes
(environmental/floor space index related, etc).
Key upside risks to our EW rating are as follows:
1. Sooner-than-expected launch of group projects in
Hyderabad and Mohali (FY13 in base case);
2. Larger-than-forecast joint development project MoU
in Vikhroli;
3. Positive movement on pending issues: JDA on Jet
Airways land in BKC, which could be a lucrative joint
development project in Mumbai’s Central Business
District; development clearance by Bombay Port Trust on
GIL-owned land in Wadala, which could open up further
joint development opportunities with the Group in Mumbai.
GPL’s Positioning
Physical Market – GPL’s land bank is spread across super
metros (Mumbai, NCR – National Capital Region), metros
(Bangalore, Hyderabad, Kolkata) and Tier I cities (mainly
Ahmadabad). We believe that these city markets are at
different stages in the property cycle – Mumbai (major
slowdown after sharp property price increase), NCR (volumes
still not slowing, although prices have risen past previous peak)
and metros (both volumes and prices are steady). Thus, we
believe that GPL’s geographical spread minimizes its risk and
should cushion slowdowns in certain markets.
Morgan Stanley Coverage Universe – We prefer exposure to
mid-cap stocks – Oberoi Realty Limited (OEBO.BO, Rs234,
OW), Sobha Developers Limited (SOBH.BO, Rs,259, OW) – in
view of relatively better balance sheets, steady execution
scale-up visibility and inexpensive valuations. GPL does not
make this list because of its rich valuations. In the larger caps,
we are Overweight on DLF Limited (DLF.BO, Rs215) due to its
positioning as a pan-India play and Indiabulls Real Estate Ltd
(INRL.BO, Rs109) because of its deep valuation discount, but
their stock performance could take 1-2 quarters until the local
macro environment improves (inflation and interest rate) and
the companies scale up operations.
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