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UBS Investment Research
Godrej Properties
Q2 in line; enhancing NAV visibility
„ Event: Q2 in line with UBS; re-structuring land portfolio the focus
Q2 revenue grew 70% YoY and 5% QoQ, with EBITDA up 42% QoQ (-32%
YoY) on an improved EBITDA margin of 24% (18% in Q1). Net income,
however, declined 41% YoY to Rs195m primarily due to private equity stake sales
recognised last year; but in line with our estimate. Net debt grew in Q2 to
Rs11.5bn (Rs9.3bn in Q1). Operationally: 1) pre-sales steady at 0.57msf (0.56msf
in Q1); 2) signed five new deals for 8msf; and 3) reduced the development scope at
the Ahmedabad and Hyderabad projects.
„ Impact: Lower NAV and price target to factor change in development mix
We lower our NAV estimate and price target to Rs1,072 and Rs800, respectively,
to factor in the reduced development scope at Ahmedabad (10.8msf) and
Hyderabad (2.4msf), and higher leverage given deposits for new JVs (5msf). While
the reduced size is a sentiment dampener, we believe the revamp will enhance
NAV visibility. We view reduced Tier-2 commercial exposure (Ahmedabad 8% of
NAV vs. 17% earlier, and Hyderabad) and the shift to Tier-1 residential in
Bangalore, Mumbai and the National Capital Region as steps to drive cash flow.
„ Action: Maintain Buy; new deals/development progress are key catalysts
Key catalysts: 1) growing cash flow visibility from developing group land reserves
(three JVs signed with G&B over the past three months); 2) better-than-sector presales; 3) more joint developments (five in Q2); and 4) potential PE deals to address
high debt and increase capital efficiency amid the tight funding environment.
„ Valuation: Attractive at a 38% discount to NAV
Our new price target of Rs800 (from Rs850) is based on a 25% discount to our
NAV estimate of Rs1,072. At a 38% discount to NAV, we believe its strong brand
and good corporate governance should ensure healthy upside potential.
Q2 FY12 results analysis
Q Q2 revenue grew 70% YoY and 5% QoQ to Rs1.4bn, driven by higher
revenue recognition.
Q EBITDA rose 42% QoQ (-32% YoY) to Rs345m, with EBITDA margin
improving to 24% (18% in Q1).
Q Net income declined, however, 41% YoY to Rs195m primarily due to
private equity stake sales recognised last year, although it was in line with
our estimate.
Q Net debt grew in Q2 to Rs11.5bn (Rs 9.3bn in Q1) on new deals and a pickup in execution.
Operational analysis
Q Pre-sales in Q2 were 0.57msf, generating a potential Rs2.1bn in cash flow
(0.56msf in Q1).
Q New deals signed by Godrej Properties (GPL) in Q2:
— Godrej Properties entered into an agreement with group company, Godrej
& Boyce (G&B), to act as development manager for all future
development of G&B’s Vikhroli land parcel (1,000 acres). GPL will
receive 10% of the total revenue generated from the development and
incur marketing costs (2%).
— Nagpur Joint development project with a revenue sharing arrangement for
2.7msf of the saleable area (management fee for 0.7msf and 60% revenue
share for 2msf).
— Entered into NCR (National Capital Region) joint development project on
an area sharing arrangement for 2msf of the saleable area (GPL’s share is
65%)
— Two more deals signed with G&B to develop a 9.16 acre land parcel at
Moosapet, Hyderabad, with a saleable area of 2msf (profit sharing
agreement with GPL to get a 35% share) and Mumbai with a three acre
parcel at Thane (saleable area of 0.26msf; profit sharing agreement with
GPL to get a 32% share).
— Announced a deal with Jet Airways to develop land at the Bandra-Kurla
Complex (1.2msf) with 0.16msf to be built by GPL and handed over to
Jet at cost. GPL to get a 50% profit share post financing costs above the
land handed over (1msf), assuming Jet Airways Rs5bn loan to buy the
land. However, GPL’s effective liability on the loan is Rs2.5bn.
— GPL resized its Ahmedabad project from 40.4msf to 24msf of
developable area, focusing primarily on 21msf of residential and 3msf of
commercial. GPL also resized the Hyderabad project from 9.6msf to
7.2msf, focusing entirely on residential. It has reduced the focus on
commercial, given higher residential demand in both cities.
We lower our NAV and price target forecasts
We lower our NAV and price target forecasts to factor in the new development
mix at Ahmedabad and Hyderabad, new joint development deals and higher
leverage. We lower our NAV estimate 5% from Rs1,130 to Rs 1,072 and our
price target 6% from Rs850 to Rs800.
Valuation remains attractive
We believe the shares trade at an attractive 38% discount to our revised NAV
estimate of Rs1,072. We expect upside share price potential from new project
wins and higher development visibility for the group’s prime land assets. We
believe GPL’s recent JVs announced with: 1) G&B to develop projects in
Hyderabad (2msf; GPL has a 35% profit share) and Thane (0.26msf, GPL has a
32% profit share); and 2) Capsulation Services to develop 0.1msf in Chembur,
Mumbai (47.5% share of the land parcel) underscore the visibility.
Given the recent agreement concerning the Vikhroli development, we ascribe
48% of our forecast NAV of Rs1,072 to the group’s land reserves based on the
higher development visibility of the land (1,000 acres versus our previous
assumption of 750 acres). We factor in: 1) floor space index of 1.33 with a 30%
loading on the saleable area; 2) a revenue share of 10%; and 3) developed over a
10-year period with no price/cost escalations.
We believe the agreement supports our view of GPL’s ability to access and
develop the group’s prime land reserves in Vikhroli and other key cities
(Bangalore and Mohali), as we believe consensus has not factored in the
development potential. We think the embedded option value for group assets is
inexpensive (Rs611/share). The group’s strong “Godrej” brand franchise, its
execution agreement with L&T, and long track record of value creation are
advantages.
:GPL NAV (R m)
Residential 42,874
Commercial 23,771
Net land bank 42,728
Gross NAV 119,479
Less: Land o/s 0
Less: Tax @ 28% (18,661)
Less: Debt o/s (11,520)
Less: Customer Advances (4,250)
Add: Cash 0
Net NAV 74,938
Shares o/s (m) 70
NAV Per Share (Rs) 1,072
Source: UBS estimates
Q 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.
Q Statement of Risk
Risks to GPL include exposure to Ahmedabad and rising interest rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��\
UBS Investment Research
Godrej Properties
Q2 in line; enhancing NAV visibility
„ Event: Q2 in line with UBS; re-structuring land portfolio the focus
Q2 revenue grew 70% YoY and 5% QoQ, with EBITDA up 42% QoQ (-32%
YoY) on an improved EBITDA margin of 24% (18% in Q1). Net income,
however, declined 41% YoY to Rs195m primarily due to private equity stake sales
recognised last year; but in line with our estimate. Net debt grew in Q2 to
Rs11.5bn (Rs9.3bn in Q1). Operationally: 1) pre-sales steady at 0.57msf (0.56msf
in Q1); 2) signed five new deals for 8msf; and 3) reduced the development scope at
the Ahmedabad and Hyderabad projects.
„ Impact: Lower NAV and price target to factor change in development mix
We lower our NAV estimate and price target to Rs1,072 and Rs800, respectively,
to factor in the reduced development scope at Ahmedabad (10.8msf) and
Hyderabad (2.4msf), and higher leverage given deposits for new JVs (5msf). While
the reduced size is a sentiment dampener, we believe the revamp will enhance
NAV visibility. We view reduced Tier-2 commercial exposure (Ahmedabad 8% of
NAV vs. 17% earlier, and Hyderabad) and the shift to Tier-1 residential in
Bangalore, Mumbai and the National Capital Region as steps to drive cash flow.
„ Action: Maintain Buy; new deals/development progress are key catalysts
Key catalysts: 1) growing cash flow visibility from developing group land reserves
(three JVs signed with G&B over the past three months); 2) better-than-sector presales; 3) more joint developments (five in Q2); and 4) potential PE deals to address
high debt and increase capital efficiency amid the tight funding environment.
„ Valuation: Attractive at a 38% discount to NAV
Our new price target of Rs800 (from Rs850) is based on a 25% discount to our
NAV estimate of Rs1,072. At a 38% discount to NAV, we believe its strong brand
and good corporate governance should ensure healthy upside potential.
Q2 FY12 results analysis
Q Q2 revenue grew 70% YoY and 5% QoQ to Rs1.4bn, driven by higher
revenue recognition.
Q EBITDA rose 42% QoQ (-32% YoY) to Rs345m, with EBITDA margin
improving to 24% (18% in Q1).
Q Net income declined, however, 41% YoY to Rs195m primarily due to
private equity stake sales recognised last year, although it was in line with
our estimate.
Q Net debt grew in Q2 to Rs11.5bn (Rs 9.3bn in Q1) on new deals and a pickup in execution.
Operational analysis
Q Pre-sales in Q2 were 0.57msf, generating a potential Rs2.1bn in cash flow
(0.56msf in Q1).
Q New deals signed by Godrej Properties (GPL) in Q2:
— Godrej Properties entered into an agreement with group company, Godrej
& Boyce (G&B), to act as development manager for all future
development of G&B’s Vikhroli land parcel (1,000 acres). GPL will
receive 10% of the total revenue generated from the development and
incur marketing costs (2%).
— Nagpur Joint development project with a revenue sharing arrangement for
2.7msf of the saleable area (management fee for 0.7msf and 60% revenue
share for 2msf).
— Entered into NCR (National Capital Region) joint development project on
an area sharing arrangement for 2msf of the saleable area (GPL’s share is
65%)
— Two more deals signed with G&B to develop a 9.16 acre land parcel at
Moosapet, Hyderabad, with a saleable area of 2msf (profit sharing
agreement with GPL to get a 35% share) and Mumbai with a three acre
parcel at Thane (saleable area of 0.26msf; profit sharing agreement with
GPL to get a 32% share).
— Announced a deal with Jet Airways to develop land at the Bandra-Kurla
Complex (1.2msf) with 0.16msf to be built by GPL and handed over to
Jet at cost. GPL to get a 50% profit share post financing costs above the
land handed over (1msf), assuming Jet Airways Rs5bn loan to buy the
land. However, GPL’s effective liability on the loan is Rs2.5bn.
— GPL resized its Ahmedabad project from 40.4msf to 24msf of
developable area, focusing primarily on 21msf of residential and 3msf of
commercial. GPL also resized the Hyderabad project from 9.6msf to
7.2msf, focusing entirely on residential. It has reduced the focus on
commercial, given higher residential demand in both cities.
We lower our NAV and price target forecasts
We lower our NAV and price target forecasts to factor in the new development
mix at Ahmedabad and Hyderabad, new joint development deals and higher
leverage. We lower our NAV estimate 5% from Rs1,130 to Rs 1,072 and our
price target 6% from Rs850 to Rs800.
Valuation remains attractive
We believe the shares trade at an attractive 38% discount to our revised NAV
estimate of Rs1,072. We expect upside share price potential from new project
wins and higher development visibility for the group’s prime land assets. We
believe GPL’s recent JVs announced with: 1) G&B to develop projects in
Hyderabad (2msf; GPL has a 35% profit share) and Thane (0.26msf, GPL has a
32% profit share); and 2) Capsulation Services to develop 0.1msf in Chembur,
Mumbai (47.5% share of the land parcel) underscore the visibility.
Given the recent agreement concerning the Vikhroli development, we ascribe
48% of our forecast NAV of Rs1,072 to the group’s land reserves based on the
higher development visibility of the land (1,000 acres versus our previous
assumption of 750 acres). We factor in: 1) floor space index of 1.33 with a 30%
loading on the saleable area; 2) a revenue share of 10%; and 3) developed over a
10-year period with no price/cost escalations.
We believe the agreement supports our view of GPL’s ability to access and
develop the group’s prime land reserves in Vikhroli and other key cities
(Bangalore and Mohali), as we believe consensus has not factored in the
development potential. We think the embedded option value for group assets is
inexpensive (Rs611/share). The group’s strong “Godrej” brand franchise, its
execution agreement with L&T, and long track record of value creation are
advantages.
:GPL NAV (R m)
Residential 42,874
Commercial 23,771
Net land bank 42,728
Gross NAV 119,479
Less: Land o/s 0
Less: Tax @ 28% (18,661)
Less: Debt o/s (11,520)
Less: Customer Advances (4,250)
Add: Cash 0
Net NAV 74,938
Shares o/s (m) 70
NAV Per Share (Rs) 1,072
Source: UBS estimates
Q 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.
Q Statement of Risk
Risks to GPL include exposure to Ahmedabad and rising interest rates.
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