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Godrej Properties (GPL IN, INR 597, Reduce)

Godrej Properties (GPL) has successfully reduced leverage with equity issuance in Q4FY12. However, we note that the company’s key projects, accounting for ~60% of NAV, are facing headwinds, leading to strained cash flows. The stock is trading at 20% premium to NAV of INR478 which, we believe, is unjustified given the underperformance of its projects. We initiate coverage with ‘REDUCE’.

Flagship Ahmedabad project faces rough weather

Godrej Garden City (GGC) at Ahmedabad is facing stiff challenges with presumably high investor interest and with competition intensifying in the vicinity during the past 6-8 months. Along with approval issues and potential conflicts of interest with the JDA partner, we believe GGC is facing tough times which may curtail its cash generation.

Projects accounting for ~60% of NAV under strain

Most of the company’s projects, signifying large strategic bets, are either non-performing or facing challenges. These, namely GGC, Kolkata projects, Jet–BKC deal and Hyderabad projects, together account for ~60% of the company’s NAV, hence represent a downside risk (to NAV) from here on.

Cash flows to remain stressed through FY13E

GPL’s cash flows are likely to remain stressed through FY13E, easing only by FY14E. Cumulatively, we expect GPL to be net cash negative to the tune of INR8.4bn between FY13E and FY14E, driven by interest payments (INR3.7bn), capex on Jet-BKC commercial project (INR6.2bn), taxes (INR2.2bn) and minority interests (INR1bn).

Outlook and valuations: Rich; initiate with ‘REDUCE’

We estimate GPL’s NAV at INR478/share, denoting that the stock is trading at 20% premium to its NAV. We also highlight that ~60% of the stock NAV is accounted for by GGC, Kolkata projects, Jet–BKC deal and Hyderabad projects, which are facing headwinds. We believe GPL’s current project portfolio does not deserve any premium valuation and thus initiate coverage with ‘REDUCE/ Sector Underperformer’.

Godrej Properties - Rich valuations despite stressed business; initiating coverage; Reduce

Regards,