Thirty is a significant number for Pirojsha Godrej. Not only is the son of Godrej group patriarch Adi Godrej turning 30 in a couple of weeks, but that’s also the number of projects under development by Godrej Properties Ltd (GPL), of which Pirojsha Godrej is executive director.
Pirojsha Godrej and GPL have another thing in common. In many ways, they embody the future of the 113-year old, $2.6-billion Godrej group. They have both certainly grown quickly. Pirojsha has risen to the post of executive director from manager, corporate development, since he joined GPL in 2004. While the 20-year-old GPL is expected to be the biggest contributor to the group’s profits in less than seven years, surpassing the 80-year-old fast-moving consumer goods business.
According to Godrej group Chairman Adi Godrej, GPL has grown 50 per cent every year in the last five years. Currently, the contribution of the property business to group profits is 10 per cent, says Godrej. In terms of group topline, its contribution is in the lower single digits. In FY10, GPL had consolidated business of Rs 456 crore, according to the company’s financial results.
For Pirojsha Godrej, who holds master’s degrees from Columbia University and Columbia Business School , there’s nothing unusual in GPL surpassing its parent. “With the kind of advantages and brand name that we have and the business model we follow, we think it is a realistic possibility,” he says.
Pirojsha says the company is following a clear “volume game”, with the aim of becoming one of the top three real estate companies in the next few years. Towards that end, the joint development model is GPL’s biggest strength, he says. Though most developers now follow this model after the land bank-led model failed to draw investors, what makes GPL different is that nearly 80 per cent of its 50 million sq ft of land (80 million sq ft of developable area) is in joint ventures.
Property developers such as DLF, Unitech and Parsvnath bought large tracts of land across the country during the property boom of 2004-08, piling up huge amounts of debt. As property sales dwindled and debt payments mounted, they had to sell parcels of land and assets to reduce debt.
GPL has a net debt of Rs 600 crore and debt-equity of 0.68, which allows it to ramp up operations without being overleveraged, says an analyst with a Mumbai-based brokerage. DLF and Unitech, the country’s top two developers, have a net debt of Rs 18,463 crore and Rs 5,200 crore, respectively.
“The joint development approach allows GPL to have a low-risk, low-capital intensive business model. The advantages of GPL’s model are reflected in its superior RoE (return on equity),” said Motilal Oswal analysts Siddharth Bothra and Sanipan Pal in a recent report.
Due to its asset-light model, Bothra and Pal expect the company to provide a RoE of 16 per cent in FY11 and 19 per cent in FY12 – among the highest in the industry. DLF, Unitech and Indiabulls Real Estate give high single-digit RoEs.
But the joint development model has its share of opposition, too. “In this model, developers cannot make much money. Whatever comes, he has to share with landowner,’’ says the director of a Bangalore-based property company, who did not wish to be named.
In response, Pirojsha says: “We are not concentrating maximising profits in any one particular project, but at the business level.” He argues that with Rs 100 crore in hand, one can buy one piece of land and maximise profits or get into ten JVs with a Rs 10 crore initial investment each.
And for the similar logic, GPL has got PE funds such as HDFC, Milestone and Motilal Oswal on board by diluting stakes in most of its projects. But analysts say that in PE deals, developers could face liquidity pressure due to promised IRR (internal rate of return) and exit clauses if they underperform. Private equity funds expect an IRR of over 20 per cent and structure deals with preferred returns, deep waterfall structures and such to protect any downside risks.
But Pirojsha does see this as a problem. Rather, he says that the strategy helps the company redeploy money in earlier-stage projects and helps being taxed at lower rates. In property development projects, the normal tax rate of 33 per cent is applicable, but in projects where dilution has taken place, the tax rate is 23 per cent because of a long-term capital gains clause.
Though developers such as DLF first shifted focus towards mid-income housing after the economic slowdown, but have since scaled down such projects due to lower margins, Pirojsha says his company will continue to focus on this segment. Of GPL’s land bank, 74 per cent of development is focused towards mid-income residential development in Tier-I and II cities. “To be a successful real estate company, volumes are important,” he says.
While GPL plans to develop 80 million sq ft over the next 10 years, analysts have raised doubts about the huge ramp up it needs every year. To meet its ambitious plans, GPL needs an average of 8 million sq ft a year from the current 3 million sq ft, implying a three-fold improvement. While Pirojsha admits it’s a challenge, he is confident of achieving it. “Yes, real estate is a cyclical business, but with prudent risk management you can manage it,” he adds.
