Acquisitions, launch pipeline offer Godrej Properties revenue visibility

Muted near term cash flows, increase in debt and valuations to cap upside

Godrej Properties has been a key beneficiary of the rebound in residential demand over the past few quarters and the consolidation in the sector. Its strong brand name and execution track record has helped it rapidly scale up its presence in each of its four key markets of Mumbai region, Pune, National Capital Region and Bengaluru. 

Analysts believe branded developers in key residential markets will continue to gain market share as demand remains healthy, led by lower home loan rates, stamp duty reduction, discounts and pent-up demand. Manish Agrawal of JM Financial says the consolidation theme is getting accelerated and branded developers are expected to continue reporting good sales volumes and launches in the coming years. 

It is not surprising then, that the company has consistently logged over a million square feet of sales in each of its four markets over the past three years. Sales momentum continued even during the first half of FY21 in which it posted a 11 per cent growth in booking value to Rs 2,605 crore with volumes pegged at 4.2 million square feet. 

 

Recent land acquisitions and project launches offer revenue visibility over the next couple of years. The company recently acquired an 18-acre parcel of land in Whitefield, Bengaluru, which will offer 2.4 million sq ft of saleable area. The proposed metro line connecting Whitefield to Hopefarm Junction is expected to be a key trigger for the project. The latest addition is the second one in this market over the last couple of months and follows the 15-acre purchase at Sarjapur which offers a saleable area of 1.6 million square feet. At 31.8 million square feet of developable area, Bengaluru was among the largest markets for the company at the end of October 2020. The micro market is the best performing region for the sector in terms of sales bookings across the country. 

The improving sales trends amid government sops and incentives in another key market is also another positive for the stock. Mumbai recorded the highest ever residential registrations in the month of November over the last nine years, according to Knight Frank. The 67 per cent y-o-y jump was on account of a 300 basis points drop in stamp duty and demand on account of the festival period. 

The 50 per cent cut in development premiums is another gain for the sector and the company as a third of overall project costs is on account of various premiums, according to ANAROCK Property Consultants. The company recently expanded its presence in this market with a 20 acre purchase in Kalyan with a saleable area of 1.5 million square feet. The company’s shift to integrated township policy for its Godrej City project in Panvel will help it to nearly double the residential saleable area to 8.2 million square feet. 

 

Overall, the company is planning to launch over 9 million square feet of new projects in FY21 and about 6 million square feet of new phases of existing projects.

While the aggressive growth plans in its core markets are positive and will help it garner market share, it will also entail additional debt as recent project additions (the company could raise Rs 2,000 crore of debt) have been outright purchases. However, despite the increase, the company has indicated that debt to equity ratio will be maintained at 1 from half that number currently. Cash flows have to improve if the company is to hit its return on equity target of 20 per cent over the next three years from low single digit now. 

Valuations are the other issue for investors as the stock which has more than doubled over the last one year is trading at a steep premium to its peers especially on the price to book value metric at 5 times which is twice that of large peers. Await meaningful correction and improvement in cash flows before considering the stock.