Godrej Properties’ growth strategy, past performance and brand equity augur well and will help deliver healthy returns in the long run.
Godrej Properties (GPL) has evolved into an integrated real estate development company with projects in 10 cities across India. It develops properties both in the residential and commercial real estate space on a joint development basis. It plans to build around 82 million square feet of developable area in the next 8-10 years. In line with its growth plans, the company is coming out with an IPO worth Rs 460 to Rs 500 crore. The initial proceeds would be used to acquire land development rights for their forthcoming projects, construction of project as well as repayment of loans.
Asset-light strategy
Land component constitutes around 60 per cent of the project cost for real estate companies. The surge in realty prices pushed up land costs, and a lot of companies used debt to fund their projects. While the decline in the property market hit valuations of companies. In order to insulate itself from the movement in land prices, GPL follows an asset-light model. The company makes no substantial investments upfront to acquire land, but ties-up with owners to jointly develop their land. Around 85 per cent of the total area being developed by GPL is through such arrangements. In exchange of development rights of land, GPL gives a pre-determined portion of the developable area or a share in revenues or profits generated from the projects at a later date. This model is different from the land acquisition model that most other realty players follow.
| CITY-WISE PROJECT DETAILS | |||
| Location | Area (Acres) | Developable (mn. Sq. ft.) | Saleable (mn. Sq. ft.) |
| Mumbai | 38.8 | 3.7 | 2.3 |
| Pune | 26.2 | 12.3 | 1.3 |
| Bangalore | 21.5 | 2.5 | 1.9 |
| Kolkata | 16.7 | 6.9 | 2.8 |
| Hyderabad | 34 | 9.6 | 9.6 |
| Mangalore | 4.5 | 0.8 | 0.6 |
| Ahmedabad | 223.5 | 40.4 | 27.4 |
| Chandigarh | 1.8 | 0.7 | 0.3 |
| Kochi | 15.2 | 2.5 | 1.8 |
| Chennai | 8.7 | 3.2 | 2.3 |
| Total | 391 | 82.7 | 50.2 |
| The projects are a mix of Joint development as well as own properites, which are planned to be developed over the coming years | |||
The asset-light strategy helps de-risk the business and enables it to undertake more projects without having to invest large amounts of money towards purchasing land. The model has served them well in the recent downturn as well. Other companies took a hit on account of higher interest costs and a crash in real estate prices; comparatively, GPL fared better with stable margins and flat top line growth.
Scaling new heights
From a Mumbai-based realty developer, GPL is broadening its wings into other regions. It has already developed 5 million square feet (sq ft), a majority of which were premium properties. Going ahead, it would focus more on mid-income properties, a segment where demand is estimated to be huge, which would ensure better volumes.
The company intends to spend around 40 per cent of the IPO proceeds towards acquisition of land development rights for its forthcoming projects. The company plans to develop 32 million sq ft of area through its on-going projects that are slated to be coming on board in the next few years. In the near-term, GPL is likely to launch its biggest ever project, Godrej Garden City in Ahmedabad, which is slated to complete by 2017. The project accounts for half of the company’s estimated developable area in the future.
| SCALING UP | ||||
| in Rs crore | FY08 | FY09 | H1 FY10 | FY10E |
| Revenues | 228.0 | 250.0 | 115.0 | 285.0 |
| EBITDA (%) | 53.0 | 46.0 | 60.0 | 46.0 |
| Net profit | 75.0 | 76.0 | 48.0 | 120.0 |
| PAT margin (%) | 33.0 | 30.0 | 42.0 | 42.0 |
| EPS (Rs) | 12.8 | 12.5 | - | 17.1 |
| P/E (x) @ 490 | - | 39.1 | - | 28.6 |
| P/E (x) @ 530 | - | 42.3 | - | 30.9 |
| E: Estimates | ||||
To overcome project delays, which it experienced in the past, the company has roped in L&T and Gammon India. Such association will help the company execute projects faster, besides save on cost overruns that are common when projects get delayed.
Conclusion
GPL’s revenues and net profits have grown at an average rate of 35 per cent and 60 per cent, respectively in the last three years. However, the first six months of 2009-10 does not look impressive (revenues at Rs 115 crore were less than half of that reported in the 12 months to March 2009), reflecting the weak demand scenario in the recent past.
Going ahead though, sales volumes are expected to be better and the inventory that the company added in the third and fourth quarters of last fiscal might get replenished faster. While the demand from the residential segment has seen some pick up, the commercial real estate segment that accounts for 30-35 per cent of the area under development, is muddled with problems of oversupply and lower demand.
The company also plans to reduce its debt of around Rs 800 crore by Rs 170 crore from the IPO proceeds. Indicatively, its post-IPO debt-equity would reduce from 2.2 to about 0.65. The lower ratio would allow the company to further leverage its books as and when GPL scales up its operations by undertaking more projects in the future. The Godrej lineage, asset-light business model and robust plans would ensure sustainable growth for Godrej Properties.
The flip side is that the IPO is priced at a premium, given that the PE works out to around 30 times (at the upper price band) its estimated 2009-10 earnings. Although there are no comparable peers, similar sized realty companies trade between 15-25 times their 2009-10 earnings. While the IPO appears to be priced at a premium, it is justified given the business model and growth plans. But, GPL’s ability to scale up and maintain margins will determine future returns. Investors with a two-three year time frame may invest in the IPO.
