Strong execution and maintaining high volumes, in case of realisation pressure, will be the key.
The Godrej Properties (GP) scrip is on a roll. It clogged an all-time high of Rs 606 on news that the deal with Jet Airways for the prestigious BKC (Bandra-Kurla Complex) land will be concluded soon. This will add to its developable area of around 82 million square feet.
GP has been showing strong traction in revenues. However, concerns over profitability remain. Operating profit margins, excluding other income, are around 28 per cent in FY10, down from 47 per cent in FY09. The management has mentioned that earnings before interest, tax, depreciation and amortisation (Ebitda) margin is around 50 per cent, as it has counted other income in the total income. Profit from stake sale in a special purpose vehicle fetched the company around Rs 70 crore. Subsequently, the share of other income as a percentage of pre-tax profit has jumped from 41 per cent in FY09 to 87.9 per cent in FY10.
The management says the company will continue to earn profits from private equity-related activities. The share of other income will also remain high, it says. However, pressure on margins is expected to remain strong due to rising raw material costs. Volumes will provide succour as the company expects to deliver around 15 million sq feet in the next three years. This, and the ability to get strong realisations, will help the company manage higher profit margins. The debt-to-equity ratio is comfortable at around 0.5:1 and allows the company to leverage its balance sheet without creating extra pressure.
GP is increasing its pan-India footprint. However, its land bank at Ahmedabad and Mumbai dominates with around 65 per cent share of the net asset value of around Rs 4,640 crore and also the developable area. Any adverse movement in prices, though difficult at the moment, will impact profitability. But, the company may bank on its partners like Sembawang Infrastructure, L&T and Gammon India, in addition to its group companies like Godrej Boyce, with whom it has an understanding to develop around 200 acres of land.
