Godrej Properties – A Towering Success

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  • Date: 12th Jan 2015
  • CMP: 253, PE: 28.4 times
  • Mid Cap with mkt cap 5,080 cr.
  • Advice: Medium Risk. Buy for minimum 2 year holding.

Overview:  GPL is a premium end player in housing, commercial and township real estate with a national footprint. It has a good record of projects, and a lean, asset light and productive business model. Revenues, EBITDA and Net Profit have grown by 37%, 25% and 16% CAGR over the last 6 years.

Why Buy Now: 1) The sector is emerging from some poor sentiment and is likely to benefit from economic revival. 2) GPL is a sector leader in terms of transparency, low debt and an asset light model. 3) There are signs of business acceleration at GPL which will be visible over the next two years. 4) GPL is currently at low historical valuations, and a likely mean reversion also points to a share appreciation

Godrej Properties – Description and Profile

  • Godrej Properties Limited (GPL) is a Mumbai based real estate firm and part of the Godrej Group.
  • Established in 1990, GPL had FY2014 revenues of Rs 1254 crore and profits Rs 154 cr.
  • It is developing residential, commercial and township projects across 9.3m sq.m. (100 m sqft.) in 12 cities.
  • Leaders are Adi Godrej (Chairman) and Pirojsha Godrej, MD & CEO.
  • It has 601 employees, an increase of 40% in FY14.
  • GPL has an asset light and capital efficient development model. It owns only 15% of the land it is developing, and partners with land owners by sharing in either revenues, profits or the constructed area, in a JV model.
  • In its commercial portfolio, it builds office space catering to blue-chip Indian and international companies and IT parks catering to the requirements of IT/ITES companies and retail space.
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Fig 1 – GPL operations and Bookings, Source: GPL website (click on image to expand)

  • ICRA has upgraded long-term rating of GPL to AA- from A+.
  • Shareholding pattern in percentage is Promoter 75, MFs/DII 1.5, FIIs 11.5, Individuals 8.1, Corporates 3.1 and Others 0.8

Business Strategy

  • The GPL strategy is detailed in Fig 2, with which they have created a unique business model. Land ownership is mostly with partners, so operations are asset light.
  • GPL carries out project level equity dilution to mitigate risk and remain capital efficient.
  • Outsourcing of architecture and construction to good vendors ensures a lean structure and operations.
  • The strong Godrej brand is utilized and extended by GPL. The Corporate Governance is strong too.
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Fig 2 – Business Strategy, Source: GPL website

  • The CII – Sohrabji Godrej Green Business Centre (a group company) has expertise in offering advisory services to the industry in the areas of green buildings, energy efficiency, water management, environment management, renewable energy, green business incubation and climate change activities.
  • GPL is also tasked with developing the large land bank of the Godrej group. They are among the biggest land owners in Mumbai.

Recent Events and Awards

  • GPL’s blended average selling price of real estate all India in Q4FY14 was Rs 8000 psf.
  • Business acceleration: GPL has started 18 projects in the last 10 quarters with 23.8m sqft. saleable area. In Q4FY14, it saw the highest ever sales in a single quarter – of over Rs 1,000 cr. Further, GPL may launch 15-16 residential projects in FY15, a good acceleration.
  • GPL successfully concluded a rights issue in Aug 2013 to raise Rs 700 cr. It issued 8 shares for every 29 shares held by shareholders at Rs 325 apiece, a discount of about 30% to the then market price.
  • GPL is the first real estate company in India to have ISO certification.
  • They have received over 50 awards received in the past 5 years. The Godrej Garden City project of GPL is one of only two projects in India and 16 worldwide to be chosen by The Clinton Foundation to partner with them in the goal of achieving climate positive development.
  • Great Places To Work – GPL was ranked 1st in the Real Estate and Construction sector in 2014; Ranked amongst top 25 companies to work for in India for the second consecutive year in 2014; The Aon Hewitt Employee Engagement Study measured that the GPL employee engagement score increased to 81% in 2013, from 79% in 2012 and 67% in 2011.
  • GPL has entered into an agreement with a land owner to develop an affordable housing project at Badlapur, near Mumbai. The project will have 1.3 million sq ft of saleable area.

Industry Notes

  • Real estate sector plays a crucial role in the Indian economy, contributing to 5-6% of the country’s Gross Domestic Product (GDP). It is the second largest employment generating sector after agriculture.
  • Apart from generating direct employment it also stimulates the demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, furniture, consumer durables, fittings, etc.
  • Rapid urbanization, positive demographics, growing nuclear families, infrastructure development, rising income levels and growing housing demand so far have driven real estate development in India.
  • There will be a shortage of 7.55 cr. residential units by 2014 end (CRISIL). Commercial demand is highly correlated to the GDP of the country, with recent falls in growth adversely affecting demand.
  • In current Industry scenario, the decline in demand is due to deteriorating macro-economic factors such as increasing prices, and recent regulatory changes (pertaining to development control rules), have led to prolonged period of lull for the sector.
  • Despite these headwinds, the $70-75 billion Indian real estate market size is expected to touch $180 b by 2020, while FDI in the sector is expected to increase to $25 b in 10 years from present $4 b.
  • GPL is fourth ranked of 26 listed Real Estate – Construction & Contracting firms (on NSE) by market cap. Further, its market cap gives it a 5% share of this universe. (Note – this does not include Civil and Housing focused Construction and Contracting firms, and also unlisted firms).
  • Budget 2014: the govt. announced relaxed norms for FDI in real estate, which will give a huge boost to housing projects. The Centre eased criteria for FDI by reducing the minimum size of projects from 50k sq. m. to 20k sq. m. and investment in projects from US$ 10m to US$ 5m (Rs 30 cr.)
  • The budget also allowed (tax) pass-through status to real estate investment trusts (REITs). REITs allow small investors to own a share in big expensive commercial properties. This is expected to drive substantial investment demand into commercial property.
  • The industry is overall poorly regulated and there are few norms around housing project launch, sale and execution by developers. Bank funding for developers has been a challenge, due to poor loans performance (by the sector) in the past. Hence debt costs are higher for developers.
  • The Real Estate Regulation and Development Bill, 2013 aims to bring in a high level of transparency in real estate transactions and projects in India. It proposes setting up a Real Estate regulator to cover commercial and residential real estate segment. It is being piloted by the ministry of GoI.

Stock Valuation, Performance and Returns

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Fig 3 – Pricing History

  • Pricing history – Since the IPO in Jan 2010 at Rs 245 (adjusted for a split), the share price of GPL rose to a peak of 393 in July 2011. It then fell to a bottom of 154 in Jan 2014, helped along by a rights issue in Aug 2013 and share split in Nov 2013, before rising sharply to today’s CMP of 253. See Fig 3.
  • Investor returns for the IPO investors is +1.0% of IRR over 5 years. However IPO investors who added shares in the Rights issue of 2013 have a slightly better IRR.
  • But the GPL financials show a fine growth with Revenues, EBITDA and Net Profit growing by 37%, 25% and 16% CAGR over the last 6 years. EPS has also grown by 17% in this period. This lower growth is explained by the dilutions and capital raising undertaken to fund the growth. See Fig 4.
  • Annual revenues peak in Q4. As volumes increased, the Operating margin has shown a dip. But even as the EPS has increased, the Debt / Equity ratio has been in control, even improving.
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Fig 4 – Quarterly Financials

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Fig 5 – Cash Flow and Financial Ratios

  • FCF (Free Cash Flows) has mostly been negative except in the FY13. See Fig 5. This business definitely needs cash up front and is a long gestation projects business.
  • The Price and PE Chart Fig 6, shows that the PE has historically been in a range of 25-65 times over the last 6 years. This area can be broken into 4 quartiles.
  • Today the valuations for GPL are attractive as the PE is in the lowest quartile. The PE (TTM) is 28.4 times.
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Fig 6 – Price and PE Chart

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Fig 7 – Price and EPS Chart

  • Price and EPS chart Fig 7, shows that inspite of some volatility in EPS, the overall trend is a rising channel with some recent acceleration.
  • The Orders Booked to Billings ratio has stayed over 2, indicating a good pipeline of Orders. Fig 8.
  • The Beta of GPL is 0.86 which shows the low volatility as compared to the indices (Reuters).
  • The company has an interest coverage ratio of around 65 times which is good.
  • ROCE and RONW are in 7.7 and 9.9 respectively, which is an average level.
  • PEG is at 1.2 – indicates it is currently fairly valued.
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Fig 8 – Orders Booked to Billings

Peer Benchmarking and Financial Projections

Here is a benchmarking exercise of GPL with its peer companies DLF, Oberoi Realty and NBCC.

  • The PE comparison indicates relative undervaluation. The Price To Book value however is high, as its book value is low due to the asset light model.
  • GPL is also higher in terms of 3 years CAGR sales, 3 years CAGR Profit and ROE among its listed peers, which is a positive sign.
  • NBCC shows some good metrics but signs of being overvalued.
Fig 9, 10 – Peer Benchmarking and Financial projections

Fig 9, 10 – Peer Benchmarking and Financial projections

We have projected the 2 year financials for GPL.

Risks:

  • Sector risk: The Real Estate industry in India is a high risk sector due to poor land records, opaque land use conversion rules and process, and multiple development approval requirements. GPL has however reduced these risks by an asset light partnering approach.
  • Business Model risk: There is high volatility in funding and cash flows for GPL. Real Estate project investments are front ended, while revenues are back ended for the 2-4 year project life cycle. Risks here include cash flow challenges, project funding availability and high cost of unsold inventory.
  • Economy risk: Demand is dependent on GDP growth, but the economy has slowed over 3-4 years.
  • Outsourcing risk: By outsourcing the construction activities, the final product quality depends upon the vendors. Thus vendor execution standards & consistency (risk) needs constant monitoring.
  • Regulatory risk: The central government is making attempts to govern, monitor and regulate the real estate sector for project transparency, public launch requirements, complaint monitoring, delays, etc. Any new rules, regulations and compliance requirements will affect the business of GPL.
  • Competition is intense, particularly in high end residential real estate sector.

Opinion, Outlook and Recommendation

  • There will continue to be a shortage of housing from a 10 year perspective. The regulatory environment for this sector will improve over the next 2-3 years, as the new government at the center brings in reforms and improves the ease of doing business. The economic cycle in India too is recovering from a bottom of 4.6% GDP growth recently. This will have a positive effect on GPL.
  • GPL is expanding its execution capabilities and brand strength in an all India manner, by both exploiting the land assets of the Godrej group, as well as partnering with land owners for projects.
  • The asset light, and partnering with the best vendors, approach is proving to be a good strategy.
  • GPL is in the midst of a business acceleration that will be seen over the next 2-3 years.
  • GPL is a BUY. Invest now and systematically to gain from long-term outperformance.

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Disclaimer:

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. Punit Jain has owned (long only) GPL since Mar 2014. JM and employees do not seek or receive remuneration in any form for any service from the firms researched. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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