Capacite Infraprojects IPO: Play the Trump Card

  • IPO Opens 13-15th Sep at Price range: Rs. 245-250
  • Small Cap: Rs. 1,700 crore cap
  • Industry – Construction
  • P/E 24.4 and P/B 2.37 times (Post IPO)
  • Advice: Investors can BUY this IPO with a 2 year perspective

Capacite Infraprojects IPO, jainmatrix investments

Summary

  • Overview: It is a Mumbai based construction contracting firm started in 2012; makes Residential & Commercial buildings in 7-9 major cities. Income and profit were Rs. 1,166 cr. and Rs. 70 cr. (FY17).
  • Operations: It is into the construction of high rise buildings (> 6 floors), super high rise (> 39), villaments and gated communities. It is building the Trump tower in Mumbai. CIP owns tools, technologies and processes that help it deliver with high quality and on time. CIP stands out as an innovative, aggressive building contractor. It has an excellent client base among Property firms. Given this client base and assuming the relationships stay strong, CIP can look at revenues rising at over 30% annually for 3-4 years which will give it a good size, market share and high return ratios.
  • Risks: The major risks are loss of a top 5 client, and project disruption due to labour or other issues.
  • Opinion: The valuations at the IPO price are average, however we are positive due to strong growth potential. This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on Capacite Infraprojects Ltd. (CIP) IPO.

IPO highlights

  • This IPO opens: 13-15th Sep 2017 with the Price band: Rs. 245-250 per share.
  • Shares offered to public are 1.60 crore at UMP, these are 23.57% of equity. The FV is Rs. 10 and market lot is 60. The IPO will collect Rs 400 cr. by fresh issue of shares. There is no OFS by holders.
  • The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • The promoter group owns 57.2% in CIP while Paragon Partners, Infina and New Quest own 30.7%. Paragon Partners is backed by Siddharth Parekh, the son of Deepak Parekh, the chairman of HDFC. The promoter group holding will reduce to 43.7% (Post-IPO) which is low, see Fig 3.
  • CIP benefits as it is a fresh issue and the proceeds will go to it. See utilization proceeds in Exhibit 1.
  • The unofficial/ grey market premium for this IPO is Rs.110/share. This is a positive.

Capacite Infraprojects IPO, jainmatrix investments

Exhibit 1 – Utilization of IPO proceeds

Introduction

  • CIP is a Mumbai based construction firm focused on Residential and Commercial buildings.
  • Total income for FY17 was Rs. 1,166 cr. and net profit Rs. 70 cr.
  • It has 1,711 full time employees and 10,035 contract workmen across all projects (May ‘17).
  • They provide end-to-end construction services for residential buildings, multi-level car parks, corporate offices, commercial buildings and for educational, hospitality and healthcare.
  • CIP is into the construction of villaments, gated communities, high rise buildings (> 6 floors) and super high rise buildings (> 39 floors). They operate in the Mumbai, NCR, Bengaluru, Pune, Patna, Chennai, Hyderabad, Kochi and Vijaywada, and projects in the West, North and South Zones constituted, 58.9%, 14.2% and 26.7% of total projects, resp. See Fig 2.

Capacite Infraprojects, jainmatrix investments

Fig 2 – CIP Project Portfolio Concentration /Fig 3 – CIP Post Shareholding Pattern

  • CIP works for reputed clients and are associated with marquee construction projects such as Trump Towers Mumbai. Clients include Kalpataru, Oberoi Constructions, Wadhwa Group, Saifee Burhani Upliftment Trust, Lodha Group, Rustomjee, Godrej Properties, Brigade Enterprises and Prestige.

Capacite Infraprojects, jainmatrix investments

Fig 4 – Order book by Project Purpose, and by Project Type – Fig 5

  • CIP had an order book of Rs. 4,602 cr. (May 2017). CIP majorly operates in residential projects space. The order book breakup by project purpose and by project type is in Fig 4 and Fig 5.
  • CIP has received an ISO 9001:2008 certification for their quality management system. They have also received an ISO 14001:2004 for environmental management system and an OHSAS 18001:2007 in respect of their occupational health and safety management systems.
  • Leadership is Deepak Mitra (Ch’man & Director), Rohit Katyal (ED & CFO) and Rahul Katyal (MD).

Business Model and news for CIP

  • CIP has a hub-and-spoke model, with 3 zonal hubs located at Mumbai, NCR and Bengaluru.
  • CIP believes in owning equipment that is required throughout the lifetime of a project, that is, formwork, tower cranes, passenger and material hoists, concrete pumps and boom placers (their core assets) as this allows them to have timely access to key equipment.
  • CIP uses specialised formwork tech., including vertical composite panel system for columns, horizontal composite panel system for slabs, crane enabled composite table formwork, aluminium panel formwork and automatic climbing system formwork. The modern formwork technologies help reduce the construction cycle time of replicating floors in a highrise construction compared to conventional formwork systems, such as cup-lock formwork.
  • CIP have the capabilities to undertake building construction projects using modern tech. including temperature-controlled concrete for mass pours, self-compacting free flow concrete for heavily reinforced pours and special concrete for vertical pumping in Super High Rise / High Rise Buildings.
  • The order book was Rs. 4,602 cr. in May 2017. CIP obtained orders worth Rs. 1,500 cr. from real estate developers like Oberoi, Wadhwa, Rustomjee and Kalpataru in Mumbai, Emaar in Gurgaon and Ozone in Bengaluru after the demonetisation in Nov 2016, an achievement in a tough economy. In addition, CIP received orders worth Rs. 305 cr. as sub-contractors for erecting the Trump Towers in Mumbai’s Lower Parel and 2 orders from Radius Developer worth Rs. 300 cr. in Aug 2017.
  • CIP plans to expand its business operations to Ahmedabad in 2-3 quarters.
  • New Quest, Infina, Paragon and JT HUF invested Rs. 60 cr. in CIP in 2017. They were issued 6,49,332 compulsorily convertible preference shares of FV Rs. 20 each.
  • CIP received the ‘Achievement Award for Construction Health, Safety & Environment’ at the 9th Construction Industry Dev. Council Vishwakarma Awards 2017 for 3 of its ongoing projects. It got the ‘Emerging Construction Company of the Year’ award at the Construction Times Builders Award 2017.
  • Promoter profiles: Mr. Rahul Katyal (age 42) has 16+ years experience in business development. He has been a Director of CIP since Sept 1, 2012. He focuses on Sales and Operations. Mr Rohit Katyal (age 46) has held roles of CFO and ED at CIP since Mar 1, 2014. He has 25 years of experience. He is a BCom from Podar College. Both are brothers. Both had senior/ director level positions in Pratibha Industries Ltd. before CIP.

Industry Outlook

  • The Real estate sector plays a crucial role in the Indian economy, contributing to 5-6% of the country’s GDP. It is the second largest employment generating sector after agriculture.
  • Apart from generating direct employment it also stimulates demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, furniture, consumer durables, fittings, etc.
  • India’s construction industry is expected to log materially faster growth, fuelled by spends in road, irrigation, rail and urban infra projects over 2016-21. Spending in the period is expected to be Rs. 23-24 tn., translating into a CAGR of 10-12%, way faster than a 2-4% rate observed between 2012-15, when an economic slowdown and attendant sluggish demand had stalled India’s investment cycle.
  • Over 5 years, infrastructure projects will provide construction demand of 92% of overall construction spend, owing to the govt. focus on roads, urban infrastructure and railways.
  • Demonetization may have limited impact on construction as such transactions are cashless.
  • The growth drivers in urban housing and commercial real estate are: Higher urban population, Nuclearisation of families, rising income levels and large working age population. Source: RHP
  • In India, urban housing stock was about 8.9 cr. units and rural stock was 17.9 cr. units as of 2015. It is estimated that the growth in rural housing stock will be at 1.7%-1.9% CAGR of over 2016-19, as compared to a 2-4% CAGR for urban housing over the same period. (Source – CRISIL from RHP).
  • The major competitors of CIP are L&T Construction, Shapoorji Pallonji Construction, Simplex Infrastructures, JMC Projects, and Ahluwalia Contracts. Competition from multinational companies is primarily from Leighton India Contractors, Samsung E&C India and Eversendai Construction.

Financials of CIP

Capacite Infraprojects IPO, jainmatrix investments

Fig 6 – CIP Financials

  • CIP Revenues, EBITDA and PAT have grown at 75.2%, 114% and 157% resp. CAGR in FY14-17, Fig 6. CIP has a ROE of 23.15% and ROCE of 24.15% for FY17 which is excellent.
  • CIP has moderate margins which have been stable over 3 years. The D/E was 0.51 in FY17 which is moderate, but has improved from 2.02 times (FY15). The EPS has risen in the last few years, Fig 6.
  • On May 2017, CIP had an order book of Rs. 4,602 cr. This gives 3.9 years of revenue visibility at the FY17 run rate. This is a positive. In practice, CIP must accelerate growth to deliver on OB.

Capacite Infraprojects IPO, jainmatrix investments

Fig 7 – CIP Cash Flow    

  • CIP had declared a dividend of 20% in FY16; but no dividend was declared for FY17.
  • CIP had positive cash from operations in 4 of 5 years, and has made investments steadily. CIP had positive FCFE in only 2 out the last 5 years, due to debt reduction as well as CAPEX. Fig 7.
  • Management has indicated a 60-90 days’ worth of account receivables on ongoing projects. That is about Rs 291 cr. based on FY17 revenues. Debt is low in comparison at about Rs 120 cr.

Benchmarking

We benchmark CIP against peers, both construction contractors and developers. See Exhibit 8.

Capacite Infraprojects IPO, jainmatrix investments

Exhibit 8 – Financial Benchmarking

  • The FY17 based PE for CIP appears moderate. However the high growth rates make the valuations look attractive for a 2 year holding period. The P/B ratio of CIP at 2.37 times is fair.
  • CIP has excellent Sales and PAT growth compared to peers over 4 years. This is a positive.
  • The D/E ratio at 0.51 is moderate. This has fallen from over 2 times in FY15. So growth has been with improving financials. This may also have come from funds raised from PE investors.
  • Margins are high among the Contractor pack. The RoE at 23.15% makes CIP a leader in this parameter. A lot of other real estate players have low or negative return ratios due to a variety of industry wide challenges.
  • The inventory turnover ratio, fixed assets turnover ratio and margins are average among peers.

Positives for CIP and the IPO

  • The rise and rise of CIP is due to the success of promoter brothers, Rohit Katyal and Rahul Katyal. With rich work experience from Pratibha Industries, they set up CIP together. They also handle different portfolios – Rahul as MD handles Sales and Operations and Rohit is CFO.
  • CIP has a good reputation of doing quality work in a timely fashion, which is delivered by using its proprietary tools and technologies which bring down the construction cycle time.
  • CIP has an exclusive focus on construction of buildings in major cities. The geographical spread of their projects has been limited to major cities in India, with a focus on Mumbai, NCR and Bengaluru.
  • CIP has a marquee client base and a large order book at 3.9 times revenues in May 2017.
  • They have secured repeat orders from some of their clients, like the Lodha Group, The Wadhwa Group, Godrej Properties, Transcon Developers, Ahuja Constructions and Puravankara Projects. In fact clients have taken them to new geographies outside Mumbai, and helped in their growth.
  • CIP has a strong track record of growth and profitability. They have reduced debt over 2 years.
  • The asking P/E at 24 times is moderate. CIP has low debt and a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out which is a positive.

Risks and Negatives for CIP and the IPO

  • CIP has risen to today’s strengths in less than 5 years of operations. This sounds incredible, in such a high competition business. However we have found that that the promoters had many years of work experience in a related business (Pratibha Industries) before starting CIP.
  • A revenue growth of 30-50% may be required to sustain high RoE for CIP. The high RoE of CIP is explained by high revenue growth of the firm. Margins are in average range and cannot rise sharply for a construction contractor. On time delivery is a given. To continue this high performance, CIP will need to continue growing at a fast clip, in the chosen high growth cities.
  • The brother promoter relationship must stay strong, for CIP to flourish.
  • To continue its success, CIP’s senior management team will also need to scale up.
  • Client concentration – projects awarded by their top 5 clients represented 38.7%, and top 10 clients have 59.7% of their Order Book, as of May 2017. This is a risk. However conversely we can say that if relationships stay strong, these solid customers can power future growth.
  • Promoters have diluted 43% of CIP pre IPO. This is not worrying as they retain 44% post IPO.
  • Typical Industry risks include 1) manpower shortage issues. 2) Liability claims or claims for damages or termination of contracts with clients for failure to meet project milestones or defective work issues. 3) fluctuating prices of steel, sand and ready-mix concrete. 4) Clients operate in a highly regulated environment, and existing and new laws, regulations and govt. policies can affect the sector. 5) Construction involves physical hazards and risks. 6) A competitive market, CIP must bid for and continue to win construction projects.

Overall Opinion and Recommendation

  • Construction sector is massive in India and likely to witness a revival from increased demand from real estate and infrastructure projects, govt. initiatives and funding and private sector investments.
  • In this massive sector with numerous players and high competition, CIP stands out as an innovative, aggressive building contractor which brings in technologies and processes that helps it deliver with high quality and on time delivery. It has an excellent client base among Property firms.
  • CIP has a professional management team, a reputed PE backing and clear growth strategies which are likely to take the company to new heights in the near future.
  • Given this client base and assuming relationships stay strong, CIP can look at revenues growth over 30% p.a. for 3-4 years which will give it a good size, market share and high return ratios.
  • Major risks are loss of any top 5 client, and project disruptions due to labour or other issues.
  • The valuations at the IPO price are average, however we are positive due to strong growth potential. This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE 

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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. JM has no known financial interests in Capacite Infraprojects Ltd. or any group company. 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 Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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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.
JainMatrix Investments

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.
Godrej Properties, JainMatrix Investments

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

JainMatrix Investments, Godrej Properties

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.
JainMatrix Investments

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.
JainMatrix Investments

Fig 6 – Price and PE Chart

JainMatrix Investments

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.
JainMatrix Investments

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.

JainMatrix Knowledge Base:

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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.

JainMatrix on The Real Estate Industry

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  • Date: Aug 1, 2014
  • Sector: Real Estate
  • Advice: The sector is on a resurgence path with high upside potential for investors. At the same time, we have to watch out for the regulatory and project management risks

Dear Readers,

JainMatrix Investments has published an equity research report on a pick from the Real Estate sector for its Subscribers. As part of our commitment to them, we cannot share this yet with you. Instead we share this report on Real Estate Industry Insights.

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Industry Insights 

Importance

  • 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.

Demand Drivers

  • Rapid urbanization, positive demographics, growing nuclear families, infrastructure development and rising income levels are the key drivers for real estate development in India.
  • There will be a shortage of 7.55 crore residential units by 2014 end (CRISIL).
  • Commercial real estate demand is highly correlated to the GDP of the country, and the recent fall in growth has adversely affecting demand.
  • In addition, the decline in demand is due to deteriorating macro-economic fundamentals such as increasing prices and recent regulatory changes (pertaining to development control rules), which have led to prolonged period of lull for the sector.

Projections

  • Despite these headwinds, the $70-75 billion Indian real estate market size is expected to touch $180 billion by 2020, while foreign direct investment (FDI) in the sector is expected to increase to $25 billion in the next 10 years from present $4 billion.

Outlook including Budget Proposals

  • Budget 2014: the govt. announced relaxed norms for FDI in real estate, which will give a huge boost to housing projects. The Center eased criteria for FDI by reducing the minimum size of projects from 50,000 sq. m. to 20,000 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.
  • However the next few years could be positive for the sector in a scenario of improving GDP and economic activity, government thrust on investments and better regulation, falling interest rates, FDI, redevelopment, R&R and rising standards of construction.

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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. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com