Godrej Properties IPO Review

Capitalizing on the brand

The company is a relatively a small player compared with most listed players and is unlikely to be able to perform against the broad industry trend

Godrej Properties (GPL), part of Godrej group and a subsidiary of Godrej Industries, is one of the leading real estate development companies in India with focus on development of residential, commercial and township projects.

GPL initially concentrated its operations in the Mumbai metropolitan region and later expanded to include nine other cities such as Pune, Bengaluru, Kolkata, Hyderabad, Ahmedabad, Mangalore, Chandigarh, Chennai and Kochi. As of October 31, 2009, GPL had completed a total of 23 projects comprising 16 residential and 7 commercial projects, aggregating approximately 5.13 million square feet (sq ft) of developable area.

Origianlly incorporated as Sea Breeze Construction and Investments on February 8, 1985 by Mohan Khubchand Thakur and Desiree Mohan Thakur, the company came into the fold of Godrej Group in 1987 and subsequently in 1989 it became a subsidiary of Godrej Industries (formerly Godrej Soaps). Godrej Industries will hold about 69.43% of the post-issue share capital of GPL.

GPL's total land reserves stand at 391.04 acres, aggregating to approximately 82.74 million sq ft of developable area and 50.21 million sq ft of saleable area, which includes ongoing projects and forthcoming projects. The aforesaid land reserves include 64.23 acres, which are in the process of being aggregated but do not include the land ( of about 185 acres in Mohali, Bengalore and Hyderabad) from Godrej Group for which is has signed MoU for developing the owned land in various regions of the country.

The company completely out-sources construction work and has an agreement with Larsen & Toubro for all its project across the country.

The company plans to raise Rs 462.06 crore to Rs 499.78 crore (at the lower and upper price band). The object of the issue is to part finance acquisition of development rights, to meet construction costs, repayment of loans and general corporate purposes. Of the total issue proceeds, the company proposes to utilize about Rs 203 crore towards part funding acquisition of land development rights for its forthcoming projects at Ahmedabad (Godrej Garden City), Kalyan Township, Pune Township of Rs 132 crore, Rs 20 crore and Rs 51 crore, respectively. Similarly, about Rs 75 crore will be utilized to meet construction cost of its forthcoming project at Chandigarh (Godrej Eternia) and about Rs 172 crore for repayment of loans.

Strengths

The company has good track record in project execution and delivery. The good market response for the company's ongoing residential projects reflected by a high level of bookings and customer advances ensures sustained cash flow, paving the way for smooth completion of the on going projects. The company has sold about 1.02 million sq ft out of 1.26 million sq ft of saleable area of its ongoing projects, which have been launched. This excludes the Godrej Prakriti project at Kolkata, which was launched October 2009 end.

The business model of the company is joint development with landowners rather than outright purchase of land parcels. Of the total land bank (saleable area of 50.21 million sq ft), the share of joint development is about 76.77%, with tracts of land owned either in its own name or its subsidiaries is just 3.91%. Of the balance, land for which it has sole development rights is 19.12%, and land subject to private acquisition being 0.2%. The joint development model involves less upfront cash outflow and avoids investment getting stuck in land in case of downturn. This will also help the company to ramp up fast its portfolio with a lower strain on resources. This will also help the company to roll out projects with in prime locations at marketable places.

Has a strong parentage of the Godrej group, which is one of the oldest and reputed corporate houses of the country. As part of the Godrej group, the company naturally gets joint development rights for sizeable land parcels owned by various group companies as well better leverage of its brand name with others. As per company sources, Godrej & Boyce owns about around 3,500 acres of land in Vikrohli, a suburb of Mumbai. Of this about 1,000 acres is suitable to development. Moreover, being part of the group, the company could leverage on the strong and trusted brand of Godrej. This will facilitate its entry into new markets relatively easier. Further the association with the Godrej group will also facilitate attracting financial and intellectual resources on reasonable terms.

Weaknesses

After being hit by a downturn on falling demand in the latter half of FY 2009, the realty market is gradually seeing demand for the residential segment. But the commercial segment is yet to fully come out of woods. Also, the residential realty market is still driven by customers with pricing and location playing crucial roles in buying decisions, given the increased supply in most micro markets of the country.

In realty projects undertaken through joint development , the company's economic interest ranges from 10% to 79%, varying from project to project as it has to bear the entire cost of construction and give part of the constructed space to the land partner or share the profit arising out of gross sales minus cost of construction and other expenses. Given this business model, the company's profitability/ margin largely depends on its ability to contain construction cost and other expenses as well as pricing as against developing realty projects from its owned land, bought outright at relatively lower cost, which will push up margin in the long term/ bullish times.

Commercial realty projects warrant huge cash outflow, unlike residential projects, where the customer will pay at the time of booking as well as after crossing each milestone. Godrej Properties' high exposure to commercial projects will result in high funding requirements. The share of commercial projects in the total saleable area was just 24% in the completed projects, but has zoomed to 36% in ongoing projects, and is set to leap to 63% of the forthcoming projects. This is a cause for concern, considering the sluggishness in the commercial realty sector.

Limited residential projects slotted for completion over the next one-two years. Of the total estimated residential saleable area of 20.71 million sq ft, just 1.41 million sq ft is to be completed by 2011. Of the 11.40 million sq ft of commercial saleable area about 5.01 million sq ft is scheduled to be completed by 2012.

The company is more likely to go for a lease model for commercial projects developed o the land of group companies such as one planned on the land in Vikrohli. This calls for higher capital investment on the part of the company despite providing sustained revenue over a period of time.

Of the total developable area, about 3.05 million sq ft is under litigation. There are about 21 litigations against the company including two criminal proceedings.

Valuation

The company is relatively a small player compared to most of the already listed players and is unlikely to be able to perform against the broad industry trend. Though the sector has witnessed some stability and signs of pickup in certain residential segments, overall it still faces a lot of uncertainties. Moreover, there are many new issues lined up from this sector, which will continue to increase supply even when the sector itself remains out of fancy.

Sales of Godrej Properties were lower by 10% to Rs 205.26 crore in the fiscal ended March 2009. With operating margin shrinking sharply to 34.3% from 52.7% in corresponding previous period, the operating profit fell by sharp 41% to Rs 70.42 crore. But facilitated by higher other income inflated on account of stake sale in selects special purpose vehicles (SPVs), the company has managed to report higher net profit (after minority interest) of Rs 75.63 crore, a rise of 1%. The EPS for the fiscal ended March 2009 was Rs 10.8 and the PE at the lower price band works out to 45.3 times FY 2009 earnings and at the upper price band it works out to 48.9 times its FY 2009 earnings. In comparison, Parsvnath Developers and Puravankara Projects are quoting at a PE of 19.3 and 14 times of their FY 2009 earnings.

On valuation front, the company is priced at an enterprise value per million sq ft of Rs 51 crore at the lower price band and at Rs 54 crore at the upper price band. This is factoring in the total land bank of the respective companies. However, taking into consideration only land under development/ construction, the EV/ millon sq ft of GDL at the lower price band is Rs 132 crore and that at the upper price band is Rs 140 crore. In comparison, Parsvnath Developers quotes