Current valuations at 4.7x FY19E PB are misleading as it does not account for 110mn sqft. development manager (DM) project in Mumbai. (Image: IE)
We initiate coverage of Godrej Properties (GPL), a leading pan-India developer, with a ‘buy’ rating and PO of Rs 756 as (1) strong ‘Godrej’ brand + asset light model make GPL best placed to benefit from consolidation through its JV model and (2) robust sales from recent/upcoming launches coupled with completion/renegotiation of low margin legacy projects could lead to FY17-20E EPS CAGR of 44% and 907bps rise in RoE to 20% in FY20E. Current valuations at 4.7x FY19E PB are misleading as it does not account for 110mn sqft. development manager (DM) project in Mumbai. Adjusting for NAV of this project, GPL would trade at 3.2x FY19E P/B.
GPL, best placed in our competitive framework, has an unmatched ability to sell houses across India on strong ‘Godrej’ brand, and product portfolio targeting mid-segment, in our view. While other listed developers struggled to clear unsold inventory in the last 9m, GPL reported the highest sales among listed developers in FY17, driven by 3.5 million sqft of launches in the last 12m. GPL added 7 million sqft of new projects in the last 15 m. Our channel checks indicate several stressed assets deals are available in the market as Compliance with RERA (Real estate Regulation (and Development) Act) raises capital cost of the project. GPL is best placed to gain share through its asset-light models, via: (1) JV and (2) DM.
While execution bandwidth (construction outsourced) and capital (marginal equity requirement) is not a constraint for GPL, it will hand pick projects meeting its three key criteria: (1) clear land title, (2) initial stage of construction and (3) GPL’s estimated profit share > Rs 10 billion.
(1) Robust sales from 11 million sqft of recent/upcoming launches in metro cities, (2) completion/ renegotiation of low-margin legacy projects in Tier-2 cities, and (3) repayment of debt from the sale of Godrej BKC inventory, could lead to 54% FY17- 19E EPS CAGR and 817bp rise in the RoE to 19% in FY19E. Our PO of Rs 756 includes Rs 183 /share for GPL’s ability to add new projects through JVs.
