The real estate space is associated with scams, black money and debt-ridden balance sheets. In such an environment, trust becomes the number one priority, both for consumers and investors. I would put the Godrej brand amongst the cleaner groups doing business in the country. It is of special importance in this space, as this is probably the only quality here which would create pricing power.
To start with GPL has an asset light and outsourcing based business model. They do JVâs with land owners, outsource the construction work, and raise financing from PE guys. Their work involves conceptualisation, design, marketing and sales. So in this way, they have lent what is their most valuable asset (The Godrej Brand) and have expanded very rapidly across major cities in India, with **minimal capital and maximum speed.**Their most valuable asset is their partnership with Godrej and Boyce for developing the land banks at Vikhroli. This will ensure **sustainable cash flows **for a number of years
On conventional metrics, GPL may appear very expensive. But letâs try and look ahead till 2020. One may concur with their stated vision in the annual report, which is to be in the top 3 real estate companies in India. Their goal is clear â 10 x 10, which means to grow 10 times in 10 years. In fact, as stated in every concall, the growth of the entire Godrej Group rests on the fortunes of GPL.Further, the bookings are increasing at a scorching pace, 50% up from last year. Their property sales are creating records â For eg, 695 flats sold in Gurgaon in one day. Rated as the best real estate company to work for in India â These factors mean that GPL should regularly **trade at a premium, relative to its peers.**The management also deserves special mention â They are the best in the business. Besides the Godrejâs, one director is the co-founder of Knight Frank, another an ex economic advisor to the Prime Minister etc. One would expect these guys to do relatively smart and transparent work
At a market cap of 4000cr, it appears cheap relative to where it can be by say 2020. In most developed countries, Real estate is an organised play with some seriously large players whose market caps easily run into double digit billion dollars. In india, the largest company (DLF) is 5 billion dollars (with all the debt and mgmt issues) while all the others are below a billion. Further for GPL, operating cash is expected to turn positive for the first time in 2014. Going forward, falling interest rates will further help increase demand.
Drop in real estate prices may affect demand. Regulatory risks (new bill), possible family disputes, management does not handle the growth well â takes on too much too soon, Increase of debt levels above comfort zone.
Normally I prefer to look for the undiscovered, micro-cap story but I think in certain sectors its winner takes all. They continue to get bigger while the smaller ones remain niche