Godrej Properties – Brand, Business model & Scale

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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.

Risks

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

View invited

Akshay

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The stock is expensive. Real estate is passing thru tough time, home prices are already high. It is true that GPL has been able to sell flats at a faster pace most likely due to sensible pricing, but still due to prevailing conditions margins will be under pressure and the stock remains expensive and there is not much left on the table for investors.

Ashiana housing seems to be better as the mgmt is good quality and the stock is quoting at reasonable valuations.

Oberoi realty is also much cheaper as compared to GPL . NO DEBT.****good mgmt, they are also looking for asset light model, construction is outsourced, model is quite similar to Godrej.

GPL - FY 13 sales of 940 Cr and debt of abt 1900 cr ( as of Mar 12, did not check the latest) (data from screener.in)

Compared to that Oberoi realty seems cheaper - Fy 13 sales of 1040 cr with zero debt. Oberoi is into premium segment and their NP margin is more than double of GPL.

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Hi Manish

Yes I agree with you that Ashiana Housing is a good company in this sector, with a business model similar to GPL. I think, the challenge for them will be ‘scale’ - to continue to replicate their success in other cities, where the Ashiana brand is unknown. which is why their strategy is to look at the smaller cities where some of the serious players are not present at the moment. All in all - a good business at reasonable valuations.

Oberoi realty I think has a completely different business model.Dividing property purchase in two parts - 1) sentimental,luxury 2) necessity…OR targets the aspirational buyer. Also a large proportion of their sales are of consumers using property buying as an investment and not necessarily as homes. I think this makes the purchase discretionary in nature, creating more cyclicality and volatility. Also most of the business in OR is in Bombay and in the good areas where prices are sky high. I see a higher chance of time wise or price wise correction here. And also one city concentration has associated risks. Also from their latest annual report - it says they own land bank in bombay to the extent of 18.5 million sq.ft. - so am not sure if they do want to follow the asset light model. Finally look at the sales growth - been flat for a few years now.

For GPl â the good thing is that it caters mostly to the middle class which is expected to double by 2020. Housing is a shortage in India and they cater to that necessity. So demand is not as elastic as in the case of OR. The sales growth here has been about 35% p.a. and bookings are increasing with every passing year. Yes debt remains a concern and something to keep an eye on.

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Godrej Properties Ltd, the real estate arm of the Godrej Group, has sold 300 apartments within a week at its flagship project — The Trees at Vikhroli. The value of the apartments was over Rs 700 crore, making it the firm’s best launch, the Mumbai-based developer said in a release.

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CONFERENCE CALL

Godrej Properties

Looks to build on the momentum of first 3 quarters of FY16

Godrej Properties held a conference call on Feb 3, 2016. In the conference call the company was represented by Pirojsha Godrej, MD & CEO of the company.
Key takeaways of the call

Total bookings for Q3FY16 stood at Rs 1214 crore (up 122%yoy). Registered booking value of over Rs 1200 crore for the third consecutive quarter of FY16. Area sold in Q3FY16 was about 1.03 msf, a growth of 47%yoy. The company looks forward to building on the momentum of first three quarters of FY16 in Q4FY16.

The company has launched 3 projects in Mumbai market in Q3FY16 - Sold 348 units (or 455503 sft) accounting for 93% of launch inventory has been registered in ‘The Trees’ in Vikhroli worth Rs 862 crore. The company sold 412 apartments or 82% of launch inventory in case of Badlapur project (Godrej Vihaa) and sold 32 units (or 59509 sft) worth Rs 119 crore amounting 60% of launch inventory in case of Byculla (Godrej Sky).

The Trees project in Vikhroli, which was launched in November 2015, was the most successful launch in the history of GPL in terms of value sold in the launch quarter.

Start monetization of commercial portfolio. The company concluded deal for Kolkata (Godrej Genesis) and Chandigarh (Eternia) commercial projects and already delivered 1.34 msft at Godrej Genesis in Kolkata. The cash flow from monetization of Kolkata and Chandigarh commercial properties will be Rs 400 crore. On completion of BKC project which is one year down the line, the company expects cash of about Rs 1300-1500 crore after paying for all expenses. The BKC project is nearly complete in construction terms and there is pick-up in demand for commercial space.

Added two projects with 5 msf of saleable are in January 2016. The first one is in Thane (Ghodbunder Road) which has about 1 msft of saleable area and second project is in Noida (sector 150) with a saleable area in excess of 4 msft. While the Thane project is revenue/profit sharing basis, the Noida project is on Development Management Agreement.

Consolidated operating income for Q3FY16 stood lower by 16% to Rs 450 crore but the PBT was up by 27% to Rs 102 crore. Eventually the net profit (after minority interest) was up by 10% to Rs 52 crore.

Net debt as end of Dec 2015 stood at Rs 2532 crore compared to Rs 2230 crore as end of Sep 2015.

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Expect FY18 to be best year for business development: Pirojsha Godrej -

http://dsatest.moneycontrol.com.http.akamai-trials.com/news/business/companies/godrej-properties-started-the-year-on-a-very-positive-note-pirojsha-godrej-2329881.html

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Summary of Q2 Concall (source: capital market)

  • Area sold in Q2FY18 was up by 111%yoy to 15,56,058 sft with a booking value of Rs 1,335 crore, a jump of 122%yoy. Sales, excluding sales in new launches, for Q2FY18 stood at about 873,000 sft with a booking value of Rs 883 crore.
  • Area sold in H1FY18 was up by 152%yoy to 33,55,736 sft with booking value of Rs 2,809 crore, a jump of 184%yoy.
  • Given exciting pipeline of launches, the company is hopeful of maintaining the area sales momentum going forward.
  • In Q2FY18, the company monetized commercial space of about 75,000 sft in Godrej BKC project for about Rs 272 crore. Cash from this transaction still to be received and will improve the cash flow in quarter ahead. The amount will be received in next 3 quarters. Monetization of significant portion of the company’s commercial portfolio is the priority of the company as it releases funds that can be deployed in other projects. More commercial space will be monetized with-in end of current fiscal.
  • Post RERA there is a shift to organized player who have governance, regulatory compliance, delivery capability and access to fund.
  • There is change in structure of Godrej Garden City, Ahmedabad. In the new structure, GPL will receive 17% of the revenue from the project while all investments excluding GPL overheads and marketing costs will be borne by the joint venture partner. There will be no further capital deployed by GPL in this project. This will ensure that the project becomes strongly cash generative for GPL. The 5 mln already launched is part of the old agreement and the newer launches will be under the new agreement/structure.
  • Given the change in strategy with regard to the Hyderabad market, GPL has exited the agreement with G&B to develop a residential project at Moosapet, Hyderabad. Currently the company is focused on the 3-4 markets. The piece of land in Hyderabad is acquired more than a 10 year ago and if the company looks to expand then Hyderabad is the logical one. The company so far has not launched any project on the Hyderabad land parcel.
  • In Q2FY18 the company has added 4 new projects with about 12.6 million sft of saleable area and this is in addition to 4 projects added in Q1FY18. The 12.6 msft include a residential project of 2.1 msft for which the company has singed development management agreement at LBS Marg, Thane, Mumbai in Q2FY18 and this project will get launched by end of current fiscal.
  • Mamurdi - The company has signed development management agreement for development of 4.5 msft of residential space at Mamurdi in Pune. This project is strategically located just off the Mumbai - Pune expressway and very close to prime commercial centers such as Wakad, Hinjawadi, and the automobile hub of Pimpri Chinchwad. The project is directly opposite to Lodha project which is already in the process of delivery. GPL’s economic interest is 11% of revenue as DM Fee and 26% of profit.
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Hi Basumallick,

I really acknowledge for providing information in a concise format.
It looks very attractive about Godrej Properties, but why it is not being reflected into bottom line?

In a simple mathematical calculation, I see the following is achievable by this company:

  1. Total develop-able area, as per latest Q2 FY 2018 presentation - 145 million sq. ft.

  2. Assuming this shall be developed/executed in next 7 years.

  3. Assuming the average sale price per Sq/feet shall be Rs.6,000/-

  4. Assuming the “Net Profit” margin 8% (as shown in presentation of Q2 FY 2018).

  5. On a current equity base of Rs.1082.4 million, the average “Earning Per Share” for next 7 years comes as follows;

           A. Area (145 million) X Sale Price Rs.6,000/- = Rs.870,000 million
       B. Divide by 7 (to be executable in 7 years)   = Rs.124,285 million
       C. 8% net profit margin comes to                    = Rs.9,942 million
       D. On a paid up capital of Rs.1,082.40 EPS   = Rs.45.92 per share

I am asking to you:

  1. Did I missed anything or any calculation mistake?
  2. If not, than when shall these earnings being start realized by the company?
  3. All these calculations are, assuming there is no fresh bookings for next 7 years.
  4. When one calculates the PE ratio on historical basis for FY 2016-17 earnings of Rs.9.55 (Consolidated) & the closing
    price Rs.708.45 of today (On NSE 19-12-2017), it comes to 74.18, which is scary.
  5. But as per potential, I am greedy at today’s price.
  6. Correct me, if I am wrong?

Thanks.
Unconditional Love.

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You are assuming a sale of Rs 12500cr v/s current run rate of 1500 cr… so there is a mismatch… I dont think it will get developed in 7 years… any basis of that assumption? I would personally assume that it will take much much longer than that.

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Varun,

Godrej always delegate construction activities to L&T at all places.
Therefore in my view this can be achievable.

I have booked a flat at “The Trees - Vikhroli Mumbai (Phase-2)” last year on 29-August-2016 & they have promised to give possession in June 2020. L&T has already constructed nine floors, by 24-Nov-2017. When we booked last year, it was a barren land. Today they have already recovered 61% of the cost of the flat, from us. They launched phase-2 in June-2016 only & promised to give possession in 4 years only. Where as I have assumed the average execution period as 7 years.

The figures looks tall when we compare Rs.12,500 Crores v/s Rs.1500 Crore. But, the company has matured enough, since 1991 to execute with ease & grace. With Godrej, sale is no problem & customers pay their installments in time, because of faith & trust. In my point of view, Godrej has attained in-flexion point already.

Thanks for sharing.

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Considering the working capital requirement, I still believe that will need atleast 7-8k cr of working capital to achieve that kind of sales even after considering advance payments and out-sourcing of the projects. I do not think the company’s balance sheet is strong enough to raise such kind of money anytime soon.

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Varun,

If we go through the Q2 FY 2017-18 presentation, total working capital is already Rs.5,076.56 Crores, as follows:
Borrowings Rs.3,966.35
Trade Payable Rs. 226.49
Other Liabilities Rs. 846.00
Provisions & Tax Liabilities Rs. 37.72
What do you say?

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I was talking about net working capital… Current Assets less current Liabilites… which is around Rs 1600-1700 cr…

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Varun,

As on 30-09-2017 out of total develop-able area of 145 million, only 10.41 is that of commercial projects, where they are stuck in monetizing completed projects in time. Rest all are residential projects, where advance payments are there. In fact, since April, 2015 till September, 2017 the value of sales booking is around Rs.9,800 Crores. Secondly, the cost of borrowing as on date is 8.10%, which is lowest bank funding rates in the sector.

At “The Trees”, they are already earning rental on “Godrej One” & after completing the “Godrej Two” (in next 3-4 years), the rental income shall increase.

Since 1991, I have not heard, about they delayed the projects for want of working capital. Recently, Pirojsha Godrej in an interview (Business Standard) declared about continuing with the present model, instead of buying land, constructing & than selling (here margins are more, but requires huge working capital). DLF is in second model.

Also, there requirements of working capital increases when projects are in finishing stage. and I don’t think for the number one company of India, it has a challenge about borrowing money for working capital.

Do you still experience, me being unreasonably bullish? Correct me, if I am wrong!
Thanks.

Disclaimer: In family we own shares of “Godrej Property”, which constitute 24.74% (last assessed on 17-10-2017) alone of the total worth in equities.

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Sorry it is “Disclosure”
& not disclaimer

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Sir as per the presentation they have developed 15 million sq feet in last 4 years. I think developing of 20 million sq feet on average for next 7 years will be huge expectation. Also consider that their sales is around 3.3 million for this half year, if we extrapolate it could be around 7 million for this year. In case they develop 20 million, working capital issues will be there as 10-13 million will go into inventory. I am not saying they are facing issues with fund raising or delayed any projects. They being a very prudent management are developing only what can be sold. I take your point that they operate on an asset light model and this developement can be done provided there is demand.

They must be capitalising some of the cost.

Next, they have given the complete list of projects in the last pages of presentation. Many of the projects are on JV basis, so the propotionate profits from those projects need to be taken.

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Q4 Concall Highlights

Total booking in Q4 FY18 was a value of Rs 1054 crore (and volume of 1.47 million sft) as compared to total booking value of Rs 340 crore (and total booking volume of 0.59 million sft) in Q4 FY17. FY18 witnessed total booking value of Rs 5083 crore (and total booking volume of 6.26 million sft) as compared to total booking value of Rs 2020 crore (and total booking volume of 3.11 million sft) in FY17.

Strong growth in new sales booking was contributed by new launches and ongoing properties. Sales from existing inventory stood at 3.2 million sft (with a booking value of Rs 2780 crore compared to Rs 1052 crore in FY17). Sales in new launches stood at 3.1 million sft with a booking value of Rs 2303 crore.

FY18 was best ever year for business development as the company has added 12 new projects with saleable area of 23.5 million sft. About 83% of the area added in FY18 is in partnership with other developers. The company has added 4 new projects with 6 million sft of saleable area in Q4FY18.

The board of the company approved issue of 1.2765 million equity shares of Rs 5 face value at a price of Rs 783.50/equity share aggregating to an amount of Rs 1000.13 crore on preferential basis today (May 4, 2018).

The proceeds from this preferential issue will be used as growth capital to scale up the business. The company is not changing current business model of JD to outright purchase model but the company will use the proceeds to enter new micro markets, look at higher ticket size projects, higher economic interest or stake under JD/BD projects etc.

Godrej BKC - Balance inventory is just about 51000 sft as end of March 2018. FY18 sales at Godrej BKC stood at Rs 697 crore.

Signed deal with Godrej Fund Management (GFM) to sell 50% stake in Godrej Two project, a commercial building at The Trees, Vikhroli. Godrej Two is the second Grade A commercial building within the commercial precinct, which also houses Godrej One, the Godrej Group’s global headquarters. Godrej Two will offer approximately 1.2 million square feet of built space and will be delivered within three years.

The company in relation to its plan of monetizing commercial portfolio by FY18 could not do it as far as its commercial property in Chandigarh and Kolkatta, where the sale was tepid. So the company took a haircut to push and the write-off towards it was about Rs 150 crore.

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Godrej Properties
Highlights of Q4 FY18 and FY18 results
Key Highlights

  • Crossed 1000 Cr revenue in each quarter of FY18
  • Largest developer in NCR and Pune, Second Largest in Mumbai , Third Largest in Bangalore
  • Sold 1.25 Mn Sq Ft with 800 Cr booking value
  • Company revenue was mix of new launches and significant sale of inventory by 164 % growth
  • Total value of booking stands at 5083 Cr for the whole financial year up by 162 %
  • Q4 sales grew up by 210 % to 1064 Cr compare to last year same quarter
  • Commercial building Godrej-2 had been completed 50 %
    Financials
  • Q4 FY18
    o Revenue grew by 79 % to 849 Cr compare to last year same quarter
    o EBITDA gret by 85 % to 285 Cr compare to last year same quarter
    o PAT grew by 126 % to 142 Cr compare to last year same quarter
    o Launch 4 projects in Gurgaon of 0.7 Mn Sq ft
  • FY18
    o Revenue grew by 38 % to 2200 Cr yoy
    o EBITDA grew by 28 % to 660 Cr yoy
    o PAT grew by 48 % to 275 Cr yoy
    o Collection went up by 54 % to 3891 Cr yoy
    o Cash flow stands at 1868 Cr
    o Debt reduce by 653 Cr yoy
    o Company had launch 12 new project with 23 Mn Sq ft out of which 80 % is in partnership
    o Launches plan in Mumbai , Gurgaon , Pune , Ahmedabad and Kolkata
    o Company issue 1.27 Mn share on preferential basis for 783 per share to total 1000 Cr value which will use for growth
    Q&A
  • What company is planning to do with the fund raise ?
    o Company will scale in number of new micro markets as well as new project where company is participating . Company Interest is in higher value projects
    o Most probably it is deploy in FY19
  • Give some update on Godrej-2 project ?
    o It is a flagship project for the company and create value for company to deploy huge amount of capital in residential development . Remaining wll be strongly invested in the project
    o It is total worth of 1400-1500 Cr project with 50 % partnership by Godrej Properties
  • In Gurgaon company have a project with 95 % revenue sharing , So kindly share details about it ?
    o It was a part deal only but due to some issues company has to take it on own balance sheet . Company has paid the money as non-refundable . 5-7 % of revenue go to the owner
  • Are there any one-off at EBITDA level ?
    o 150 Cr write off was taken during the quarter in one of the older projects in Kolkata and Chandigarh . It will monetise in FY19
  • After RERA does company see any significant change in valuation ?
    o Company had a significant correction in valuation of both partnership and land project
  • New TP is out so does company is planning for Godrej-3 ?
    o Still awaiting for the confirmation Once it approved then Godrej-3 will start
  • How does company look at Mumbai market ?
    o Sector is consolidating so larger players are getting market share . If dumping issue get solved out then there will be more clarity and increase in prices with new Infrastructure development it will give benefit to real-estate theme. Company is extremely bullish on Mumbai
  • What is the strategy behind mot giving dividend ?
    o Company is at a stage where there is opportunity for rapid growth. It will not available forever for such significant development Any capital will generate more capital for the shareholders then giving Dividend and there is tax effect also in giving dividend
    o Dividend paying is a challenge between growth and capability . Next 2-3 years company is not planning to give any dividend because company want to grow and generate more cash slow
  • In current projects does land amount is already paid out ?
    o Land payment has been fully paid in FY18 . Advances will be further paid at certain milestones
  • Does company receive whole money for BKC project ?
    o Half amount was received in FY18 and rest will receive in Q1 FY19
  • Give some brief on current and non-current investment that gone up and JV also ?
    o Equity part started investing in Non-asset and the Non-equity into financial asset . So for example if whole investment is done in Godrej-2 through Debt that will come in non-current assets
    o Company had also done some project in Pune so depend on financial structure it will come down
  • In future does more recognition will come in ?
    o If same accounting standard goes on then company will see a lot more recognition in coming quarter Q1FY19 . It follow project completion method
  • In godrej-2 Does there will be a Hold and lease model ?
    o Yes
  • In launch pipeline what will come in near time ?
    o Company will launch a project in Mumbai in near term
  • Is the NCR market look good ?
    o NCR market is same it was in past no change no jump in any demand scenario
  • Company don’t have inventory available in vikroli so does last year was a benchmark for sales ?
    o Last year company had sold 700-800 Cr worth property. Company don’t have such huge inventory right now but company also don’t want to de-grow also
  • Why gross margin was lower in Q4 FY18 ?
    o Because of one time write off of 150 Cr . So it is low against whole year
  • What is the confidence that give 70-80 % of launch will be done in FY19 ?
    o As approvals come the launch will done immediately , one can assume that 10-20 % will slip from FY19. Rest 70-80 % will get launch
  • What target does company set for FY19 in term of projects ?
    o Company have to launch a project in every market in every quarter where company has presence
  • What about the project in Mamrodi ?
    o Company bought a land with fund and fund is paying 11 % PMC for a first time. This fund is of some other so the profit will get distributed between company and fund holder
  • What is the current value of project in Chandigarh and Kolkata where write off was taken place ?
    o 275-300 Cr and area is about 8-9 lakh sqft
  • What is the outlook on Godrej Fund ?
    o Little additional fund is necessary and after that fund deploy there will be a plan for further raising of funds
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It is a no-brainer pick,best among the RE stocks in India . Many a times people are unable to see the obvious.