Godrej Property is expected to be what Google is in internet & what NetFlix is in entertainment streaming or Titan is in branded jewelry.
Now think whether past history would help here to judge this company ?
Markets, sectors and segments evolve with time and whichever company is able to steer well during the evolution, they survive & thrive.
Godrej has created a brand for itself. Business, investors & customers trust it blindly. It is a very ethical business house. RE is going through transition from unorganized to organised and GPL is the top play.
I am a bit amused by such optimism which characterise bull markets, especially in this current market. Prices create narratives. Prices can change narratives as well and prices follow fundamentals. Fundamentals currently are this -
- Low RoE/RoCE
- High leverage
- Poor interest coverage ratio
- Zero dividend
- Negative long-term cash-flow
- Constant dilution (Value destructive growth, funded by both debt and equity)
- Poor working capital metrics
There is simply way too much being priced in at this point in this mediocre scrip. My point has been simply this - If the company is going to let others abuse its brand, how long do you think it will take before the brand image tarnishes? Take a look at how one individual pretty much brought the Lodha brand down and forced them to change names even to Macrotech very recently in this same sector. I suspect price manipulation in this scrip, in pretty much the same way PEL price/action looked suspect in the run-up to 3000. These sort of narratives last until they don’t.
Hi @phreak
The low ROE is because the co raised money. I think in the region of 3000cr. It will take time for roes to reflect reality. Meanwhile godrej aims to sustain an ROE of 20% as per its AR and the commentary by mgt. Dilution at this valuation is not bad for the existing shareholders.
The p&l statement of any realty co is not a reflection of reality as due the completion method current results reflect the performance a few years ago.
Godrej valuations are high no doubt but it did a sale booking of I think 5000cr+ in fy19 which is admirable. I think its one of the few cos to have cracked the template in rough weather.
Hi Bheeshma, I was going by the long-term return ratios of the business and not just the recent year.
I think optimism is built around QIPs and money is raised at eye-popping valuations - this happens very often in capital intensive sectors and such valuations don’t come back for sometime - Seen it in quite a few financial institutions, why even PEL was also the same story isn’t it? I remember the optimism when PEL raised some 7000 Cr or so in 2017 at 2700/share. Lot of narratives and deifying happened then, as it is now with Godrej’s brand. Maybe I don’t get it, so will let it pass. Just trying to bring another perspective, as otherwise this thread is filled with optimism (maybe rightfully so).
Hi @phreakv6
PEL is a complicated business to understand and is out of syllabus for me. What I think is happening in case of godrej properties is that the market is valuing it like a consumer facing business which technically real estate is. Its a B2C business. Its not a capital intensive biz as there are no plants and machinery but its a capital hungry biz.
Godrej properties has managed to scale up nicely in the 4 geographies it has focused on with each geography giving it 1000cr top line. Its valuation is now linked to price to sales multiples while other developers are still being evaluated at price to book like commodity cos which they are. How long it will sustain is anyone’s guess but when businesses find favour with customers the rerating is quite rapid.
there is no doubt that godrej has scaled the top-line well. much better than any other developer. and also has a beach head in various markets. and the asset light strategy has clearly helped keep debt in control relative to the scale up of execution. there are reports that they sell a lot of the flats during the launch etc. that further reinforces the belief that indeed things are in moving in the right direction.
so the theory seems to be godrej offers a platform consisting of 1) brand 2) sales/channels 3) exec capability 4) marginal higher pricing. which leads to a rapid monetisation/higher pricing of the raw land and therefore make an excellent partner for the sub-scale developers. which are therefore more than likely to offer favorable terms.
but, what doesn’t add up is - if this is all true - a) given brand why is it that they are making such a low margin? b) given asset light model : why is it that they make a low roe/roce?
one way to ans this would be to start looking at individual projects and try to understand the economics at a project level. unfortunately this is harder because a) there are too many projects b) details of the deal terms are opaque. c) its geographically dispersed.
has anyone done a project level analysis or can point me to a report?
my current running theory is there are some good project and some bad projects and only the good projects get talked about.
i am happy to be proved wrong.
i personally have a very high allocation to real-estate developers. but just have given gpl a pass.
Oberoi, Brigade, Godrej, Sobha have the lowest unsold inventory in the country. Their numbers, 16/17/21 months respectively, are far below the 30 months average for the top 25 developers. In an environment of increasing inventory for competition (up 19% yoy on average) this indicates better execution and competitiveness for these developers.
One of the aspects that I do not understand is how to value this business. It is trading at too rich valuation. Looks like all real estate allocation is to godrej properties only.
One admirable aspect is their ability to sell properties at premium even when others suffer slow down.
They use external vendors to get properties completed indicating a risk of quality issues … whcih I understand exists.
Ability to deliver on time is a reason for partial premium for properties.
Looks to over priced for me.
What’s your take
i have my own horse in this race. and its not gpl.
that said, there is a certain amount of soros’s reflexivity at play here.
if you can raise money at 8x book and buy projects from distressed players at less than or near book, then its a very profitable trade and this music can go on for a very long time.
also as almost all developers are levered play of real estate prices. the asset light ones keep the upside and if they don’t pay much for the development potential have limited downside.
now ideally what you’d want to find is a financially unlevered developer who has shown the ability to expand the development potential without deploying much money upfront i.e. collecting options. sam zell got very rich doing this.
for example if development-potential/mcap = 10. a 10% increase in real estate prices could have a 10x multiplier. i.e. a theoretical 100% increase to book.
so on one side you are trying to maximise development-potential/mcap and on the other you are trying to minimise book value multiple you are paying to acquire the stock.
then ofcourse you also must have reason to believe the potential is profitable and not just empty calories.
i personally am not comfortable paying 8x book-value for this theme as it very little margin for error. and real estate as a business is so full on speed-bumps. but, other people right now seem to be more than willing…
Can you please explain this more? I don’t get this.
say if mcap is 5k crs and you estimate the development potential to be 20k crs. all else being equal the 10% increase to property prices i.e. 2k crs should accrue to the equity holders. the 2k crs is a 40% return on the 5k initial investment.
thats the theory. in practice it might be lower(4x might be 3x etc). and this is true only when property prices are increasing. and we are not in that regime of increasing prop prices - yet.
that said, the 2 variables 1) book value and 2) potential development are estimates and not readily available and if the developer provides it should be adjusted
relying on the “reported” book value is a bad idea because almost all real estate developers capitalise interest costs. and sometimes a large portion of the book is this paid interest costs. and therefore, on average, for a leveraged developer the book is more meaningless. book also includes legal + professional fees.
and secondly estimates of potential development should be conservative as some of the projects may remain unviable for a long time.
But this assumes that all input cost is fixed and specially all land (large part of input cost) is already acquired or expected to be acquired at current prices. As RE prices rise, even input costs will go up accordingly so if input costs also increase at same rate, margins will remain same - only the ticket size will go up. Again, its possible that for a 10% increase in land and other input costs, a developer may be able to charge say 15% more but at some point this will affect demand. In fact, most industries are negatively affected when input costs go up because they are not able to pass it on while maintaining same volumes. Why should it be different for RE? Or am I missing something?
i guess if all the input costs rise proportionally with output costs, then there wouldn’t be any convexity to the returns. the returns would be proportional to increase in underlying prices. assuming that margins remains constant.
however:
-
real estate cos usually hold large land banks which lasts many years. its very rare that a manufacturing co holds 5-10 years or raw materials in their inventory. but, if they did, it would be very happy with inflation.
-
there are certain class of goods where increase in prices generates more demand - for real estate you will find many 5-10 year periods when this is true. in india and across the world. its important to ack that this is possible. or may be as i believe - its more likely than unlikely.
-
land, labour, capital and material costs and the 4 main inputs for a developer. capital can substitute labour to some degree. capital costs can be a substantial portion of the costs. its not obvious to me why this should increase automatically with output price increase. actually to some degree they are inversely related i.e. the finished goods prices go up when interest rates go down. also, with labour and material, real estate end prices are not the determinant factor for their prices.
the when and the whom is important in any investment decision. but in real estate developer i think they are even more important. at the top of the cycle or a crooked developer and you might loose every paisa you have invested.
just as a disclosure, gpl is not my preferred way to play this theme. and i dont hold a position.
Again I don’t agree. The cost of holding the land for RE companies or raw material in case of manufacturing companies is not zero. The only way they will benefit from holding land or raw material is if the rise in prices of these land/raw materials is more than the RoE the company generates. Otherwise they would have tied up capital in an unproductive resource. In any case, markets prefer asset-light businesses.
asset light or low leverage and having land inventory for the next 5-10 years does not have to be mutually exclusive. the subject of this thread is the case in point 
I’m tracking Real Estate Sector especially in MMR.
Godrej Properties have excellent skills of timely completion of Projects. In current environment of distrust created by some organised or unorganized Builders Brand like Godrej bring hope to Customers willing to buy Home.
Industry in huge Consolidation Phase, Players with Financial Discipline and Project Executioner will be huge beneficiary.
Godrej Properties leveraging it’s Strong Brand and delivering Projects.
I believe in MMR around 10-15 Strong Developers will Grow Exponentially
In my view all strong Players in Real Estate Sector is on inflexion Point. Post RERA and NBFCs crisis huge Consolidation Phase is going on. Across the Markets 50-80% Players left the Business post RERA now Industry Estimates total 15-20% Players will remain in Business, which will provide huge business opportunities to established players.
Godrej Properties is the biggest beneficiary of RERA and Liquidity Crisis at the moment and believe continues to Grow.
I’m Vocal since last one Year that Real Estate Stocks will outperform & that’s happening as well.
Hello @akja
Really impressed to see your analysis and vision for 2020 when you first posted in June, 2013. From a market cap of 4000 Cr it has now risen to 24000 Cr.
You were also right about the asset light model working because of their brand image.
I am sure this investment must have created great wealth for you.
What are your views on Godrej Properties now that we are in 2020? Would love to hear your thoughts.