Godrej Properties: A tall order

It’s time for investors who had earlier taken exposure to the stock of Godrej Properties Limited (GPL) to book profits. At the current market price of ₹657 per share, the stock has almost doubled since our recommendation in January 2017 at a price of ₹331. GPL has always traded at a premium to peers, given its growth potential, strong brand as well as management quality. However, at the current price, all the positives seem more than factored in, making the stock’s valuation expensive. It quotes at a trailing price-to-earnings ratio of 74 times against its three-year average of 35 times.

Even on a forward basis, the stock quotes high — at 48 times FY-18 estimated earnings and 36 times FY-19 estimated earnings respectively — higher than the three-year averages. On the business front, the company faces regulatory bottleneck in its key residential market, Mumbai. Also, the debt levels are rising with the difficulty in offloading commercial inventory.

About 80 per cent of GPL’s revenue comes from the residential property business, while commercial property constitutes the rest. While the company is present in 12 cities it is focussing on the four cities — Mumbai, Bengaluru, Chennai and the NCR region.

Residential sales in the major cities of the country have been affected by various regulatory measures. Demonetisation that was introduced last November and the implementation of the Real Estate (Regulation and Development) Act, 2016 put a spoke to launches. During 2016-17, the company sold 3.1 msf of realty space, 28 per cent lower compared with the previous year.

While the company will benefit from the consolidation expected from the ushering in of RERA Act, regulatory bottlenecks in its key market, Mumbai, is a concern. The company has completed RERA registration of all its residential projects in Maharashtra, Chennai, Ahmedabad and NCR, excepting Kolkata. West Bengal is yet to notify RERA rules. The Mumbai High court, last year, directed the BMC (Brihanmumbai Municipal Corporation) not to process new applications for residential or commercial projects till it resolves the city’s dumping ground problem. This will affect launches in the city. However, five of its existing Mumbai projects have approvals in place to launch new phases in 2017-18.

There is lot at stake for the company in the city. Revenue from its flagship Mumbai project ‘The Trees’ at Vikhroli, constituted 36 per cent of overall revenue in 2016-17. As per the management, there is further potential to sell 50-100 msf in the Vikhroli region itself. However, the Mumbai residential market is not in good shape.

In 2016-17, it added seven new projects with 18 msf of saleable area. This was far higher than 6.75 msf of saleable area added through four new projects a year before. And in 2017-18, in the first quarter itself, it added fourprojects totalling 4.9 msf of saleable area; three of them were in the NCR region. While initial bookings in new projects have been encouraging, it remains to be seen for how long the company will continue to buck the trend. The NCR region has been saddled with the highest residential inventory in the country and marred by dwindling consumer confidence due to project delays.

Moreover, sales in the commercial property market has been subdued. Over the last two quarters — March 2017 and June 2017 — the company was unable to sell any space in its flagship commercial office project at Mumbai (Godrej BKC).

Out of 1.28 msf of commercial saleable area, about 0.25 msf of the project is yet to be sold. At the high prevailing rates in the region — till date, its sales have averaged ₹31,333 per sq ft — offloading the BKC inventory will be a challenge, especially when there is a slowdown in the Mumbai office market.

GPL is expecting to garner ₹600-1,100 crore from the BKC project during 2017-18. Offloading the BKC inventory could free up about ₹600 crore of debt in the BKC SPV(Special Purpose Vehicle).

The company has high debt on its books — ₹4,021 crore as of June 2017 . Debt has increased over the last year, from ₹3,122 crore as of March 2016.

. Interest coverage ratio has deteriorated from 5.4 times during FY-16, it fell to 3.5 times in FY-2017 and 2.5 times during the first quarter of 2017-18.

In the past fiscal, the company has been increasingly taking short-term debt; as of March 31, 2017, it comprised 70 per cent of the total debt. As of June 2017, the debt-to-equity ratio of the company was 1.9 times compared with 1.8 times as of March 2016. However, debt levels are expected to remain elevated till the commercial projects — especially the BKC project — remain unmonetised.

The company’s sales were down 25 per cent to ₹1,582 crore during 2016-17 compared with the previous year. During the first quarter of 2017-18, sales continued to fall; it was down 18 per cent y-o-y to ₹248 crore.

During 2016-17, net profit was up 52 per cent to ₹193 crore

In the June 2017 quarter, the company, reported a loss at the operating level. The management attributed it primarily to cost escalation across projects as well as increase in advertising expenses incurred for launches in Mumbai, Pune and Noida. Net profit was down by 46 per cent y-o-y to ₹23 crore during the June 2017 quarter.

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