Godrej Properties: Initiating Coverage Research Report By HDFC Securities

Godrej Properties

The housing factory

Godrej Properties Ltd (GPL) is a sectoral bell-weather with an innate capacity to build homes. Over the years, it has metamorphosed into a seamless home manufacturing machine with the shortest production time from land acquisition to approvals to launches and sales. In this journey, it has gained market share and emerged a crucial challenger in the respective micro-markets; it is on its way to becoming a leader.

Given strong brand, robust financial capacity and strong execution capabilities, landowners/Tier 2 developers have been partnering with GPL for JV opportunities. The growth journey is expected to crystallise further with the regulatory landscape changing over the years, in favour of organised developers. We believe GPL only constrains itself, and that is its biggest strength or weakness. Given recent run up we initiate coverage on the stock with an ADD recommendation and SOTP of Rs 1,164/sh (40% NAV premium).

 Whilst others want to grab it all, GPL stays focused on residential: GPL has always stressed that it anchors its strategy mainly towards residential developments. The market has been giving premium to mixed-use players with exposure to annuity and residential developments. In between, the capital allocations get jumbled up in office/retail/hospitality and residential. GPL is clear that it would allocate the lion share of its capital to residential, which reflects in strong market share gains over the years in the Top-4 regions of Mumbai, Pune, Bengaluru and NCR. We believe it would continue to dominate these markets and remain developer of choice for buyers, given its strong track record and robust housing demand.

 Regulatory overhaul could consolidate the market among 8-10 developers: Over the past few years, demonetisation, RERA, GST, NBFC crisis and COVID-19 have restricted sectoral funding, resulting in consolidation of market share amongst Top 5-10 developers. GPL’s massive expansion has been in sync with the long-pending regulatory overhauls. It has been averaging at 1-2.5mn sqft per micro-market and is well-poised to double the presales over the next four years. Whilst other developers are defocused on residential, GPL has a hawk-eye on residential opportunities, from perspective of both business development (BD) and launches.

 Cash flow to remain mostly negative, BD opportunities to lead to debt build out: Whilst the past three years’ BD efforts have started paying off in terms of new launches, GPL may continue to pursue new BD deals. Although a large part of the BD funding may be met with project cash flows, GPL has given net D/E target of 1x, which implies about Rs 20-25bn outlay on land acquisitions over the next four years. GPL maintains a 20% ROE target from FY23/24E. Interest cost for GPL at 7.5% pre-tax (~5% post-tax) reduces the cost of capital and aids accelerated launches in the key markets.