Godrej Properties to maintain growth; new launches treble in 6 years

Falling operating cash flows could make it difficult to meet return on equity target, say analysts

Godrej Properties has been one of the better performing realty stocks with gains of 74 per cent on the back of standout June quarter (Q1) results and consolidation in the sector. Over the past five years, its market share in the National Capital Region, Pune, and Bengaluru has increased from below 1 per cent to over 3.5-4.1 per cent. In Mumbai, its share has improved by 200 basis points to over 4.4 per cent. 

This is thanks to new launches and bookings, which have trebled over the last six years from 3 million square feet in financial year 2013-14 (FY14) to about 8.8 million square feet in FY20. Volumes have improved by 18 per cent annually in the past five years even as the industry’s growth is down 3 per cent due to falling demand and regulatory hurdles. Say analysts at Spark Capital, “GPL has been the biggest beneficiary of consolidation in the industry led by not only market forces, but also by proactive project additions, aggressive sales engine, right mix of projects and a well-funded balance sheet.”

Sales momentum has continued in the current financial year with new bookings growing to over 70 per cent in Q1 while peers saw a 50 per cent plus decline. 
 

Given its plans to launch projects in the second half of the year in Mumbai and NCR market, subvention schemes, stamp duty cut and demand from non-resident Indians, it is expected to end the year with over 20 per cent year-on-year (YoY) growth. 

 

 

While sales are expected to be the best in class, analysts believe the company’s return on equity target of over 20 per cent will take time to play out. Its operating cash flows have been declining as the company has been funding projects including those involving joint ventures. 

Mohit Agrawal of IIFL expects the weakness in operating cash flow to persist over FY21 and barely breakeven given lower execution and revenue recognition. 
 

He expects this to be a drag on return on equity, pushing the mid-term target even further. While most analysts are positive on the company, given the premium valuations, investors should await a better entry point.