For Godrej Properties, sale is a big positive

Almost a third of the company's capex was stuck in this project

The sale of 435,000 square feet by Godrej Properties in Godrej BKC, Mumbai, to Abbott India, is a big positive. This will unlock value and improve returns. Almost a third of the company's capital expenditure was stuck in this project. The sale will help get value for some of the investments. Given the total area of 1.3 million square feet, the company, with a single transaction, has been able to sell a third of the saleable area for Rs 1,479 crore. This pegs the value of the transaction at Rs 34,000 per square foot, which is 21 to 30 per cent higher than analyst estimates of Rs 26,000 to Rs 28,000 per square foot.  

Till March, the company had sold 0.3 million square feet in this project, at an average realisation of Rs 25,925 per square foot. Sales in this property declined from 0.2 million square feet in FY14 to 0.08 million square feet in FY15. JM Financial says that with a major chunk of sales through, cash flows from the project is expected to improve in FY17, leading to a reduction in debt. Seventy per cent of the project is complete.

 

The company had a debt of Rs 3,000 crore at the end of the June quarter. The sale should bring it down by half. Before the deal, the debt-to-equity ratio was 1.5. Eighty per cent of the debt was invested in commercial projects. Macquarie analysts say the sale of these projects (in Mumbai, Chandigarh, and Kolkata) could help the company cut debt significantly over 12 to 18 months. After the announcement of the BKC deal, the Godrej Properties stock closed seven per cent higher on Wednesday. On Thursday, the stock gave up some gains.

In the future, the key positive for the company will be residential sales - there are 14 projects across cities. The company received a strong response to its launches in the quarter ended June, with pre-sales rising 52 per cent year-on-year to Rs 1,250 crore. Nearly 70 per cent of the sum-of-the-parts valuation of the company is made up by its residential portfolio.

Forty-five per cent of the analysts tracking the stock recommend a buy. But the Bloomberg consensus target price for the stock is Rs 300. The current stock price is Rs 320. Investors can buy the stock on correction.