Godrej Properties: Falling short

Vikhroli deal was a disappointment; stock may not sustain premium valuations

While realty sector scrips bore the brunt of sluggish demand, higher interest rates and debt, Godrej Properties (GPL) has been an exception. Since listing (in January 2010), the stock has outperformed the BSE Realty Index and the Sensex by 174 per cent and 34 per cent, respectively, says a HSBC report. The scrip, however, may not be able to sustain its premium valuations. On a day when the BSE Realty index is up half a per cent, the GPL stock is down 3.5 per cent. GPL entered into an agreement with Godrej & Boyce to develop the latter’s massive land at Vikhroli (Mumbai). The Street was disappointed that the deal was not arrived along the same lines (60 per cent share of profits) as that of The Trees, a 2.8-million sq ft mixed-use project in Vikhroli, leased from the Godrej Group.

Instead, GPL settled for 10 per cent of total revenue generated from the development of the land, which analysts say will not generate as much profit as the previous deal. Given that the Street was factoring in the previous deal as the basis for valuing the company’s Vikhroli land (25 per cent of net asset value ranging from Rs 600-800 per share for the 500 acres), lower potential profits came in as a disappointment. Further, HSBC and Nirmal Bang analysts, in recent reports, have been pessimistic about the stock's prospects due to margin contraction, rising leverage, slowdown in residential segment and expensive valuations.

Param Desai of Nirmal Bang believes the recent land acquisition at the BKC and the leasing of Vikhroli property (The Trees) will make it asset-heavy and increase its net debt-equity ratio to 1.3 times from just under 1 currently. Further, the company’s margins could be vulnerable to cost pressures, as some of its projects are not covered by fixed price contracts, unlike in the past. This would bring down its margins by 900 basis points to 27 per cent by FY13, he says.

On the flip side, Suman Memani of Pioneer Intermediaries says from a long-term perspective, the recent deal could be favourable, as it ensures steady cashflows over a 15-year timeframe at the profit before tax level, without attendant headaches of construction, cost escalation, higher debt and unsold inventory.

While the Vikhroli land deal is a definite plus from a visibility perspective (barring the belied expectations on profit sharing), the slowdown in the realty space and, most importantly, its steep valuations will mean that the stock may see more downgrades than upsides.