BSE SENSEX S&P CNX 21,034 6,252 Bloomberg GPL IN Equity Shares (m) 99.6 M.Cap. (INR b) / (USD b) 36.4/ 0.7 52-Week Range (INR) 641/340 1, 6, 12 Rel. Per (%) -1/-44/-47 Financials & Valuation (INR b) Y/E MAR 2013 2014E 2015E Net Sales 10.4 11.2 15.1 EBITDA 2.9 2.9 4.3 NP 1.4 1.6 2.0 EPS (INR) 17.7 16.0 20.1 EPS Gr.(%) 41.3-9.9 26.1 BV/Sh (INR) 183.1 225.1 240.6 RoE (%) 9.6 8.7 8.7 RoCE (%) 8.6 9.1 9.6 Payout (%) 26.4 29.3 23.2 Valuations P/E (x) 20.7 23.0 18.3 P/BV (x) 2.0 1.6 1.5 EV/EBITDA 15.3 17.8 12.3 () Div. Yld (%) 1.1 1.1 1.1 31 October 2013 2QFY14 Results Update Sector: Real Estate Godrej Properties CMP: INR368 TP: INR420 Neutral Revenue up 32% YoY; PAT grows 5% YoY: Revenue grew 32% YoY to INR3.1b, EBITDA grew 12% YoY to INR808m and PAT grew 5% YoY to INR343m. Margin expanded 6.3% QoQ to 26.4%. Assuming EBITDA margin of Godrej One (Vikhroli commercial) at ~40%, EBITDA margin for other projects was ~13% (v/s 12% in 1QFY14 and 27% in 4QFY13). Higher revenue from low margin commercial (including Waterside) and older projects like GGC (Ahmedabad), and Frontier (Gurgaon) initial phases was the key drag. Other income was higher due to higher cash balance post rights issue. No new launch during 2QFY14: There has been no new launch in 2QFY14. Adjusting for JV partners stake and DM fees, we calculate GPL s 2QFY14 presales at 0.43msf (INR2.7b) v/s 0.49msf (INR4.2b) in 1QFY14. Overall presales velocity weakened in Ahmedabad and Kolkata, but improved in Pune and Mumbai projects. In BKC, GPL has sold 0.2msf (INR4.9b) till date against annual guidance of ~0.25msf. However, incremental presales in 2QFY14 were subdued. Negative OCF: We calculate GPL s operating cash flow (OCF) in 2QFY14 at a negative INR2b (-INR0.2b in 1QFY14). Apart from lower cash flow from customers, we attribute the negative surplus to INR0.7-0.8b of land advances (INR0.3b in Okhla project, INR0.3b Vikhroli payment and INR0.1b in recent Gurgaon advances). FCFE stood at negative INR3.7b, post INR1.2b exit to HDFC PMS in Chennai, higher interest outgo (INR0.67b) and dividend payment. Net debt declines post rights issue: Despite INR7b of rights issue in 2QFY14, negative FCFE curbed deleveraging potential. Net debt stood at INR12.6b (0.6x) in 2QFY14 v/s INR16.1b (1.1x) in 1QFY14. Cost of debt was 11.36% as against 11.42% in 4QFY13. Maintain Neutral: We are yet to derive any meaningful positive outlook from 2QFY14 results due to continued margin pressure, delay in launches, decline in presales, and negative FCFE. However, post rights issue, the decline in net debt (DER of 0.6x) seems comfortable. Key operational triggers for re-rating would be (1) sustenance of presales velocity at BKC, (2) generation of positive cash flow, and (3) no major increase in gearing hereon. GPL trades at 18.3x FY15E EPS and 1.5x FY15E BV. Maintain Neutral. Sandipan Pal (Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436 Investors are advised to refer through disclosures made at the end of the Research Report.
Revenue growth moderated; core margin down at 12% 2QFY14 revenue stood at INR3.1b (+32% YoY), EBITDA at INR808m (+12% YoY) and PAT at INR343m (+5% YoY). Key revenue contributors are: (1) Godrej One, Vikhroli commercial (33%), (2) Waterside, Kolkata commercial (11%), (3) Platinum, Bangalore residential (16%) and (4) Prakriti, Kolkata residential (11%). Anandam Phase II (Nagpur) have crossed revenue recognition threshold in 2QFY14. Margin went up to 26.4% (+6.3% QoQ). Assuming EBITDA margin of Godrej One (Vikhroli commercial) at ~40%, EBITDA margin at other projects stood at ~13% (v/s 12% in 1QFY14, and 27% in 4QFY13). Higher revenue from low margin commercials (including Waterside) and older projects like GGC s (Ahmadabad), Frontier s (Gurgaon) initial phases, where cost escalations have dent margins, were key drag. Other income was higher due to higher cash balance post rights issue. Revenue contribution mix (%): Godrej One and Platinum (Bangalore) key contributors Project-wise execution (% completion): slower progress in advance-staged projects 31 October 2013 2
Sharp decline in presales in absence of new launch There has been no new launch in 2QFY14, after launch of new phases of GCC (Ahmadabad), Prakriti (Kolkata) and Summit (Gurgaon) in 1QFY14. Adjusting for JV partners stake and DM fees projects, we calculate GPL s 2QFY14 presales at 0.43msf (INR2.7b) v/s 0.49msf (INR4.2b) in 1QFY14. Average realizations stood at INR6,535/sf v/s INR10,375/sf in 1QFY14 (1Q was higher due to higher contribution from BKC commercial). Key contributors to presales have been Vikhroli One (21%), GGC, Ahmadabad (18%), Waterside, Kolkata (10%) etc. Overall commercial projects contributed ~40% of presales. Overall presales velocity weakens in Ahmadabad and Kolkata, while improved in Pune and Mumbai projects. In BKC, GPL has sold 0.2msf (INR4.9b) till date against annual guidance ~0.25msf. However incremental presales in 2QFY14 were subdued. Faster sales in BKC would be a key to improve operating cash flow and resist from putting further pressure on its leverage as GPL has almost INR11b of cash outgo towards BKC project over FY14-16. FCFE negative on weaker OCF (lower collections, land advances) and PE exits We calculate GPL s operating cash flow (OCF) in 2QFY14 has been negative at INR2b (-INR0.2b in 1QFY14). Apart from lower cash flow from customers (no new launch in 2Q), we attribute the negative surplus to INR0.7-0.8b of land advances (INR0.3b in Okhla project, INR0.3b Vikhroli payment and INR0.1b in recent Gurgaon advances). FCFE stood at negative INR3.7b, post INR1.2b exit to HDFC PMS (invested INR0.55b in FY10, 15-18% assured IRR) in Chennai project, higher interest outgo (INR0.67b) and dividend payment. Despite INR7b of rights issue in 2QFY14, the negative FCFE curbed deleveraging potential. Net debt stood at INR12.6b (0.6x) in 2QFY14 v/s INR16.1b (1.1x) in 1QFY14. Cost of debt stood at 11.36% as against 11.42% in 4QFY13. GPL management has earlier indicated for a positive annual OCF trend here on. But a negative OCF in BKC (INR11b+ of capex commitment over FY14-16) could be a pressure point. Therefore, we don t expect any moderation in gearing in FY14-15, rather there could be upward trend if the recent momentum BKC sales velocity fails to sustain. 31 October 2013 3
Core margins continue to disappoint (%) Pre-sales trend (Ex JV partner) Pre-sales declined OoQ (GPL s stake adjusted) Trend in average realizations (INR/sf) FCFE negative on PE exit and weak OCF (INR b) Net debt at INR12.6b (0.6x) 31 October 2013 4
Sales trend in key ongoing projects in 2QFY14 (msf) Project Volume (msf) Value (INR m) Realization (INR/sf) GCC, Ahmedabad 0.18 600 3,380 Prakriti, Kolkata 0.03 140 4,152 Bangalore - Platinum 0.01 80 7,756 Vikhroli (Platinum) 0.01 190 15,833 Palm Grove, Chennai 0.03 130 4,556 Serenity, Mumbai 0.01 210 18,658 Horizon, Pune 0.03 180 5,249 Gold County, Bangalore 0.02 140 7,111 E-City Bangalore 0.02 110 4,549 Others 0.03 250 7,970 BKC 0.01 260 26,423 Vikhroli (One) 0.04 710 17,039 Waterside*, Kolkata 0.07 340 4,816 0.51 3,340 6,614 Valuation and view: Rights issue comforts on leverage; on time monetization key to prevent deterioration in leverage hereon We fail to derive meaningful positive outlook from GPL s 2QFY14 results due to continued margin pressure, delay in launch, decline in presales, and negative FCFE. However post Rights issue, the decline in net debt (DER of 0.6x) seems comfortable. Its residential projects are generating RoCE of 14.9%, which needs to improve further through better margin and faster launches. On the other hand INR15b of capital employed towards commercial projects have a major drag on capital efficiency. While initial presales in BKC commercial has been encouraging, we believe to momentum needs to sustain (or augment) to thwart any further weakening of liquidity. Despite bank financing not being a challenge for the company, we remain cautious about potential liquidity discomfort due to (a) negative FCFE, (b) high capex commitment towards BKC commercial (~INR11b over FY14-16 including MMRDA premium) and (c) payment to Godrej & Boyce for Vikhroli land. Timely monetization of planned launch is required to prevent any further deterioration in leverage. Key operational trigger for re-rating would be (1) sustenance of presales velocity at BKC demand, and (2) generation of positive cash flow, and (3) no major increase in gearing hereon. GPL trades at 18.3x FY15E EPS and 1.5x FY15E BV. Maintain Neutral. 31 October 2013 5
: an investment profile Company description Godrej Properties Limited (GPL), established in 1991, is part of the 113-year-old Godrej group of companies. GPL, which develops residential and commercial properties, recently entered large township development. The company expanded its footprint into 12 key tier-1 and tier-2 cities, with a land bank of ~400 acres and developable area of ~77msf, where it has economic interest for over 50msf. Key investment positives Focused mid-income housing play with an assetlight model. GPL's development portfolio is skewed in favor of JDA projects. Widely recognized Godrej brand gives GPL the unique strength to emerge as a true pan-india player. Key challenges Higher inclination towards joint-development model caps gains during an economic upswing and exposes the company to the potential risk of operational conflicts with JD partners. High leverage and negative OCF could exert pressure on balance sheet Godrej Properties Recent development HDFC PE fund s exited from two of its projects at Chennai and Chandigarh in 1HFY14 Acquired two NCR projects in Gurgaon and Okhla in 1HFY14 Valuation and views We are yet to derive any meaningful positive outlook from 2QFY14 results due to continued margin pressure, delay in launch, decline in presales, and negative FCFE. However post Rights issue, the decline in net debt (DER of 0.6x) seems comfortable. Key operational trigger for re-rating would be (1) sustenance of presales velocity at BKC demand, and (2) generation of positive cash flow, and (3) no major increase in gearing hereon. GPL trades at 18.3x FY15E EPS and 1.5x FY15E BV. Maintain Neutral. Comparative valuations GPL Prestige Oberoi P/E (x) FY14E 23.0 38.3 12.8 FY15E 18.3 20.9 8.9 P/BV (x) FY14E 1.6 1.8 1.3 FY15E 1.5 1.7 1.2 EV/Sales (x) FY14E 4.6 5.2 4.4 FY15E 3.5 3.8 3.2 EV/EBITDA (x) FY14E 17.8 11.4 8.0 FY15E 12.3 8.4 5.2 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY14 16.0 22.5-28.8 FY15 20.1 30.9-35.0 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 368 420 14.1 Neutral Shareholding pattern (%) Sep-13 Jun-13 Sep-12 Promoter 75.0 75.0 75.0 Stock performance (1-year) Domestic Inst 1.4 2.0 2.6 Foreign 15.5 14.9 13.5 Others 8.1 8.1 9.0 31 October 2013 6
Financials and valuation 31 October 2013 7
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This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Anosh Koppikar Kadambari Balachandran Email : anosh.koppikar@motilaloswal.com Email : kadambari.balachandran@motilaloswal.com Contact: (+65) 68189232 Contact: (+65) 68189233 / 65249115 Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318 Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com 31 October 2013 8