Godrej Properties - November 2014 Multibagger

8/9/2019 Godrej Properties - November 2014 Multibagger

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Godrej Properties Ltd (GPL)- Good Management chasing a Huge Opportunity


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Content Index

• Godrej Properties – Investment Snapshot :- Slide #4

• Our Research Desk’s views on the Stock Idea :- Slide #5

• Godrej Properties – Business Overview :- Slide #13

• Investment Arguments :- Slide #33

• Godrej Properties – Financials:- Slide #52

• Concerns & Reasoning :- Slide #54

• Conclusion:- Slide #56

“ Specialists in discovering Multibagger stocks “


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Our Cumulative Portfolio performance



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Godrej Properties – Investment Snapshot(as on November 25, 2014)

Recommendation :- BUY

Maximum Portfolio Allocation :- 4%

Current Accumulation Range :- 200-260 Rs

Core Investment Thesis :

The company follows a business model of real estate

development which we believe has the potential to create strong

value for shareholders. It has a very aggressive management and

also a strong growth visibility. We believe that the company can

definitely grow at over 30% CAGR over the next 10 years.

While the current Return ratios may not look attractive, we

believe this is a temporary phenomenon and expect the ROE to

inch upwards to about 18% over the next 3 years. While there

might be short-term valuation pressures, the long term story

looks robust.

We certainly believe that the stock has a strong probability of

becoming a Large cap over the next decade and can provide

Multi-Fold returns to existing investors.

Current Market Price – Rs. 250

Current Dividend Yield – 0.79%

Bloomberg / Reuters Code –GPL. IN/

GODR.BO

BSE / NSE Code – 533150/ GodrejProp

Market Cap (INR BN / USD Mn) – 50.60/806 [1 USD – Rs. 62.0]

Total Equity Shares [Mn] – 202.6

Face Value – Rs. 5

52 Week High / Low – Rs. 264 / Rs.154

Promoter’s Holding – 74.92 %

FII - 10.98 %

DII - 1.46 %

Other Holdings - 12.94 %



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Dear Members,

Indian Markets have had a very sharp rally (especially in the Small/ Mid Cap space). While the Markets on an

aggregate still don't look expensive, the stocks that we are focused on (High Quality - Secular Growth businesses)

are frothy. Most of our earlier high conviction/ Core Portfolio bets - Housing stocks (Cera sanitary ware, HSIL,Astral Poly, Ashiana Housing), Discretionary consumption (Kewal Kiran, Symphony, PVR, La Opala), Quality

Exporters (Poly Medicure, Mayur Uniquoters, Balkrishna Industries), Fast growers (Dhanuka, Atul Auto, VA Tech

Wabag, Treehouse) along with some Contrarian Bets (NBCC, Wimplast, TCI, Indiabulls Housing) etc - have been re-

rated sharply and are now quoting at >30 P/E valuations.

Companies with similar characteristics – Long run way for growth, Good Management team, Durable Moats,

Capital Efficient and Scalable business model, Huge opportunity Size and high Incremental ROCE’s - are all quotingat valuations that are too high for our comfort. Many of them deserve such valuations for the certainty they deliver

to Investors. Therefore we are not booking profits and are still fully invested in such names but buying them

incrementally is challenging. The Risk-Return doesn't look attractive for an Investor to buy these businesses

currently at these prices where most of the positives are priced in.

We have been writing in a similar tune for the past few months now. There were a few opportunities that were still

available in the secular growth space such as Treehouse and Heritage Foods that have been added to our CorePortfolios. Currently, we are not able to find any new Idea in which we have enough conviction as a long term

Investor. There are several interesting spots in the Tactical/ Intelligent Speculation space that we utilize as part of

our 1-3 year buckets (Hedge Fund portfolio), but the secular growth ideas that we identify in our Multibagger

service (ahead of the general market) have become too pricey with the sharp rally. We don’t want to get into lower

quality Stock Ideas recommendation just for the sake of it. We continue to track/ meet/ understand several new

businesses that we like and incase of a healthy correction, we have our list of stocks to be bought ready.


Our Research Desk’s views on the Stock Idea


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Investing in Mid-Caps and Small-Caps needs to have a contrarian strategy. When it was hated by Market

participants a few years ago, we were heavy buyers (literally betting every penny on them), but in times like these

in which we find a few spaces extremely frothy – we are happy to stay out of the game. We have not been buying

anything significantly in the past several months as our Equity Allocation was higher anyways. The challenge has

been on Incremental allocation for clients with low equity allocations. In such cases, we have been playing safe bybuying businesses that offer tremendous certainty for a long term Investor despite overvaluation.

Godrej Properties has been one of our earlier recommendations in which we are allocating significant capital for

clients with low equity exposures. It is very rare that you find one of your picks that has delivered over 55% return

within a year time span falling at the last place of returns from your last year’s recommendations (it was

recommended in December-2013 at 160Rs/ Share). That is what current Market Rally has done. Almost 1 in 2

stocks in the Market has doubled and thankfully all our picks have delivered much higher returns than the average.In such a backdrop, we are happy to re-recommend Godrej Properties for Investors with a 5-10 year horizon.

Godrej Properties is one of our few recommendations that is a real beneficiary of all the Macro positives that has

happened to India over the last year. Compared to last year, there are several positives to the stock.

-Tail Risks have reduced substantially and Visibility for the long term has improved.

- Godrej Properties performance over the last 3 Quarters has been better than expectation.- A progressive chief Minister elected in GPL’s core market in addition to a business friendly Central government.

- Interest Rate reduction looks much more certain.

- Real Estate sentiments have picked up strongly and pent-up demand seems to be coming back.

- GPL has shown the ability to launch and execute projects quickly.- Brand’s pull can be seen from the premium in new projects + the strong Pre-Sales in almost all new projects.

- Pan-India expansion ahead of plans. Filling up the vacuum of large distressed leaders (DLF & Unitech).




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While short term earnings/ valuations pressure seems imminent – the conviction on the real long term story isbuilding up well. Investors who can comprehend the BIG picture can see the rationale behind this Investment. Wehave enough reasons to strengthen our long term projections as compared to last year.

-Management team has shown contrarian thinking to launch and execute projects in a difficult environment.- Over 25 Million Sq.ft of project additions over the past 2 years. Improved mix towards high ROE projects.- Consistent sales volume of over 1 Million Sq.ft every month over the past 3 Quarters (tough environment).- Ability to improve prices by over 15% across projects during Phase-2 development.- Building a strong team across sales, marketing, execution divisions to scale up the business over the next decade.

Management is clearly having huge ambitions and are building this business for the long term. They are focusing onimproving the process consistently and are setting up the building blocks of a successful organization. Let’s

understand a few important Investment drivers.

- The Big Picture : (How do we see this Business in a decade from now ?)

Godrej Properties current revenue size of around 1000 Cr is miniscule when compared with the market size forquality Real estate development. Godrej group chairman – Adi Godrej believes, “GPL will be the group’s fastestgrowing business and will be the biggest contributor to the group’s profits in a decade from now”. There is also aninternal growth target of around 40% CAGR over the next 10 years which should take the business to a size of

>20X from the current size. While all of these targets may look Aspirational, we believe that the company is in factgetting well positioned to grow at such high rates for a long period of time with the strong focus from the Godrejgroup on this line of business. With a strong capital backup from the group, a huge market opportunity, healthyproject pipeline, ambitious Management, improving operational bandwidth, large land bank of Godrej groupcompanies and a mix of asset light business models – the company is well positioned to grow its operations multi-fold in the coming decade as it aims to be amongst the Top-3 Real estate players in India. Looking at the company’s performance over the last many years – we certainly believe that it is a achievable dream.




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- Strong Visibility for growth : (Will the company’s Business Model allow a rapid scale-up in Operations ?)

GPL follows a mix of development strategies such as JV model (Revenue Sharing, Profit Sharing, Area Sharing),Development manager fee model (10% revenues with no capital investment), Re-Development projects and Co-Investor platform projects for developing real estate projects across the country. GPL doesn’t follow a land bankmodel and the company’s preference for tying up with local Land owners whose responsibility is to get all theapprovals in place for the project, allows the company to scale up across the country in a business where localconnections are extremely important. Its Pan-India brand value and Company’s model of outsourcing contractingwork also facilitates the rapid scale up without much technical glitches.

Capital is not a constraint for GPL as it uses relatively asset light business models. The promoter’s strong capital

backing and preference for tying up with external investors on Asset heavy projects (Private Equity Partnership’s – Slide 32) allows the company to scale up its business multi-fold without any capital constraints.

Company’s rapid scale up in new project addition (Slide-19 & 43) and the huge opportunity of developing Godrejgroup’s own land bank (Slide-28) offers strong growth visibility to the company for many more years. All of thesemakes us believe that the company can certainly grow at a healthy CAGR of at least 30% for the next 10 years andhence the more valid question should be to understand as to how profitable would this growth be, how much ofthis growth would be un-diluted and how much wealth creation can accrue to the existing share holder. It is here

that we believe that the Markets are mis-reading the quality of incremental growth in the business.

- Improving Quality of Growth : (Will the company’s growth be Shareholder friendly ?)

We believe that the company’s current low returns Ratios doesn’t reflect the true nature of its business modeland a more normalized Return on Equity should be in the range of 15-20%. We believe that the current low ROE isdistorted by a few temporary factors such as, (also look at Slides – 36,37)




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- Company’s loss making old Commercial Projects :

The extremely bad commercial real estate demand has made sure that – GPL’s commercial projects are makinglosses and are delivering low returns on the locked-in capital, resulting in a distortion in the overall return ratios.

The ROE’s of projects excluding these Commercial projects are already at 15%. With the slow run down in these lossmaking projects and a improved mix of Residential projects, there is enough indications of a improvement in ROE.

- Longer maturity profile for the company’s large Projects :

Some of the company’s important projects such as Vikhroli and Godrej Garden city are large projects withtimelines for these projects extending for the next 8-10 years. In such large projects, the initial phases are alwaysused to establish a strong neighborhood and bulk of the project’s profits are back ended as the later phases ofdevelopment fetch strong margins. Hence the current Margins should improve over time and boost return ratios.

We also believe that the company’s consistent focus on Capital efficiency (Management doesn’t miss a chance tospeak about the focus on Return on capital in all their Concalls and Interviews) and an intent to deliver ROE’s above 20% should serve as an indicator for an improvement going forward. We believe that the changing mix ofprojects towards High ROE models such as Development Manager Fee model (Slide – 46) and Profit sharing modelwould help the company to have larger incremental returns on capital. Our research indicates that the new projectscan generate EBIDTA of around 1500 Cr on little capital employed (Slide – 36) which shows the inherent strength ofGPL’s business model. DM Model is the preferred model for working with group companies. Looking at the projectvisibility at the group level, we certainly believe that GPL will transform to a high ROCE business over the nextdecade from the current sub-10% ROE’s that it earns.

We also believe that the company is learning from some of its mistakes and there are indications of themrectifying it, as any credible Management does. While there would still be glitches, our understanding is that thecompany’s structural business model definitely allows for generating 20% ROE on an incremental basis. We believethat the improving quality of growth would help investors achieve dis-proportionate returns over time.




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- Seamless Web of deserved Trust : (How does the company stand out among other big Developers ?)

Real Estate sector has always been a murky sector where there is a lot of distrust among Market participants.Godrej’s credible brand built over a 100 years has helped the company establish trust among various stake holdersof Real estate business in a extremely short period of time. Godrej is largest brand in the number of Indian people ittouches on a daily basis. GPL can successfully capitalize on this strong brand to attract more customers.

Company’s strong reputation also provides it with other advantages such as, Low cost of debt (11.2%) which is asolid 100-300 bps cheaper than its competitors. It’s cost of Equity is the cheapest among all Real Estate players andInvestors are ready to invest in the company despite a weak Real Estate environment as seen from the hugesubscription for its Recent Rights Issue. Company has also been able to tap the Private Equity network efficiently toraise capital. The company’s unique structure of a Co-Investment platform also is an indication of the company’s ability to tap into different sources of capital to keep itself asset light. We believe that the low cost of Capital is aresult of the deserved trust which the Group commands.

The company’s takes its reputation as customer friendly very seriously and makes sure that it continues to buildon to that brand image. This has helped the company to generate strong customer interest for its projects even in adull environment (Slide – 30). This trust combined with Godrej group’s DNA in marketing helps the company outbeat its Peers and create strong value for its projects. This can be easily verified with the consistent increase in theshare of Development Manager Fee model where the company mainly does Project design, Planning, Marketingand Sales of a project and does not commit any capital. We believe that the company’s ability to receive more than10% of the projects revenue by just engaging in such 0 Capital investment activities demonstrates the real strength

of GPL’s Operations. As its strength improves, so does its negotiating power with its various partners.

We believe all these positives create a strong reinforcing loop which allows the company to tap into the bestLand bank partners, Private Equity investors, Cheap debt and a stronger customer connect. This would onlystrengthen going forward as the company improves on its Project Quality and gets financially stronger. Thecompany’s strong base of Operational excellence can be seen from the numerous recognitions for its projects (Slide – 41, 42). We believe that GPL has all the ingredients to emerge as a large quality real estate developer whichdeserves a premium for its projects.




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A Few Realistic concerns about Godrej Properties :

1.) Valuations are costly but the long term story provides confidence !

The current valuations of 5000 Cr equity value (2400 Cr of Debt) for a company with an expected PAT of around260 Crs next year is costly. Also the stock is quoting around 2.5X Book Value which is not attractive by any

Investment standards. As we have been saying, this stock should be seen as a 10 Year bet where most of the returnswould be back ended. We have estimated the company’s Net Asset Value in Slide (51) to be around 215 Rs/ Share.We are definitely buying the stock at a >15% premium to its intrinsic value, but it hardly matters when the

Investment horizon is a decade.

2.) Company has made mistakes in its Project selection & its execution strategy

GPL had done early monetization in a lot of its projects and where there has been cost escalation over the last 2

years, resulting in lower Margins. The company has now shifted more towards Profit Sharing (rather than Revenuesharing) and covers for cost escalation during its initial sales. The company’s commercial projects and even itsrecent large project like BKC doesn’t look attractive from a Return on Capital point of view.

While we can give a benefit of doubt based on its young execution history, the company should improve itsproject selection and execution skills to consistently earn strong returns on its deployed capital. Company’s rapidscale up in the number of projects it handles would also make it vulnerable to a lot more errors. Considering thenumber of variables involved, we believe that the company would develop stronger expertise going ahead in

selecting a better project and would become more choosy.

3.) Aggressive Accounting practices & Optimistic guidance of the Management

GPL follows a relatively aggressive accounting policy to book revenues and also in booking profits during saleof stakes in projects to its Private equity partners. We believe that the company has been optimistic in severalestimations which can be seen from the hit the company has taken on few projects where it has provided for aassured IRR to PE investors. We believe mistakes like these are costly and creates doubts in the minds of Investorsabout the guidance on its future profitability.




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While we believe that these are important concerns, we are not very much worried about the company’s consistent negative cash flow generation as we are sold on to the Management’s vision of Investing aggressivelyduring the current bad environment which would help it to reap rich rewards going ahead. The company’s balancesheet strength and backing from its Parent should help it to tide over any balance sheet related stress.

We believe that any long term Investor should not miss this opportunity to buy into a high Growth business whichhas a strong probability of being 20X of its current size in next 10 years, which is run by a credible Management,which has a business model to capture those returns efficiently for a share holder and which is available atreasonable valuations. We believe Markets would love this high structural growth business and we expect thecompany to become a 18%+ ROE business over the next 3-5 years. All of this would ensure that the company’s stockwould gain not only from the company’s earnings growth but also from the potential re-rating which would help usget strong Multibagger returns.

We would like Investors to take a dipping stake into the stock and add on to it aggressively in case the stockcorrects significantly from the current levels.



Regards,

[ Gokul Raj . P, Director & Head – Investments ]


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Godrej Properties – Business Overview


10 Y P f S h


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10 – Year Performance Snapshot



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Godrej Properties – Core Execution Model


.

• GPL uses the “joint development model” for developing properties, which entails entering into a development agreement

with the owner(s) of the land parcel(s) sought to be developed and developing the project jointly with the land owner.

projects. • GPL is typically, entitled to share in the development property, or a share of the revenue or profits generated from the sale

of the developed property, or a combination of both entitlements .

• GPL in some projects offer and sell equity interests in project-specific companies to long-term investors. This business

model enables to hold fewer assets, be more capital efficient, achieve higher returns on investments in the projects and

undertake more projects without investing large amounts of capital towards the purchase of land.

Business Model


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Business Model

• GPL focuses primarily on residential projects. In residential project portfolio, GPL develops projects that

are focused on the higher end to mid-level range of the real estate market. Residential projects constituted

approximately 82.39% of our total Saleable Area.

• GPL entitled to share in the development property, or a share of the revenue or profits generated from thesale of the developed property, or a combination of both. GPL’s joint development model allows them to be

more capital efficient and hold fewer assets.

• GPL in some projects offers and sells equity interests in project-specific companies to long-term investors.

This business model enables the company to rapidly scale up and use its capital efficiently. GPL is able to

limit its risk through project diversification while maintaining significant management control over these

projects. The company usually sells these equity interests for a premium leading to healthy profits.

• GPL also undertakes the development of projects as a development manager on a fee basis - where it

ideates, designs, markets and sells the project. There is no capital commitment and this model is highly ROE

accretive. The Value addition of the company is very much visible in this model.

• GPL has also created a residential development financing platform of 10,725 million under which a Dutch

co-operative representing a group of overseas investors and an Indian investor commit equity investments in

GPL’s residential projects. The platform intends to focus primarily on the development of FDI-compliant

residential projects in Mumbai, the National Capital Region, Bangalore, Chennai and Pune. The platform will

enable the company to capture outright land purchase transactions without deviating from GPL’s asset light

model. This will also add to the ease of capital access for GPL’s projects.


GPL A th l 3 P I di l t t d l


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GPL – Among the only 3 Pan-India real estate developers


• GPL is a focused mid-income housing

player, with a pan India presence and a

differentiated business model.

• GPL is currently present in 12 cities i.eChandigarh, Chennai, Mangalore, NCR,

Ahmedabad, Mumbai, Nagpur, Kolkata,

Pune, Hyderabad ,Bangalore and Kochi.

• GPL will be able to expand to more

cities and towns across India which can

be easily penetrated given the brand

loyalty enjoyed by the company on a

Pan India basis.

• GPL is currently executing a total of 4

projects on a Pan India basis with

potential developable area of 88.7million sq.ft.

• The projects are a mix of residential,

commercial and Townships which

provide long term visibility.


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Strong Pipeline of projects


G d j P ti O i R id ti l P j t


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Godrej Properties – Ongoing Residential Projects


Godrej Properties Forthcoming Residential Projects


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Godrej Properties – Forthcoming Residential Projects


Godrej Properties Commercial Projects


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Godrej Properties – Commercial Projects


Ongoing Commercial Projects

Forthcoming Commercial Projects

Strong Revenue Visibility


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Strong Revenue Visibility


Projects Location FY14 Launch Area(msf) Realization(INR/SF) GPL's Revenues(Rs.Bn)

Garden CityPhase5A & AFS Ahmedabad 0.6 2950-3450 1.3

Garden CityPhase5B Ahmedabad 0.5 3400 1.1

Platinum Kolkata 0.17 22000 1.7

Shahakar Nagar Mumbai 1.35 12000-14000 15.8

Palm Springs Mumbai 0.13 17000 1

Horizon Pune 0.54 5700 1.5

Panvel Mumbai 1 5500-6000 1.9

Oasis/Moosapet Hyderabad 0.5-1 3500 0.3-2

Total 4.5-5 3500-17000 24-25


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Important Projects of Godrej Properties


Godrej Garden city Ahmedabad


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Godrej Garden city - Ahmedabad


• Godrej Garden City is a township development

planned in Ahmedabad which is located in Jagatpur

village in the northwest region of Ahmedabad and is

located within the Ahmedabad Municipal

Corporation administrative limits.

• The project is expected to feature a clubhouse, full-

time security and a mix of apartments, villas and row

houses.

• The project has a developable area of 23.72 mn

Sq.Ft with a saleable area of 20.60 mn Sq.Ft. Godrej

Properties - economic interest in Phase I-IV is area

based at 73.6% and from Phase V onwards it is

revenue based at 67.6%.

• The current rate per square feet for the project is

around Rs.4400 per Sq.ft.

• Till June,2013 about 4.62 mn Sq.ft of the project

had been sold .

Garden City Project Details

Location Ahmedabad

Type of Development Residential Township

Developable Area(Mn.Sq.Ft) 3.5

Saleable Area(Mn Sq.Ft) 2.62

Project Starting Year 2010

Project Mode Area, Revenue Basis

Project Value(Rs.Cr) 1688

NAV Per Share 64

Godrej BKC Project Mumbai


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Godrej BKC Project - Mumbai


• GPL launched its landmark commercial project

Godrej BKC located at the centre of India’s most

prestigious commercial project Bandra -Kurla Project.

• The project is being developed on 2.5 acres of land

and is expected to have approximately 1.2 million sq.

ft. of office space. The project is located

approximately six and nine kilometers away from

Mumbai’s domestic and international airports,

respectively, and has access to both the western and

eastern express highways .

• The project has a developable area of 1.26 mn Sq.Ft

with a saleable area of 1.20 mn Sq.Ft. GPL has

entered into a profit sharing with 50% profits.

• The current rate per square feet for the project is

around Rs.25,800 per Sq.ft.

• Till June,2013 about 0.19 mn Sq.ft of the project

had been sold .

BKC Project Details

Location Mumbai

Type of Development Commercial



Project Starting Year Mar-13

Project Ending Year 2015

Project Mode Profit Sharing

Profit Sharing Basis 50%

Project Value(Rs.Cr) 1375

NAV Per Share 76

Godrej Frontier Gurgaon


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Godrej Frontier - Gurgaon


• GPL’s Godrej Frontier is a residential

development located in Gurgaon.

• The project is expected to feature three-

bedroom and four-bedroom homes in addition

to 19 penthouses. The project is expected to

include a health club, jogging track, swimming

pool, gymnasium, indoor games area and a

variety of landscaping features .

• The project has a developable area of 1.35 mn

Sq.Ft with a saleable area of 0.82 mn Sq.Ft. GPL

has entered into a profit sharing with 70%

profits.

• The current rate per square feet for the

project is around Rs.5800 per Sq.ft.

• Till June,2013 about 0.79 mn Sq.ft of the

project had been sold .

Frontier Project Details

Location Gurgaon

Type of Development Residential



Project Starting Year Oct-10

Project Ending Year NA

Project Mode Profit Sharing


Project Value(Rs.Cr) 47.6

NAV Per Share 26.8

The Trees VIKHROLI Project


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The Trees - VIKHROLI Project


• The Trees is expected to have approximately

3.5 million sq. ft. of office space, residential

apartments, retail and hotel space.

• GPL is the Development Manager for theproject. GPL is required to provide expertise

and advice FSI/FAR regulations and project

feasibility, design and marketing plans.

• GPL has to bear all costs related to

management, sales and marketing and entitled

to receive 10% of the money received for the

sales of units plus all related statutory levies.

• GIL is responsible for arranging financing,

obtaining all necessary development approvals

and permissions, performing all construction

work and for bearing all costs related todevelopment.

• The current rate per square feet for the

project is around Rs.15950 per Sq.ft.

Vikhroli Project Details

Location Mumbai

Type of Development Residential,Commercial



Project Starting Year Oct-11Project Ending Year NA

Project Mode Development Manager


Project Value(Rs.Cr) 117.8

NAV Per Share 23.5


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Advantages of a Strong Parentage


Vikhroli Land Bank – A Cash Cow


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Vikhroli Land Bank A Cash Cow


• Godrej & Boyce the holding company of all

Godrej group companies, owns ~3,500acres in

Vikhroli (Mumbai). The management has

indicated that while a large chunk of this land

(~2,200acres) comes under mangrove area and

cannot be developed, it plans to commercially

develop the remaining ~1200 acres over the next

10-15 years.

• The Vikhroli project has a development potential

of about 25 residential projects which offer hugeupside potential over the next several years and

will be a cash cow.

• The estimated revenues for developing 36 acres

of land is about Rs.3000 Cr which translates to

about Rs.83.33 Cr per acre which signifies the

potential of the land bank.

• Further as these projects are developed over a

period of time there is scope for increase in

realizations as it has been proved that realizations

improve at the later phases of the projects

Agreement with Godrej group companies


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Agreement with Godrej group companies


• GPL has entered into limited liability partnership agreements with Godrej & Boyce and Godrej Industries

Limited for the joint development of certain real estate projects (the “LLP Agreements”). Under the terms of

the LLP Agreements, GPL and the counterparties are required to contribute certain amounts as fixed capital

contributions and are entitled to certain shares of the partnership profits.

• For the Thane project GPL is entitled to profit sharing of 32% while the rest will go to Godrej & Boyce

where there are 3 acres.

• For the Hyderabad project GPL is entitled to development manager fee of 10% while the rest will go to

Godrej & Boyce. For the Vikhroli project (discussed separately) GPL is entitled to profit sharing of 40% while

the rest will go to Godrej & Boyce.

Good Response to Projects


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Good Response to Projects


• GPL has had good response to its projects with most projects have pre-sales which is a testimony to their

brand and timely execution of projects. GPL in H1FY14 had 11,09,732 Sq.Ft of booked area which is valued

at Rs.944 Cr which provides revenue visibility for its projects.

Strong Performance in recent Quarters


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Strong Performance in recent Quarters


Robust Pre-Sales Momentum

Margins trend

Debt Ratios

Consistent Access to Private Equity


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Consistent Access to Private Equity


• GPL has been using the PE route to de-risk itself from negative operating cash flow and the company has

adopted early monetization strategy as a part of its business model.

• GPL has been able to leverage its brand which has helped it to strike deals with PE players at a substantial

premium to its peers. While DLF had entered into deals at 3x its Book Value, GPL has been able to enter

deals at 5x its book value. During 2012 - 2 of the top 5 PE deals were done by GPL valued at USD 239 Mn.

The deal was done to foreign investors one of which happens to be with Government of Singapore

Investment corporation(GIC).

Top 5 PE Deals in 2012Year Project PE Partner % stake Deal Size

FY09

Godrej developers

private Ltd Redford India RE Babur 49% Rs.0.42 Bn

FY10

Godrej Realty Private

Ltd HDFC Ventures 49% NA

FY10

Godrej Waterside

Private Ltd. HDFC Ventures 49% NA

FY10 Happy Highrises Milestone RE Fund 49% Rs.0.70 Bn

FY10

Godrej Estate

Developers HDFC Asset Management 49% Rs.0.45 Bn

FY10 Godrej Sea View HDFC PMS 49% Rs.0.55 Bn

FY11

Godrej

Properties(Gurgaon

Project) Sun Apollo India Real Estate Fund 49% Rs.45 Cr

FY12 Godrej Properties APG Group of Investors NA 140.8 Mn USD

FY12 Godrej Properties

Government of Singapore

Investment Corporation (GIC) NA 98.2Mn USD

FY12 Godrej Landmark ASK Property Investment Advisors 49% 20 Mn USD

FY12 Godrej Properties

APG(Dutch Pension service provider)

& Sparinvest property Funds NA 141 Mn USD


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Godrej Properties – Investment Rationale


Group’s ambitions from Godrej Properties


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Group s ambitions from Godrej Properties


Focused & Contrarian Managing Director


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Focused & Contrarian Managing Director


Highly Profitable Projects in Pipeline


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Highly Profitable Projects in Pipeline


• GPL management has indicated that they are likely to do 7 large projects in FY14 in profit sharing model

which is likely to generate revenues of Rs.28.5 Bn.

• GPL has plans to launch in these 87areas an area of about 7.1 Mn.Sq.Ft with realizations ranging from

about Rs.5500 – 14,000 per square feet.

• GPL management is expecting cost for these projects to be at Rs.13.1 Bn and is expecting EBIDTA of

Rs.15.4 Bn from these projects.

Projects Location

FY14 Launch

Area(msf) Realization(INR/SF)

GPL's

Revenues(Rs.Bn) Cost(Rs.Bn) EBIDTA(Rs.Bn)

Shahakar Nagar,Phase 1 & 2 Mumbai 1.35 12000 14.6 6.8 7.8

Malad Mumbai 0.1 12000 1.1 0.5 0.6

Undri Pune 1.5 4200 2.5 1.2 1.3

Ghatkopar Mumbai 0.2 14000 2.7 1.3 1.4

Byculla Mumbai 0.3 NA 0.5 0.1 0.4

Curry Road Mumbai 0.1 30000 0.4 0.1 0.3

Panvel Mumbai 3.5 5500 6.7 3.1 3.6

Total 7.1 28.5 13.1 15.4

Commercial Projects distorting real ROCE


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Commercial Projects distorting real ROCE


• GPL has evolved plans to improve its ROCE which was dragged by commercial projects. GPL plans to focus

on residential segment for the next two to three years, fast monetization of its recent acquisitions and

better sales in commercial projects.

• GPL’s commercial developments in Kolkata and Chandigarh remain a concern. The management is

confident of the BKC project which has been a better performing project in Mumbai in a sluggish commercial

environment, despite severe concerns from the Analyst community on this project.

• GPL expects steady monetization of BKC commercial projects where it plans to complete the construction

in 3 years with annual sales of 0.25 Mn.Sq.Ft from FY-14

• GPL plans to bring in PE funds to offload partial stake if the markets turns favorable failing which they

would funding can be done through internal accruals.

Rising share of Residential Properties


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Rising share of Residential Properties


• GPL had in FY14, a revenue share of 80% from residential segment while the commercial segment

contribution was around 20%.

•

GPL had lower margins and profitability on account of commercial projects which were hit by a slowdownin the economy.

• Going forward GPL is likely to see increased contribution from Residential projects which will improve its

margins and profitability. GPL had in FY13 sold about 4.56 Mn.Sq.Ft of residential area and 0.83 Mn.Sq.Ft of

commercial area and its forthcoming projects are likely to sell 29.2 Mn Sq.Ft of residential area and 3.59 Mn

Sq.Ft of commercial area.

Strong Back-Ended Cash Flow in its long gestation projects


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Strong Back Ended Cash Flow in its long gestation projects


Makings of a Quality Real Estate developer


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g Q y p


Strong Project Addition – Better ROE Mix


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g j


Accounting Policy


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g y



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Improving Mix of Projects


Better Project Mix will lead to sustainably high ROE’s


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j y g


Development Manager Fee projects – A Huge Positive


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p g p j g


•

GPL is executing several projects as development manager for which it is generally entitled to about 10-11% of revenues a s development manager fee.

• Going forward GPL will benefit from more number of development projects on account of the groups land

bank for which they are the preferred developer. GPL is currently developing 4.36 Mn Sq.Ft of its ongoing

commercial projects while forthcoming residential and commercial projects are likely to have about 12.92

and 2.36 Mn. Sq.Ft respectively.

Development Manager Projects

On Going Residential

Project Name Location

Est. Saleable

Area(Mn.Sq.ft) Economic Interest

Electronic City Bengaluru 1 DM Fee - 11% of Revenue

Godrej Platinum Mumbai 0.6 DM Fee - 10% of Revenue

Godrej Anandam Nagpur 2.76 Upto 784790 Sq.ft DM Fee-400/Sq.Ft & remaining area revenue basedForthcoming Residential

Projects


Est. Saleable


White Field Bengaluru 1 DM Fee-11%

Godrej & Boyce,Moosapet Hyderabad 2.22 DM Fee-10% + Lumpsum payment-Rs.15 Cr

Godrej Sky Mumbai 0.3 DM Fee ̀ 500 million, with upside promote to GPL

Currey Road Mumbai 0.12 DM Fee-10% of Revenue

Bhugaon Township Pune 9.28

DM fee –11.09% + 162.00 / sq. ft., profit sharing if profits exceed certain

threshold

Forthcoming Commercial

Projects


Est. Saleable


Bhugaon Township Pune 2.36 DM Fee-11.09% +162.00 / Sq. Ft., Profit Sharing if profits exceed certain threshold

Area Sharing based projects


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g p j


• GPL is executing about 4 ongoing residential area based projects with saleable area of 5.26 Million Sq.Ft.

Godrej Palm grove is the largest of the four ongoing residential projects which contributes about 47.76%

while Godrej summit contributes about 38.79%.

•GPL is currently developing 1.81 Mn Sq.Ft of its ongoing commercial projects on the basis of area. The

proportion of residential to commercial mix of projects done on the basis of area is about 75:25%.

Area Based Projects


Est.developable

Area(Mn Sq.ft)

Est. Saleable


On Going ResidentialProjects

Godrej Palm Grove Chennai 2.69 2.51

Area based – 70.0% (for 12.57 acres),

68.0% (for 4.82 acres)

Godrej Summit Gurgaon 2.59 2.04 Area based – 65.0%,

Godrej Palms Mumbai 0.13 0.13 Area based – 47.5%

Godrej Alpine Mangalore 0.83 0.58 Area based for residential area – 71.5%

On Going Commercial

Projects

Godrej Waterside Kolkata 2.17 1.81 Area based – 61.0%

Redevelopment Projects


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p j


• GPL has entered into redevelopment projects in

a major way as they offer tremendous scope in

Mumbai where land is a scarce commodity and

redevelopment eases pressures of housing in the

city and creates a Win-Win situation.

• Redevelopment in Mumbai offers a tremendous

opportunity with at least 16,000 buildings to be

redeveloped in the next decade.

•

GPL plans to capitalize on the tremendousopportunity available in the Mumbai

redevelopment market and has incorporated a

wholly-owned subsidiary, Godrej Projects

Development Private Limited.

• GPL’s redevelopment projects having seen good

traction as the company was able to add twoprojects in this space during the past 5 quarters.

• GPL ‘s redevelopment projects also suits its asset

light business model as that will allow them to

enter into JV deals for such projects.

Profit Based projects – better cost structure


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p j


• GPL is executing about 3 ongoing residential profit based projects with saleable area of 4.22 Million Sq.Ft.

The Trees is the largest project with saleable area of 3.5 Million Sq.Ft. The segment share is about 25%.

• GPL is executing 3 forthcoming profit based projects with saleable area of 5.05 Million Sq.Ft. The share of

forthcoming projects is about 31% in this segment.

• GPL is executing a large commercial project in Hyderabad with saleable area of 7.19 Million Sq.Ft. GPL has a

economic interest of 100% profits on this project which has the highest share of about 44%.

Profit Based Projects


Est.developable

Area(Mn Sq.ft)

Est. Saleable


On Going Residential Projects

The Trees Mumbai 3.5 0.88 Profit based – 60.0%

Godrej Edenwoods Mumbai 0.03 0.03 Profit based – 50.0%Godrej Horizon Pune 0.69 0.54 Profit based – 51.0%

On Going Commercial Projects

Godrej BKC Mumbai 1.26 1.2 Profit based – 50.0%

Forthcoming Residential Projects

Panvel Township Mumbai 3.5 3.5

Profit based –35% with upside promote to JV

partner

Godrej & Boyce Lawkim, Thane Mumbai 0.12 0.27 Profit based –32%Undri 2 Pune 1.43 1.5 Profit based 40%

Forthcoming Commercial

Projects

Godrej Oasis Hyderabad 7.19 0.44 100% of Profits

Current Net Asset Value (NAV) of Godrej Properties


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Project Value(Rs.Mn) NAV

Residential 31,360 155

Office 17,850 88

Retail 2,600 13

Hospitality 330 1.7

Value from Group MOUs 6,000 29.7

Total GAV 60,140 298

Net Debt -24,000 -119

NAV 36,140 179

Vikhroli Land 9,600 48

Net Asset Value 45,740 226

NAV Discount 2,800 13

Fair Value 42,940 212


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Financials


Earnings Projection – P&L Account


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Specialists in discovering Multibagger stocks “

Particulars FY 14 FY 15E FY 16E

Net Sales 1179 1440 1880

% Chg 14 22.13 30.55

Total Expenditure 896.4 1190 1437

EBITDA 282.6 250 443

EBITDA Margins(%) 23.9 17.36 23.5

Interest 4.5 8 10

Depreciation 5.8 10 11

PBT 347 307 501

Adj. PAT (Consolidated) 159.4 180 265

EPS 8 9 13.5

Concerns & Reasoning


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1.) Lack of ownership rights and clean title :

Certain parties granting development rights may not have acquired ownership rights or clear title in

respect of land that the company has categorized as part of Land Reserves. Parties granting development

rights may also have litigation, bankruptcy or such other proceedings pending with respect to such land. Any

legal issues pertaining to ownership and title will impact the company.

2.) Suspension or Abandoning of Projects :

Disputes may arise between the company and development partners which may cause delay in

completion, suspension or complete abandonment of a project, which may adversely affect the business,

financial condition and results of operations .

3.) Delay in project completion will impact the company :

The company in certain developments commit to complete the developments within specified time

frames, failing which, we are required to pay liquidated damages to our customers at specified rates for the

delay. Further the company provides warranties for a period of up to three years from the completion of

construction for construction defects and may be held liable for such defects that occur, if any. Any such acts

will adversely impact the company ‘s financials.

4.) Rising Input Cost to impact the company :

GPL has procured building materials such as steel, cement, flooring products, hardware, bitumen, sand

and aggregates, doors and windows, bathroom fixtures and other interior fittings from third party suppliers.

Any steep increase in the prices of these materials may impact the margins and profitability of the company.

Price Chart


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• GPL has corrected over the years since its IPO. The

stock has rallied recently in line with the overall Market

up move since the start of the year.

• The stock did have a sharp fall last year, when we

released our BUY recommendation on this stock first.

• The Institutional exposure in the stock is still quite low,

especially the domestic institutions.


Share Holding

%

Sep Jun Mar Dec

2014 2014 2014 2013

Promoters 74.92 74.95 74.96 74.96

FII 10.98 11.48 12.49 14.30

DII 1.46 1.52 1.46 1.22

Others 12.94 12 11.09 9.52

Conclusion


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We have always loved businesses where a credible Management chases a huge opportunity and where

there is a shareholder friendly business model to capture the business growth into Value creation for

shareholders. We believe that Godrej Properties perfectly fits this bill with the incremental improvements in

its business operations and the huge ambition of becoming India’s Top real estate developer.

Godrej Properties like NBCC and Ashiana Housing, generates profits from increased volume of real

estate development and not from increasing realizations of their Land bank. While the execution of Godrej

Properties is nowhere comparable to the strong track record of Ashiana housing, the ambition levels and the

huge scale up in GPL’s operations will definitely compensate for the lack of operational excellence. We look

at Ashiana housing as a company which can generate strong return ratios with a moderate growth and

Godrej Properties as a company which can grow at a stupendous rate with moderate return ratios. We

believe that both companies provide strong returns potential for long term investors.

We believe that Investors are underestimating the structural return potential of GPL’s business model

and also the improvement in its quality of projects going forward. With a right intent, a strong team and a

good business model, it’s only a matter of time before GPL’s starts generating consistently high returns on its

capital employed. The company’s advantages over its Peers and strong Parentage would certainly help thecompany to achieve its ambition of becoming a large profitable Real estate player. We certainly believe that

the stock has a large probability of becoming a Large cap over the next decade and can provide Multi-Fold

returns to existing investors.



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Godrej Properties - November 2014 Multibagger

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