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Why Godrej Properties may take time to recover

The timely spurt in business activity would aid long-term revenue visibility and margin profile.
The timely spurt in business activity would aid long-term revenue visibility and margin profile.

Summary

One reason for the stock getting battered is that it had risen quite a bit making valuations pricey.

Calendar year 2022 has been tough for real estate companies, with the sentiments towards the sector getting sour as home loan rates inched up. But company-specific factors have aggravated the pain for some investors. Take the case of realty developer Godrej Properties Ltd. The stock is down almost 31% year-to-date, while the Nifty Realty index has fallen at a much slower pace of 7%.

One reason for the stock getting battered is that it had risen quite a bit making valuations pricey. The company’s shares hit a 52-week high of 2,125 on 13 December 2021 and closed at 1,299 apiece on Monday.

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“Moreover, in the recent quarters, the pace of new launches has been relatively slower than peers and operational performance has been muted," said an analyst, requesting anonymity.

He added that with the company purchasing land in attractive locations, some buying interest may return in the stock, but the recovery would be gradual.

In November, Godrej purchased two adjacent land parcels in Noida. Earlier this month, it bought a land parcel in Kandivali, Mumbai on an outright basis and this project has an estimated revenue potential of nearly 7,000 crore. With this, the cumulative expected booking value from projects added in FY23 has reached to nearly 16,500 crore ahead of the guidance of 15,000 crore.

The timely spurt in business activity would aid long-term revenue visibility and margin profile. Analysts from Jefferies India estimate that cost of land acquisitions is reasonable (20-25% of saleable value for all-in land cost for Noida and Kandivali), which makes potential project margins of more than 30%.

That’s not all. With the Kandivali land acquisition, Godrej also aims to strengthen its presence in the western suburbs of Mumbai.

The company’s micro market selection is improving as strategic markets such as Kandivali have limited competition from Grade A developers, pointed out Dolat Capital Market.

However, on the flipside, a faster-than-expected project addition could push the company’s debt levels higher. Jefferies has raised Godrej’s net-debt forecast by 300-700 crore for FY23-25.

At September end, the company’s net debt-to-equity ratio stood at 0.16x. True, this key metric is currently low and cash flows are comfortable. However, in a rising interest rate scenario, investors would not like debt to inch higher. Needless to say, any disappointment on this front would hurt sentiments for the stock.

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