Godrej properties has has acquired a new group housing project in Sohna (new market entry), further expanding its NCR foray. Despite sluggish residential demand in NCR over the last 4 years, GPL has leveraged its strong brand name and product quality well, leading to strong sales in most of its ongoing NCR projects. For its Sohna project we estimate sales potential of Rs 4.3 bn; NAV of Rs 4/share. In our view, GPL’s new projects pipeline, prospects of portfolio expansion, strong brand name and tailwinds from RERA & affordable housing incentives are largely priced in. Hence, we maintain ‘HOLD’.
New project acquisition in Sohna
GPL has entered the Sohna market through acquisition of a group housing project. The project is located 12kms from Gurgaon’s Golf Course Extension Road and connected to Gurgaon via Sohna Road. It has an estimated saleable area of 1.7msf with GPL entitled to 40% of project profits. Project economics: We have assumed a starting selling price of Rs 5,200psf, project cost of Rs 2,800psf, project completion period of 6 years, 5% y-o-y inflation and 14% discount rate. Accordingly, we estimate GPL to garner sales of Rs 4.3 bn (its share) resulting in NAV of Rs 856m.
Good show in sluggish
This is GPL’s first project in Sohna micro-market and eighth in the encompassing NCR market. In past 5 years, the company has been steadily ramping up its project portfolio in the NCR through JDA/JV/Development Management deals with local developers. This allows the local partner to handle various project approvals/clearances, while GPL focuses on leveraging its strong brand name and product quality to provide the necessary selling/marketing push. Consequently, most of GPL’s NCR projects have seen strong new sales – sold 80% plus inventory in its ongoing NCR projects. Importantly, the company recorded such strong performance despite overall NCR residential demand being sluggish in the past 3-4 years.
Outlook and Valuations: Fairly valued; ‘HOLD’
We expect GPL to continue expanding its project portfolio in its focus markets of Mumbai, NCR, Bengaluru and Pune. Post RERA, opportunities for new project acquisition should increase for GPL; we have built-in 15msf of new project additions for FY18 in our NAV estimate. At CMP, the stock trades at 14% discount to our FY18E NAV of Rs 612. We believe the stock is fairly valued and offers limited upside from current levels. Maintain ‘HOLD/SP’.
GPL, established in 1990, is a pan-India real estate developer focusing mainly on residential development. It has a development portfolio with significant exposure to key markets of Ahmedabad, Bangalore, Mumbai, Pune, NCR, Hyderabad and Kolkata. Its land bank strategy includes both outright purchase of land and joint agreement with land owners in the form of revenue/profit share. Additionally it also tie-up with developers as a ‘Development Manager’ entailing GPL to earn 10-11% of project revenues in lieu of marketing, selling and branding of the project.
We have a HOLD rating on GPL in view of strong fundamentals and expected tailwinds largely priced in. We cite the following positives and expected tailwinds. Continued scale-up in operations through steady new launches and strong sales recorded in these projects. Tailwinds in the form of some demand uptick due to interest rate subvention offered to first-time home buyers for affordable housing.
Steady augmentation of GPL’s development portfolio through value accretive JDA/JV deals in key city markets. Post implementation of RERA, opportunities for new project acquisitions are expected to increase, especially for organised/large developers like GPL. Strong cash flows expected from monetisation of balance inventory in legacy commercial projects and Godrej BKC.