Godrej Properties (GPL) has chosen a new business model of being a development manager by designing, marketing and selling residential apartments, a move to preserve capital and maintain a healthy leverage. The model, which the company feels is more capital efficient than its existing joint venture and joint development models, hasn?t enthused analysts.
GPL has signed a deal with Godrej & Boyce (G&B) as a manager to develop a project with just the residential component of approximately 6 lakh sq ft, near its corporate office in Mumbai, which will earn it 10% of the total revenue. “GPL?s premium valuation of its shares relative to peers was primarily due to investors attributing a very substantial value for the company\’s Vikhroli land parcel of about 400 acre,? wrote Ashutosh Narkar, an analyst at foreign brokerage HSBC Securities and Capital Markets (India), in a report released on October 7, 2011. ?While the current agreement improves clarity on GPL?s share in the project, the 10% revenue share implies GPL will earn only 6% net profit margin as a development manager against the 22% net profit margin it would have earned as a project developer.?
Narkar compared the deal with one where GPL is a developer to 36 acres of land and receiving 60% of the profit share. But, company officials counter the analyst\’s view. ?This deal is by far the best that has happened to Godrej Properties,” says Pirojsha Godrej, executive director, Godrej Properties. “One of the key considerations is to keep Godrej Properties relatively capital efficient.” The project with G&B will have both residential and commercial space built in phases. ?This development, over the years, will take tens and thousands of crores of investments,? says Godrej. ?If Godrej Properties was mandated to bring all of that investment, I think it would significantly limit the amount of external development.This arrangement now frees us up entirely.”
On Oct ober 21, GPL, had signed another deal on the same revenue earning model. The company tied up with Universal Builders to develop roughly 0.4 million sqft of premium residential villas, spread over 14.5 acre at Electronic City, Bangalore. As the development manager, GPL will receive 11% of the total revenue as fees. Also, the company\’s debt-to-equity ratio is rising, but according to Godrej, debt is not much of a concern. GPL\’s debt-to-equity ratio stood at 1.22:1 as on September 30, 2011, against 0.64:1 in the same quarter last year. The company is in a growth phase and debt is a tool which GPL will be using for its further growth, he explains. GPL\’s net debt rose to R1,150 crore until September, 2011, from R940 crore in first quarter this fiscal.