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  1. Godrej Properties sales humming, but is the stock a buy? Edelweiss makes this recommendation

Godrej Properties sales humming, but is the stock a buy? Edelweiss makes this recommendation

GPL’s operations will continue to scale-up aided by its strong brand, diversified land bank and ability to augment project portfolio via partnerships.

By: | New Delhi | Published: November 13, 2017 2:45 AM
godrej properties, godrej sales Godrej Properties (GPL) posted strong Q2FY18 numbers with: (i) robust sales—H1FY18 new sales at Rs 28 bn, 40% higher than entire FY17; (ii) healthy project addition (17.3msf YTD versus 18.1msf in FY17); and (iii) sales pick-up in legacy BKC project, which will aid cash flows.
Godrej Properties (GPL) posted strong Q2FY18 numbers with: (i) robust sales—H1FY18 new sales at Rs 28 bn, 40% higher than entire FY17; (ii) healthy project addition (17.3msf YTD versus 18.1msf in FY17); and (iii) sales pick-up in legacy BKC project, which will aid cash flows. We believe, GPL’s operations will continue to scale-up aided by its strong brand, diversified land bank and ability to augment project portfolio via partnerships. Moreover, we envisage project addition momentum to accelerate, propelled by RERA, with GPL likely to be the preferred partner of smaller developers owing to its extensive experience in the partnership model. We revise our TP to Rs 748/share due to improving growth prospects and lower capital costs. Maintain Hold.
BKC project contributes to Q2FY18 beat
Revenue, at Rs 4.9 bn, jumped 49% y-o-y and 98% q-o-q; top line was aided by Rs 2.9 bn income from commercial assets, which was up 49 % y-o-y. Ebitda margin, at 15%, rose 8% y-o-y and 23% q-o-q. This led to net profit catapulting 90% y-o-y to Rs 441 million.
Q2FY18 operations: new sales maintain robust trend
New sales were 1.6msf worth Rs 13.4 bn. GPL sold 76,000 sq ft in the BKC project worth Rs 2.7 bn. The company added 4 new projects with saleable area of 12.1msf in Q2FY18. H1FY18 has been the best ever half year period for GPL’s business development in terms of number of new deals. The company has added projects with 17.3msf saleable area YTD versus 18.1msf in FY17.
Outlook and valuations: Burnished prospects; maintain ‘HOLD’
We expect GPL to continue to expand its project portfolio. Post RERA, the company should benefit from smaller developers looking to tie-up with prominent players to ensure better sales momentum and timely completion; the company’s strong track record of striking partnerships will help it in this regard. We factor in improved prospects of portfolio expansion (assumed 30msf over FY18), narrow the discount to our NAV and lower our discount rate (due to falling interest costs) to arrive at revised TP of Rs 748. While we are bullish on GPL’s prospects, the recent run-up in the stock has capped upside in the near term. Hence, we maintain Hold.
Management call: Key highlights
BKC project: GPL sold 76,000 sq ft in the BKC project worth Rs 2.7 bn. GPL is keen to liquidate balance commercial inventory in the project (0.175msf) and expects to monetise significant inventory by year end. Given the low cost of debt (8.1% currently), the company may deploy the proceeds in new residential assets rather than debt repayment.
Sales during the quarter were driven by strong response to new launches during the quarter in Bengaluru and Greater Noida. Residential sales in H1FY18 were higher than in any other previous half year period. Excluding sales in new launches, sales in Q2FY18 stood at 0.87msf worth Rs 8.8 bn. Notable contribution was from Godrej Emerald project where the company sold 273 apartments worth Rs 2.4 bn. The company has exited the DM agreement with G&B for a residential project at Moosapet in Hyderabad. While net debt remained flat q-o-q at Rs 31 bn, net gearing fell 2ppt q-o-q to 151%.
Outlook and valuations: Burnished prospects; maintain ‘HOLD’
We have updated our model to account for latest disclosures related to ongoing projects as well as future plans. Discount to NAV lowered from earlier 15% to 10%. This is primarily to account for prospects of balance sheet improvement post pick-up in sales in the BKC project. We are building in higher new project additions for FY18 in our NAV estimate. Lowered discount rate to 11% from 13% earlier to account for lowering of borrowing cost. Consequently, our new FY18 NAV estimate for GPL is Rs 831/share (earlier Rs 612/share), to which we apply 10% discount (earlier 15%) to arrive at new target price of Rs 748 (earlier Rs 520).
Company description: 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.

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