Shares of Godrej Properties Limited have been in focus since the recent signing of four project development deals. The stock gained about 17% last month. The Mumbai-based developer has expanded its existing arrangement with Shivam Realty to develop a residential group housing project in Kandivali East, Mumbai. Godrej has acquired a 9-acre plot in the residential micro market of Pimpri-Chinchwad, Pune. Also, it will develop 33 acres in Bangalore’s Bannerghatta Road and about 50 acres in Haryana’s Sonepat.
These four new projects with salable area of 7 million square feet (msf) and revenue potential of Cumulative project additions of Rs 4,400 crore are close 4,800 crore in Q2 and Q3FY22, analysts at Motilal Oswal Financial Services told. Delayed project launches degraded Godrej’s performance in Q3FY22, so the four recent deals were good for the outlook on project pipelines. That said, finding its lost allure can be challenging for the stock.
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In the past one year, Godrej stock has gained 20% against Nifty Realty’s 42% return. It is difficult to make similar comparisons for real estate developers looking at different portfolios, but stocks of other big developers like Macrotech Developers Ltd (Lodha), Oberoi Realty Ltd and Prestige Estates Projects Ltd have given higher returns.
“About a year ago, Godrej enjoyed a premium over its competitors due to its brand name, balance sheet strength and comfort on corporate governance. Now, developers like Lodha and Prestige have seen a meaningful debt reduction in recent quarters and their liquidity position is improving with increased sales,” said an analyst requesting anonymity. The DB Realty episode was a setback for Godrej’s investors as far as corporate governance and brand value are concerned, the analyst said. “It’s breaking its mojo,” he said. Godrej joined the slum rehabilitation platform at DB Realty in February. Potential investment for S.O. was canceled because it worried investors because of the poor track record of the latter’s business and the low success rate of slum rehabilitation projects.
Godrej’s thrust on the asset-light model of jointly developing residential projects has placed it in a good position among investors. However, returns from these projects have been disappointing, raising concerns about Godrej’s earnings and cash flow outlook.
Godrej’s investments in joint ventures grew to 22% of FY11 assets, compared to 10% in FY11, although several previous projects have been loss-making, Ambit Capital reported on April 7. Its scale grew by 4.2 times to 10.8 msf over FY12-21, making it the largest developer by sales in India in FY21. However, execution was weak with the completion of just 0.5x sales compared to FY18-21, Ambit said. Little wonder, then, that the valuation premium of Godrej’s stock versus its counterparts has declined on a price-to-book basis over the past decade.
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