Godrej Properties

Godrej Properties is entering the capital market on 9^th December, 09 with a public issue of 94.30 lakh equity shares of Rs. 10 each, in the band of Rs. 490 to Rs. 530 per share. This will result in 13.50% equity dilution, with market capitalization expected to be at Rs. 3,700 crores, at upper price band of Rs. 530 per share.

The basic model of the company is to develop the properties in joint development with the land owners, with over 75 per cent of the saleable area under this model. Hence, this result’s in lower land bank, less amount getting blocked in land purchase and focussing entirely on development of the land. For development of the land, builders and developers, generally raise construction finance or working capital requirements by selling part of the property under development. So, under the given circumstances, there is very low requirement of funds for the company and hence, such a stiff market capitalisation of the company is not justified at all.

Upto 31-10-09, the company had completed just 23 projects, with total area of 5.13 million sq. feet, of which, 16 were residential and 7 were commercial projects. It is strange to see project size of 10,000 sq. feet to 40,000 sq. feet, having developed by the company. Due to this, the financial performance of the company has been on a very small scale as they were unimpressive as well. For FY09, on consolidated basis, the total income of the company was at Rs. 250 crores, with PAT at Rs. 75.63 crores. This PAT has been achieved to the extent of Rs. 41.99 crores, being profit on sale of long term investments. Even for 6 months ended 30-09-09, the total income of the company was at Rs. 115 crores with PAT at Rs. 47.74 crores. Can you believe that profit on sale of long term investment for 6 months ended 30^th Sept 2009 was at Rs. 58.38 crores? So, where is the earning from the core business of the company? Also, this kind of profit was never earned in the earlier years. Even a group like Godrej has to resort to these measures to show respectable financials of the company!

Now coming on the total saleable area, it has 50.21 million sq. feet, of which 27.38 million sq. ft., being 54% is in Ahmedabad, with just 2.26 million sq. ft. in Mumbai. Not very significant completion of the projects is likely over next 2 years, which may keep the financials of the company, depressed and low. The company has recently entered (on 08-10-09) into a MoU with group company, Godrej & Boyce Mfg. Co. Ltd., for acquiring lease of 99 years, for 36.50 acres of land. This project may not take off for next two years and is in the eastern suburb of Mumbai, where realizations and margins are low. Also, this is seen as a measure to show a boost in saleable area, which may not really impress the prospective investors and justify the stiff offer price.

As stated earlier, against the expected market capitalization of the company at Rs.3,700 crores, there are many comparable peers available at a much cheaper valuations, with good presence in Mumbai, Pune, Banglore and NCR region. For example Parsvanath Developers has a market cap of Rs. 2,050 crores, Mahindra Life at Rs.1,400 crores, Peninsula Land at Rs. 2,250 crores, Ansal Properties at Rs. 750 crores, Marathon at Rs. 450 crores, Ajmera Realty at Rs.850 crores and Brigade Enterprise at Rs.1,600 crores. Now, all the developers have elevated their quality of projects and Brigade in Banglore and Marathon and Peninsula in Mumbai are few to name in this category. Even the financial performance of all these companies is quite respectable with very low equity base. Ajmera has an equity base of Rs. 35.50 crores, Ansal properties at Rs. 57 crores, Marathon at Rs. 12.65 crores, Mahindra Life at Rs.41 crores and Peninsula at Rs. 56 crores. Peninsula had an income of Rs. 169 crores with PAT at Rs. 83 crores, for quarter ending Sept. 09, while Marathon had net income of Rs. 40 crores, with PAT at Rs. 29.23 crores.

Even the culture and quality of the company is same and comparable with other developers, in respect to loading over built up area, floor rise etc. So where is any extra feature, which needs to get valued higher or deserves disproportionate valuation or premium tag?

Issue is steeply priced and much better plays are available in the secondary market and our advice is to give a skip to the issue.