Why Godrej Properties remains a good buy despite a lacklustre real estate market

Godrej Properties surprised the stock market with its fourth quarter numbers. Its revenue grew 63% compared to the same period last year, and 34% compared to the previous quarter. However, pressure on margins continued. This is because growth in sales volume has come from the low-margin office space segment. Margins for its commercial project in Mumbai, Godrej BKC, have been low because of high land acquisition costs.

Godrej Properties' strategy of augmenting new residential project launches and monetisation of old commercial projects has started yielding positive results. And some of its recent launches are generating good user interest also. For instance, Godrej Properties was able to sell more than 4 lakh sq. ft of space in the first three weeks of the launch of its residential project, Godrej Icon, in Gurgaon. Expect increased sales in the first quarter of 2015-16 as well. As per the consensus estimate, the company's annualised revenue growth is expected to be at 25% during 2015-17. This is largely because the company has a fairly strong project launch pipeline.


Though new residential launches have high margins, overall margins may remain under pressure for a few more quarters—till some of the old, low-margin projects move out of the system. Things should improve after that because of the company's focus on projects with better margins. Most of the new projects planned in Mumbai and Gurgaon carry a high margin. This is why its net profit is expected to grow at an annualised rate of 38% between 2014-15 and 2016-17. However, growth in EPS (earnings per share) will be around 28% because of equity dilution due to the buyout of the company's land parcel in Vikhroli in Mumbai. Godrej Properties will issue 1.67 crore new shares to Godrej Industries to buy out its 40% stake in Vikhroli Trees project.

The recent fall in the company's share price has brought down its valuation to much reasonable levels and this is another reason why analyst are finding the counter interesting. The stock is now trading at just 16-times its expected EPS of Rs 15.8 for 2016-17. Though a mid-cap company, Godrej Properties deserve better valuation multiple than other mid-cap real estate players due to its track record, and strong brand and parentage.




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