Godrej Properties IPO

Godrej Properties' may fetch listing gains, but given the risks long-term are advised to skip the issue

 

MUMBAI based Godrej Properties is one of the leading real estate developers in the country. Its current projects include residential, commercial and township developments across 10 cities. The listed parent company, Godrej Industries currently holds 80.26% of its equity share capital. The company proposes an initial public offer of 94 lakh shares of face value of Rs 10 each to raise around Rs 500 crore. The proceeds are primarily to be used for acquisition of land development rights and construction of forthcoming projects, repayment of loan and general corporate purpose expenses. The issue represents around 13.5% of the post-issue capital of the company. 

   After an analysis of company's business and comparing it with its peers, the issue appears to pricey.

BUSINESS

Started in 1989, Godrej properties was initially concentrated in the Mumbai Metropolitan Region and later expanded to Pune, Bengaluru, Kolkata, Hyderabad, Ahmedabad, Mangalore, Chandigarh, Chennai and Kochi. The total land reserves currently stand at 391.04 acres, aggregating to approximately 82.74 million square feet of developable area and 50.21 million sq ft of saleable area. The aforesaid land reserves include 64.23 acres, which are in the process of being aggregated. As of October 31, 2009, the company has completed a total of 23 projects aggregating approximately 5.13 million sq. ft. of developable area. The company does more projects on joint development basis (77% of developable rights) rather than owning land and thus follows an asset light model. 

   The company intends to use Rs 278 crore of the issue proceeds for land acquisition and construction activity. Around Rs 172 crore have been allocated towards payment of loans and the balance to be used for meeting issue expenses and other corporate purposes. Going ahead the company is planning to increase its presence in high volume affordable housing segment. 

   The company has large equity participation from private equity investors (upto 49%) in most of its large projects that are being executed through special purpose vehicles. While it spreads the risk, it also caps gains besides necessitating the need to seek partner's consent for every major decision.

FINANCIALS

The company's net sales have grown at compounded annual growth rate (CAGR) of 40.42% since FY05 to reach Rs 185 crore in FY09. Similarly, profits have grown at a CAGR of 67.3% over the same period to stand at Rs 75.7 crore at the end of FY09. In FY09, the revenues from commercial, residential segent and other income was Rs 1,67.7 crore, Rs 59.6 crore and Rs 23 crore, respectively.
   The company is a dividend paying company with a CAGR of 43% in dividend payout in the last five years. The company's operating and net profit margins stand at 60% and 41% respectively due its presence in the premium segment.

CONCERNS

The company has been in operations since the last 18 years but has developed just over 5 mn sq feet. This is less than one tenth of the area the company is looking at developing in near future. Going forward, project execution will be the key success factor for the company .

VALUATIONS

The post issue valuation of the company comes to 35.8x to 38.8x of its annualised estimated earnings of FY10. At the higher price band the company is valued at Rs 3690 crores market capitalisation. 

   Considering the company's financials, the issue is priced on the higher side to its existing listed player like Peninsula Land (12x), which works on a similar asset light model. Being a new entrant, the company must come at a discount to its peers to provide some upside to investors. Given its brand equity, it may fetch some listing gains but it advisable for long-term to wait for its listing.

Price Band:

Rs 490 - 530 per share