Stock Review: Godrej Properties

 

But co may book lower profits as it falls short of booking estimates for FY11

 

Mumbai-based realty firm Godrej Properties' scrip has fallen by 20% in the past six months, much lesser than the 40% drop in the ET Realty Index. Though the company recorded poor earnings performance in the past two consecutive quarters, its unique business model has provided some support compared to peers.

The company comes from a strong parentage of the Godrej Group, and unlike most other realty firms has an asset-light business model. Most of its portfolio consists of joint development projects. Unlike a realty company that buys land upfront and then develops it, Godrej Properties forms joint ventures with landowners to develop a piece of land. This is beneficial since the company need not commit large capital to buy land parcel and its debt level is relatively lower. On the flip side, profitability during the boom time is restricted since a portion of the profit is shared with the JV partner. Therefore, under this business model, profitability largely depends on the company's ability to contain construction cost.
During the December 2010 quarter, Godrej Properties' net profit fell by 12% year-on-year despite a robust 41% growth in sales. This was due to the faster increase in operating expenses compared to revenue growth, which eroded operating margin to 38% compared to 49% a year ago.

The company's debt-to-equity ratio increased to 0.78 from 0.66 a quarter ago, which could be due to steady traction of key projects in the past few months. However, the company is expected to book lower profits in the coming quarter as it is falling short of booking estimates of its projects for the full year ending March 31, according to a report by broking firm Motilal Oswal.

Also, though the company has launched a series of residential and commercial projects in the past three quarters, demand for these projects may be hampered due to rising interest costs.

When compared with other realty companies, Godrej Properties looks well positioned to take on these challenges, given its joint development model and concentrating on mid-price housing category, which is less affected by swings in property cycle. This can support volume growth in the near term. But the company's share price could be impacted by poor sentiments surrounding the sector.