Stock Review: GODREJ PROPERTIES

Worried about economic and political factors impacting the real estate sector, investors have dumped real estate stocks in the past few months. The 15-member BSE realty index is down by 40% in the past one year. The members of the index have had varying degrees of fall in their stock prices ranging between 8.5% and 81% during the same period. However, through all this, the Godrej Properties scrip has not only held its ground, but also registered 19% appreciation in price in the last one year. One of the few business houses to be in real estate, Godrej Properties is a national real estate developer with presence across 11 cities in mid-income housing development. One of the huge advantages enjoyed by the company is the equity of its Godrej brand. At a time when the sector is losing investor confidence due to some of its players' alleged involvement in corruption, having a strong and reliable brand in the realty space could not have been more cherished by Godrej Properties.

Given the regime of high interest rates, high leverage is yet another issue for real estate companies. Unlike most companies in the sector, Godrej Properties has a debt-equity ratio under 1 — thanks to its asset light model. The company develops property jointly with the landowner — thereby not locking money in buying land. The low capital-intensive model is a good change over other capital-intensive companies.

The fourth quarter ended March 2011 has been the best one for the company — driven by sales from its projects in Ahmedabad and Gurgaon. The growth momentum is likely to continue — given the pipeline of projects under construction. The company is expected to launch 4.5-5.5 million square feet area in FY12. However, one of the concerns regarding the company is the geographic concentration of the company's landbank. Around half of its current land bank is located in Ahmedabad.

Another concern is the weak demand in Mumbai market where the company's ambitious project 'The Trees' is being constructed at Vikhroli. The demand should recover over the next two years, around the time when the company is expected to complete the first of its commercial properties.