Godrej properties hbj capital

Godrej Properties Ltd (GPL) - Good Management chasing a Huge Opportunity

Content Index

• Our Research Desk’s views on the Stock Idea :- Slide #3 • Our Performance Update for 2013 :- Slide # 10 • Godrej Properties – Investment Snapshot :- Slide #15 • Godrej Properties – Business Overview :- Slide #17 • Investment Arguments :- Slide #39 • Godrej Properties – Financials:- Slide #53 • Concerns & Reasoning :- Slide #55 • Conclusion:- Slide #57

“ Specialists in discovering Multibagger stocks “

Dear Members, Before we get into the details of this month’s Multibagger stock, I would like to wish all our Members – “A Wonderful and Prosperous New Year”. We have used this year end opportunity to look back and evaluate our performance in Stock picking and Portfolio Management. We strive consistently to improve our Stock picking abilities and we believe that we are on the right path of having a strong strike rate in discovering good businesses at reasonable prices. This can be seen from the performance of our Stock Ideas and our Portfolio as mentioned in the Slides (10 – 13) of this report. Let us come to Multibagger stock Idea of this month – Godrej Properties. For a long time, we have had - Ashiana Housing as our only Investment Idea in the Real Estate sector. But over the last two months, we have recommended NBCC and Godrej Properties as well. These recommendations are not based on a broad bullishness on the sector (in fact we are extremely negative on the Traditional Real Estate developers and Land prices too), but the reasons for these recommendations are more stock specific after taking into account various considerations such as Business Model, Management, Growth Visibility, Valuations, Share-Holder friendliness etc. Through this Investment write-up, I would be providing you with the broad reasoning on why we believe that Godrej Properties is a potential Multibagger Idea and why we believe that Markets are wrong in valuing the company at current prices. We have been tracking Godrej Properties for a long time, but the trigger for the current recommendation primarily comes from the steep price correction (~50%) in the stock during the current fiscal year. Let’s understand why the Stock may be a great long term investment at the current price.

1.) The Big Picture : (How do we see this Business in a decade from now ?)

Godrej Properties current revenue size of 1000 Cr is miniscule when compared with the market size for quality Real estate development. Godrej group chairman – Adi Godrej believes, “GPL will be the group’s fastest growing business and will be the biggest contributor to the group’s profits in a decade from now”. There is also an internal growth target of around 40% CAGR over the next 10 years which should take the business to a size of >20X from


Our Research Desk’s views on the Stock Idea

the current size. While all of these targets may look Aspirational, we believe that the company is in fact getting well positioned to grow at such high rates for a long period of time with the strong focus from the Godrej group on this line of business. With a strong capital backup from the group, a huge market opportunity, healthy project pipeline, ambitious Management, improving operational bandwidth, large land bank of Godrej group companies and a mix of asset light business models – the company is well positioned to grow its operations multi-fold in the coming decade as it aims to be amongst the Top-3 Real estate players in India. 2,) Strong Visibility for growth : (Will the company’s Business Model allow a rapid scale-up in Operations ?) GPL follows a mix of development strategies such as JV model (Revenue Sharing, Profit Sharing, Area Sharing), Development manager fee model (10% revenues with no capital investment), Re-Development projects and Co-Investor platform projects for developing real estate projects across the country. GPL doesn’t follow a land bank model and the company’s preference for tying up with local Land owners whose responsibility is to get all the approvals in place for the project, allows the company to scale up across the country in a business where local connections are extremely important. Its Pan-India brand value and Company’s model of outsourcing contracting work also facilitates the rapid scale up without much technical glitches. Capital is not a constraint for GPL as it uses relatively asset light business models. The promoter’s strong capital backing and preference for tying up with external investors on Asset heavy projects (Private Equity Partnership’s – Slide 20) allows the company to scale up its business multi-fold without any capital constraints. Company’s rapid scale up in new project addition (Slide-27 & 28) and the huge opportunity of developing Godrej group’s own land bank (Slide-37) offers strong growth visibility to the company for many more years. All of these makes us believe that the company can certainly grow at a healthy CAGR of at least 30% for the next 10 years and hence the more valid question should be to understand as to how profitable would this growth be, how much of this growth would be un-diluted and how much wealth creation can accrue to the existing share holder. It is here that we believe that the Markets are mis-reading the quality of incremental growth in the business. “ Specialists in discovering Multibagger stocks “


3.) Improving Quality of Growth : (Will the company’s growth be Shareholder friendly ?)

We believe that the company’s current low returns Ratios doesn’t reflect the true nature of its business model and a more normalized Return on Equity should be in the range of 15-20%. We believe that the current low ROE is distorted by a few temporary factors such as, (also look at Slides – 41 to 44)

- Company’s loss making old Commercial Projects such as the project in Kolkata :

The extremely bad commercial real estate demand has made sure that – GPL’s commercial projects are making losses and are delivering low returns on the locked-in capital, resulting in a distortion in the overall return ratios. The ROE’s of projects excluding these Commercial projects are already at 15%. With the slow run down in these loss making projects and a improved mix of Residential projects, there is enough indications of a improvement in ROE.

- Longer maturity profile for the company’s large Projects :

Some of the company’s important projects such as Vikhroli and Godrej Garden city are large projects with timelines for these projects extending for the next 8-10 years. (Slide-45) In such large projects, the initial phases are always used to establish a strong neighborhood and bulk of the project’s profits are back ended as the later phases of development fetch strong margins. Hence the current Margins should improve over time and boost return ratios.

We also believe that the company’s consistent focus on Capital efficiency (Management doesn’t miss a chance to speak about the focus on Return on capital in all their Concalls and Interviews) and an intent to deliver ROE’s above 20% should serve as an indicator for an improvement going forward. We believe that the changing mix of projects towards High ROE models such as Development Manager Fee model (Slide – 48) and Profit sharing model would help the company to have larger incremental returns on capital. Our research indicates that the new projects can generate EBIDTA of around 1500 Cr on little capital employed (Slide – 41) which shows the inherent strength of GPL’s business model.

We also believe that the company is learning from some of its mistakes and there are indications of them rectifying it, as any credible Management does. While there would still be glitches, our understanding is that the company’s structural business model definitely allows for generating 20% ROE on a consistent basis. We believe that the improving quality of growth would help investors achieve dis-proportionate returns.



4.) Seamless Web of deserved Trust : (How does the company stand out among other big Developers ?)

Real Estate sector has always been a murky sector where there is a lot of distrust among Market participants. Godrej’s credible brand built over a 100 years has helped the company establish trust among various stake holders of Real estate business in a extremely short period of time. Godrej is largest brand in the number of Indian people it touches on a daily basis. GPL can successfully capitalize on this strong brand to attract more customers.

Company’s strong reputation also provides it with other advantages such as, Low cost of debt (11.2%) which is a solid 100-300 bps cheaper than its competitors. It’s cost of Equity is the cheapest among all Real Estate players and Investors are ready to invest in the company despite a weak Real Estate environment as seen from the huge subscription for its Recent Rights Issue. Company has also been able to tap the Private Equity network efficiently to raise capital. The company’s unique structure of a Co-Investment platform also is an indication of the company’s ability to tap into different sources of capital to keep itself asset light. We believe that the low cost of Capital is a result of the deserved trust which the Group commands.

The company’s takes its reputation as customer friendly very seriously and makes sure that it continues to build on to that brand image. This has helped the company to generate strong customer interest for its projects even in a dull environment (Slide – 38). This trust combined with Godrej group’s DNA in marketing helps the company out beat its Peers and create strong value for its projects. This can be easily verified with the consistent increase in the share of Development Manager Fee model where the company mainly does Project design, Planning, Marketing and Sales of a project and does not commit any capital. We believe that the company’s ability to receive more than 10% of the projects revenue by just engaging in such 0 Capital investment activities demonstrates the real strength of GPL’s Operations. As its strength improves, so does its negotiating power with its various partners.

We believe all these positives create a strong reinforcing loop which allows the company to tap into the best Land bank partners, Private Equity investors, Cheap debt and a stronger customer connect. This would only strengthen going forward as the company improves on its Project Quality and gets financially stronger. The company’s strong base of Operational excellence can be seen from the numerous recognitions for its projects (Slide – 46). We believe that GPL has all the ingredients to emerge as a large quality real estate developer which deserves a premium for its projects. “ Specialists in discovering Multibagger stocks “


5.) Un-demanding valuations for a High Growth stock : (How does the current stock price compare to the Intrinsic value of the company ?) The current valuations of 3300 Cr equity value (1200 Cr of Debt) for a company with an expected EBIDTA of 360 Cr in FY-15 doesn’t look very costly. The forward P/E multiple for this high growing business is around 13X on FY-15 numbers. The current stock price is less than 1.5X its Book value. Our estimates also show that the stock is currently quoting at a slight discount to its Net Asset Value (NAV) as showed in Slide – 52. The stock has always quoted at a high premium to its NAV since its IPO. We believe that the stock has shed a lot of Froth which has surrounded it, since its IPO. The current valuations doesn’t price in any irrational exuberance and rightly so. We believe that there is enough room for valuations to expand as the company’s operations improve and Return ratios move upward. We believe a Investor with a time-frame of around 10 years has a strong probability of making big bucks from this stock as there would be major upsides from its Vikhroli Land (Slide – 36) and also improving business quality. A Few Realistic concerns about Godrej Properties :

1.) Company has made mistakes in its Project selection & its execution strategy

GPL had done early monetization in a lot of its projects and where there has been cost escalation over the last 2 years, resulting in lower Margins. The company has now shifted more towards Profit Sharing (rather than Revenue sharing) and covers for cost escalation during its initial sales. The company’s commercial projects and even its recent large project like BKC doesn’t look attractive from a Return on Capital point of view.

While we can give a benefit of doubt based on its young execution history, the company should improve its project selection and execution skills to consistently earn strong returns on its deployed capital. Company’s rapid scale up in the number of projects it handles would also make it vulnerable to a lot more errors. Considering the number of variables involved, we believe that the company would develop stronger expertise going ahead in selecting a better project and would become more choosy. “ Specialists in discovering Multibagger stocks “


2.) Aggressive Accounting practices & Optimistic guidance of the Management

GPL follows a relatively aggressive accounting policy to book revenues and also in booking profits during sale of stakes in projects to its Private equity partners. We believe that the company has been optimistic in several estimations which can be seen from the hit the company has taken on few projects where it has provided for a assured IRR to PE investors. We believe mistakes like these are costly and creates doubts in the minds of Investors about the guidance on its future profitability. While we believe that these are important concerns, we are not very much worried about the company’s consistent negative cash flow generation as we are sold on to the Management’s vision of Investing aggressively during the current bad environment which would help it to reap rich rewards going ahead. The company’s balance sheet strength and backing from its Parent should help it to tide over any balance sheet related stress. We believe that any long term Investor should not miss this opportunity to buy into a high Growth business which has a strong probability of being 20X of its current size in next 10 years, which is run by a credible Management, which has a business model to capture those returns efficiently for a share holder and which is available at reasonable valuations. We believe Markets would love this high structural growth business and we expect the company to become a 20% ROE business over the next 3-5 years. All of this would ensure that the company’s stock would gain not only from the company’s earnings growth but also from the potential re-rating which would help us get strong Multibagger returns. We would like Investors to take a dipping stake into the stock at the current low prices and add on to it aggressively overtime as conviction levels improve on this Idea.



Regards,

[ Gokul Raj . P, Head – Investment Research ]

Our Performance Update for 2013



Performance of our Last 25 Stock Ideas

Strong Performance in an extremely tough environment for Mid-Cap and Small-Cap stocks over the last 2 years.


Performance of our Last 25 Stock Ideas


Portfolio Performance

Our High Conviction Offline PMS service (TMP) consisting of 10-15 ideas at any point has been able to consistently beat Industry benchmarks across all conditions and deliver strong Absolute returns.

Godrej Properties – Investment Snapshot


Godrej Properties– Investment Snapshot (as on December 31, 2013)

Recommendation :- BUY

Maximum Portfolio Allocation :- 4%

Investment Phases & Buying Strategy

1st Phase (Now) of Accumulation :- 80%

Current Accumulation Range :- 150-170 Rs

Core Investment Thesis :

The company follows a business model of real estate development which we believe has the potential to create strong value for shareholders. It has a very aggressive management and also a strong growth visibility. We believe that the company can definitely grow at over 30% CAGR over the next 10 years.

While the current Return ratios may not look attractive, we believe this is a temporary phenomenon and expect the ROE to inch upwards to about 18% over the next 3 years. Given all these positives, the current valuation of 1.5X book value looks attractive for a long term investor in a business which has a huge growth potential and which is run by a good management.

Current Market Price – Rs. 164 Current Dividend Yield – 0.89% Bloomberg / Reuters Code –GPL. IN/ GODR.BO BSE / NSE Code – 533150/ GodrejProp Market Cap (INR BN / USD Mn) – 33.46 /539.7 [1 USD – Rs. 62.0] Total Equity Shares [Mn]– 156.10 Face Value – Rs. 5 52 Week High / Low – Rs. 310.1 / Rs.159 Promoter’s Holding – 74.96% FII - 15.35% DII - 1.42% Other Holdings - 8.27%


Godrej Properties – Business Overview


Godrej Properties – Core Execution Model


. • GPL uses the “joint development model” for developing properties, which entails entering into a development agreement with the owner(s) of the land parcel(s) sought to be developed and developing the project jointly with the land owner. projects. • GPL is typically, entitled to share in the development property, or a share of the revenue or profits generated from the sale of the developed property, or a combination of both entitlements . • GPL in some projects offer and sell equity interests in project-specific companies to long-term investors. This business model enables to hold fewer assets, be more capital efficient, achieve higher returns on investments in the projects and undertake more projects without investing large amounts of capital towards the purchase of land.

Business Model

• GPL focuses primarily on residential projects. In residential project portfolio, GPL develops projects that are focused on the higher end to mid-level range of the real estate market. Residential projects constituted approximately 82.39% of our total Saleable Area. • GPL entitled to share in the development property, or a share of the revenue or profits generated from the sale of the developed property, or a combination of both. GPL’s joint development model allows them to be more capital efficient and hold fewer assets. • GPL in some projects offers and sells equity interests in project-specific companies to long-term investors. This business model enables the company to rapidly scale up and use its capital efficiently. GPL is able to limit its risk through project diversification while maintaining significant management control over these projects. The company usually sells these equity interests for a premium leading to healthy profits. • GPL also undertakes the development of projects as a development manager on a fee basis - where it ideates, designs, markets and sells the project. There is no capital commitment and this model is highly ROE accretive. The Value addition of the company is very much visible in this model. • GPL has also created a residential development financing platform of 10,725 million under which a Dutch co-operative representing a group of overseas investors and an Indian investor commit equity investments in GPL’s residential projects. The platform intends to focus primarily on the development of FDI-compliant residential projects in Mumbai, the National Capital Region, Bangalore, Chennai and Pune. The platform will enable the company to capture outright land purchase transactions without deviating from GPL’s asset light model. This will also add to the ease of capital access for GPL’s projects.


GPL – Among the only 3 Pan-India real estate developers


• GPL is a focused mid-income housing player, with a pan India presence and a differentiated business model. • GPL is currently present in 12 cities i.e Chandigarh, Chennai, Mangalore, NCR, Ahmedabad, Mumbai, Nagpur, Kolkata, Pune, Hyderabad ,Bangalore and Kochi. • GPL will be able to expand to more cities and towns across India which can be easily penetrated given the brand loyalty enjoyed by the company on a Pan India basis. • GPL is currently executing a total of 4 projects on a Pan India basis with potential developable area of 88.7 million sq.ft. • The projects are a mix of residential, commercial and Townships which provide long term visibility.

Consistent Access to Private Equity


• GPL has been using the PE route to de-risk itself from negative operating cash flow and the company has adopted early monetization strategy as a part of its business model. • GPL has been able to leverage its brand which has helped it to strike deals with PE players at a substantial premium to its peers. While DLF had entered into deals at 3x its Book Value, GPL has been able to enter deals at 5x its book value. During 2012 - 2 of the top 5 PE deals were done by GPL valued at USD 239 Mn. The deal was done to foreign investors one of which happens to be with Government of Singapore Investment corporation(GIC).

Top 5 PE Deals in 2012 Year Project PE Partner % stake Deal Size

FY09 Godrej developers private Ltd Redford India RE Babur 49% Rs.0.42 Bn

FY10 Godrej Realty Private Ltd HDFC Ventures 49% NA

FY10 Godrej Waterside Private Ltd. HDFC Ventures 49% NA

FY10 Happy Highrises Milestone RE Fund 49% Rs.0.70 Bn

FY10 Godrej Estate Developers HDFC Asset Management 49% Rs.0.45 Bn

FY10 Godrej Sea View HDFC PMS 49% Rs.0.55 Bn

FY11

Godrej Properties(Gurgaon Project) Sun Apollo India Real Estate Fund 49% Rs.45 Cr

FY12 Godrej Properties APG Group of Investors NA 140.8 Mn USD

FY12 Godrej Properties Government of Singapore Investment Corporation (GIC) NA 98.2Mn USD

FY12 Godrej Landmark ASK Property Investment Advisors 49% 20 Mn USD

FY12 Godrej Properties APG(Dutch Pension service provider) & Sparinvest property Funds NA 141 Mn USD

Healthy Track Record & Rapid Scale-up in Execution


Completed Residential Projects


• GPL has completed about 23 residential projects with an estimated developable area of about 6.08 Mn Sq.Ft and saleable area of about 4.56 Million Sq.ft. GPL had completed all projects on schedule which shows the consistent track record and project execution skills.

Project Name Location Developable Area(Mn Sq.ft)

Saleable Area(Mn.Sq.ft)

Completion Year

Godrej Park, Kalyan Mumbai 0.15 0.15 1996 Godrej Edenwoods – Phases I and II, Thane Mumbai 0.4 0.17 2000 Godrej Grenville Park, Ghatkopar Mumbai 0.06 0.03 2001 Godrej Hill, Kalyan Mumbai 1.07 1.07 2002 Godrej Sky Garden, Panvel Mumbai 0.31 0.31 2002 Godrej Plaza, Panvel Mumbai 0.06 0.06 2002 Godrej Indraprastha, Santacruz Mumbai 0.03 0.01 2003 Godrej Bayview, Worli Mumbai 0.04 0.01 2003 Godrej Sherwood, Shivaji Nagar, Wakdewadi Pune 0.09 0.02 2003 Godrej La Vista, Shivaji Park Mumbai 0.01 0.01 2006 Godrej Glenelg, Cuffe Parade Mumbai 0.05 0.01 2007 Godrej Waldorf, Oshiwara Mumbai 0.04 0.02 2007 Planet Godrej, Towers 1, 2, 3 and 4, Mahalaxmi Mumbai 0.66 0.2 2008-2009 Godrej Woodsman Estate, Towers 1, 2 and 7 Bengaluru Bengaluru 0.76 0.6 2009 Godrej Eden Woods, Phase III (Regency Park Tower B, Thane Mumbai 0.09 0.04 2009 Godrej GVD-I, Kalyan Mumbai 0.06 0.04 2009 Godrej GVD-II, Kalyan Mumbai 0.12 0.09 2010 Planet Godrej, Tower 5, Mahalaxmi Mumbai 0.17 0.05 2010 Godrej Riverside, Kalyan Mumbai 0.28 0.28 2010 Godrej Edenwoods – Phase III (Pine and Row House), Thane Mumbai 0.06 0.03 2010 Godrej Woodsman Estate – Towers 3, 4, 5, 6, Bengaluru Bengaluru 1.02 0.81 2010 Godrej Prakriti Kolkata 0.55 0.55 2013 TOTAL 6.08 4.56

Completed Commercial Projects


• GPL has completed about 10 commercial projects with developable area of 2.06 Mn Sq.Ft with saleable area of about 0.83 Million Sq.Ft. GPL had completed 10 commercial projects which includes IT parks, Retail spaces and Office complexes in Mumbai, Pune and Kolkata.

Project Name Location Developable Area(Mn Sq.ft)

Saleable Area(Mn.Sq.ft)

Completion Year

M.G.S.M., Bandra Mumbai 0.03 0.01 1997

Godrej Millennium, Koregaon Road Pune 0.12 0.04 2000

Godrej Eternia B and C, Shivaji Nagar, Wakdewadi Pune 0.31 0.08 2003

Godrej Avanti, Shankarsheth Road Pune 0.02 0.01 2003

Godrej Castlemaine, Bund Garden Pune 0.29 0.16 2004

Godrej Coliseum, Phases I and II, Sion Mumbai 0.22 0.06 2007

Godrej Eternia – A, Shivaji Nagar, Wakdewadi Pune 0.26 0.07 2009

Godrej Waterside, Salt Lake City, Sector V - Phase 1 Kolkata 0.62 0.36 2010

Godrej Coliseum, Phase III, Sion Mumbai 0.17 0.04 2010

Godrej Eternia – C (10th Floor), Shivaji Nagar, Wakdewadi Pune 0.02 0 2010

Total 2.06 0.83

Current Residential Projects – Better Mix of High ROE projects


• GPL has about 17 ongoing residential projects with estimated developable area of about 20.93 Mn Sq.Ft and saleable area of about 15.17 Million Sq.Ft. Out of the 17 projects about 3 are DM projects, 6 are Revenue sharing projects, 4 are Area Based and the remaining 4 are profit sharing.

Project Name Location Est. developable Area (Mn Sq.ft)

Est. Saleable Area (Mn.Sq.ft) Economic Interest

Electronic City Bengaluru 1.36 1 DM Fee - 11% of Revenue

Godrej Crest Bengaluru 0.09 0.09 Revenue based – 59.0%

Godrej Platinum Bengaluru 0.79 0.6 GPL – 49.0%, other investor has preferential dividend rights

Godrej Gold County Bengaluru 0.29 0.29 Revenue based – 63.0%

Godrej Palm Grove Chennai 2.69 2.51 Area based – 70.0% (for 12.57 acres), 68.0% (for 4.82 acres)

Godrej Summit Gurgaon 2.59 2.04 Area based – 65.0%,

Godrej Frontier Gurgaon 1.35 0.82 Revenue based – 70.0%

Godrej Prakriti Kolkata 2.4 1.95 GPL – 51.0%

Godrej Platinum Kolkata 0.19 0.17 Revenue based – 45%

The Trees Mumbai 3.5 0.88 Profit based – 60.0%

Godrej Edenwoods Mumbai 0.03 0.03 Profit based – 50.0%

Godrej Platinum Mumbai 1.03 0.6 DM Fee - 10% of Revenue

Godrej Serenity Mumbai 0.21 0.18 Revenue based – 50.0%

Godrej Palms Mumbai 0.13 0.13 Area based – 47.5%

Godrej Anandam Nagpur 2.76 2.76 Upto 784790 Sq.ft DM Fee-400/Sq.Ft & remaining area

revenue based

Godrej Horizon Pune 0.69 0.54 Profit based – 51.0%

Godrej Alpine Mangalore 0.83 0.58 Area based for residential area – 71.5%

Ongoing Commercial Projects


• GPL is developing about 7 ongoing commercial projects with a developable area of 35.33 Mn Sq.Ft and a saleable area of about 10.3 Million Sq.Ft. Out of the 7 projects - 2 are revenue based, 3 based on profit sharing and 2 on area based.

Project Name Location Est. developable Area(Mn Sq.ft)

Est. Saleable Area(Mn.Sq.ft) Economic Interest

Godrej Garden City Ahmedabad 23.72 2.4

Phase i to iv: area based – 73.6% phase v onwards: revenue based – 67.6%

Godrej Eternia Chandigarh 0.69 0.51 revenue based – 44.5% to 47.0%

Godrej Genesis Kolkata 1.59 1.34 area based – 62.0%

Godrej Prakriti Kolkata 2.4 0.42 GPL – 51.0%

Godrej Waterside Kolkata 2.17 1.81 Area based – 61.0%


Godrej BKC Mumbai 1.26 1.2 Profit based – 50.0%

Strong Pipeline of projects


Strong Residential Project pipeline


• GPL has about 17 forthcoming residential projects with estimated developable area of about 37.68 Mn Sq.Ft and saleable area of about 29.2 Million Sq.Ft. Out of the 18 projects about 5 are DM projects, 8 are Revenue sharing projects and the remaining 4 are profit sharing.



Tumkur Road,Sanjay Khan Bengaluru 1.09 0.79 Revenue Based-78%

White Field Bengaluru 1.32 1 DM Fee-11% Godrej & Boyce,Moosapet Hyderabad 2.83 2.22 DM Fee-10% + Lumpsum payment-Rs.15 Cr

Godrej Oasis Hyderabad 7.19 4.87 100% of Profits

Kochi-I Project Kochi 2.29 2.24 Revenue Based-70%

Panvel Township Mumbai 3.5 3.5 Profit based –35% with upside promote to JV partner

Godrej Central Mumbai 1.39 0.68 Revenue Based-87.5%

Kalyan Township Mumbai 0.53 0.54 Revenue Based-95%

Godrej Sky Mumbai 0.6 0.3 DM Fee ` 500 million, with upside promote to GPL Ghatkopar Redevelopment Mumbai 0.41 0.19 100% share in the project specific company & revenues from the project

Currey Road Mumbai 0.58 0.12 DM Fee-10% of Revenue

Sahakar Nagar 2 Mumbai 1.18 0.75 Revenue Based-91%

Sundar Sangam Mumbai 0.16 0.1 Development agreement with society

Godrej & Boyce Lawkim, Thane Mumbai 0.12 0.27 Profit based –32%

Godrej Okhla NCR 1.42 0.85 Revenue Based-52.5%

Bhugaon Township Pune 11.64 9.28 DM fee –11.09% + 162.00 / sq. ft., profit sharing if profits exceed certain

threshold

Undri 2 Pune 1.43 1.5 Profit based 40%

Upcoming Commercial Projects


• GPL is developing about 5 forthcoming commercial projects with developable area of 20.69 Mn Sq.Ft with saleable area of about 3.59 Million Sq.Ft. Out of the 5 projects 3 are revenue based, 1 based on profit sharing and 1based on DM model.




Godrej Alpine Mangalore 0.83 0.25 Revenue Based – 71.5% for Commercial Area

Kalyan Township Mumbai 0.53 0.06 Revenue Based – 95.0%

Godrej Genesis Pune 0.5 0.48 Revenue Based – 58.0%

Bhugaon Township Pune 11.64 2.36

DM Fee-11.09% +162.00 / Sq. Ft., Profit Sharing if profits exceed certain threshold

Strong Revenue Visibility in FY14


• GPL management has indicated that they are likely to do 8 large projects in FY14 which provides good revenue visibility. GPL has plans to launch in these 8 areas an area of about 4.5-5 Mn.Sq.Ft with realizations ranging from about Rs.3500 – 17000 per square feet. • GPL management is hoping to attain revenues of Rs.24-25 Bn from these 8 projects in FY14.The management plans seem to be reasonable and we believe that any turnaround in the Real estate markets would help the company to fast track these plans.

Projects Location FY14 Launch Area(msf) Realization(INR/SF) GPL's Revenues(Rs.Bn)

Garden CityPhase5A & AFS Ahmedabad 0.6 2950-3450 1.3

Garden CityPhase5B Ahmedabad 0.5 3400 1.1

Platinum Kolkata 0.17 22000 1.7

Shahakar Nagar Mumbai 1.35 12000-14000 15.8

Palm Springs Mumbai 0.13 17000 1

Horizon Pune 0.54 5700 1.5

Panvel Mumbai 1 5500-6000 1.9

Oasis/Moosapet Hyderabad 0.5-1 3500 0.3-2

Total 4.5-5 24-25

Important Projects of Godrej Properties


Godrej Garden city - Ahmedabad


• Godrej Garden City is a township development planned in Ahmedabad which is located in Jagatpur village in the northwest region of Ahmedabad and is located within the Ahmedabad Municipal Corporation administrative limits. • The project is expected to feature a clubhouse, full-time security and a mix of apartments, villas and row houses. • The project has a developable area of 23.72 mn Sq.Ft with a saleable area of 20.60 mn Sq.Ft. Godrej Properties - economic interest in Phase I-IV is area based at 73.6% and from Phase V onwards it is revenue based at 67.6%. • The current rate per square feet for the project is around Rs.4400 per Sq.ft. • Till June,2013 about 4.62 mn Sq.ft of the project had been sold .

Garden City Project Details

Location Ahmedabad

Type of Development Residential Township

Developable Area(Mn.Sq.Ft) 3.5

Saleable Area(Mn Sq.Ft) 2.62

Project Starting Year 2010

Project Mode Area, Revenue Basis

Project Value(Rs.Cr) 1688

NAV Per Share 64

Godrej BKC Project - Mumbai


• GPL launched its landmark commercial project Godrej BKC located at the centre of India’s most prestigious commercial project Bandra -Kurla Project. • The project is being developed on 2.5 acres of land and is expected to have approximately 1.2 million sq. ft. of office space. The project is located approximately six and nine kilometers away from Mumbai’s domestic and international airports, respectively, and has access to both the western and eastern express highways . • The project has a developable area of 1.26 mn Sq.Ft with a saleable area of 1.20 mn Sq.Ft. GPL has entered into a profit sharing with 50% profits. • The current rate per square feet for the project is around Rs.25,800 per Sq.ft. • Till June,2013 about 0.19 mn Sq.ft of the project had been sold .

BKC Project Details Location Mumbai Type of Development Commercial Developable Area(Mn.Sq.Ft) 1.26


Project Starting Year Mar-13 Project Ending Year 2015

Project Mode Profit Sharing Profit Sharing Basis 50% Project Value(Rs.Cr) 1375

NAV Per Share 76

Godrej Frontier - Gurgaon


• GPL’s Godrej Frontier is a residential development located in Gurgaon. • The project is expected to feature three-bedroom and four-bedroom homes in addition to 19 penthouses. The project is expected to include a health club, jogging track, swimming pool, gymnasium, indoor games area and a variety of landscaping features . • The project has a developable area of 1.35 mn Sq.Ft with a saleable area of 0.82 mn Sq.Ft. GPL has entered into a profit sharing with 70% profits. • The current rate per square feet for the project is around Rs.5800 per Sq.ft. • Till June,2013 about 0.79 mn Sq.ft of the project had been sold .

Frontier Project Details Location Gurgaon Type of Development Residential Developable Area(Mn.Sq.Ft) 1.35


Project Starting Year Oct-10 Project Ending Year NA

Project Mode Profit Sharing Profit Sharing Basis 70% Project Value(Rs.Cr) 47.6

NAV Per Share 26.8

The Trees - VIKHROLI Project


• The Trees is expected to have approximately 3.5 million sq. ft. of office space, residential apartments, retail and hotel space. • GPL is the Development Manager for the project. GPL is required to provide expertise and advice FSI/FAR regulations and project feasibility, design and marketing plans. • GPL has to bear all costs related to management, sales and marketing and entitled to receive 10% of the money received for the sales of units plus all related statutory levies. • GIL is responsible for arranging financing, obtaining all necessary development approvals and permissions, performing all construction work and for bearing all costs related to development. • The current rate per square feet for the project is around Rs.15950 per Sq.ft.

Vikhroli Project Details

Location Mumbai

Type of Development Residential,Commercial

Developable Area(Mn.Sq.Ft) 3.5


Project Starting Year Oct-11

Project Ending Year NA

Project Mode Development Manager

Profit Sharing Basis 10%

Project Value(Rs.Cr) 117.8

NAV Per Share 23.5

Advantages of a Strong Parentage


Vikhroli Land Bank – A Cash Cow


• Godrej & Boyce the holding company of all Godrej group companies, owns ~3,500acres in Vikhroli (Mumbai). The management has indicated that while a large chunk of this land (~2,200acres) comes under mangrove area and cannot be developed, it plans to commercially develop the remaining ~1200 acres over the next 10-15 years. • The Vikhroli project has a development potential of about 25 residential projects which offer huge upside potential over the next several years and will be a cash cow. • The estimated revenues for developing 36 acres of land is about Rs.3000 Cr which translates to about Rs.83.33 Cr per acre which signifies the potential of the land bank. • Further as these projects are developed over a period of time there is scope for increase in realizations as it has been proved that realizations improve at the later phases of the projects

Agreement with Godrej group companies


• GPL has entered into limited liability partnership agreements with Godrej & Boyce and Godrej Industries Limited for the joint development of certain real estate projects (the “LLP Agreements”). Under the terms of the LLP Agreements, GPL and the counterparties are required to contribute certain amounts as fixed capital contributions and are entitled to certain shares of the partnership profits. • For the Thane project GPL is entitled to profit sharing of 32% while the rest will go to Godrej & Boyce where there are 3 acres. • For the Hyderabad project GPL is entitled to development manager fee of 10% while the rest will go to Godrej & Boyce. For the Vikhroli project (discussed separately) GPL is entitled to profit sharing of 40% while the rest will go to Godrej & Boyce.

Good Response to Projects


• GPL has had good response to its projects with most projects have pre-sales which is a testimony to their brand and timely execution of projects. GPL in H1FY14 had 11,09,732 Sq.Ft of booked area which is valued at Rs.944 Cr which provides revenue visibility for its projects.

Godrej Properties – Investment Rationale


Extremely ambitious Management


Highly Profitable Projects in Pipeline


• GPL management has indicated that they are likely to do 7 large projects in FY14 in profit sharing model which is likely to generate revenues of Rs.28.5 Bn. • GPL has plans to launch in these 87areas an area of about 7.1 Mn.Sq.Ft with realizations ranging from about Rs.5500 – 14,000 per square feet. • GPL management is expecting cost for these projects to be at Rs.13.1 Bn and is expecting EBIDTA of Rs.15.4 Bn from these projects.

Projects Location FY14 Launch Area(msf) Realization(INR/SF)

GPL's Revenues(Rs.Bn) Cost(Rs.Bn) EBIDTA(Rs.Bn)

Shahakar Nagar,Phase 1 & 2 Mumbai 1.35 12000 14.6 6.8 7.8

Malad Mumbai 0.1 12000 1.1 0.5 0.6

Undri Pune 1.5 4200 2.5 1.2 1.3

Ghatkopar Mumbai 0.2 14000 2.7 1.3 1.4

Byculla Mumbai 0.3 NA 0.5 0.1 0.4

Curry Road Mumbai 0.1 30000 0.4 0.1 0.3

Panvel Mumbai 3.5 5500 6.7 3.1 3.6

Total 7.1 28.5 13.1 15.4

Commercial Projects distorting real ROCE


• GPL has evolved plans to improve its ROCE which was dragged by commercial projects. GPL plans to focus on residential segment for the next two to three years, fast monetization of its recent acquisitions and better sales in commercial projects.

• GPL’s commercial developments in Kolkata and Chandigarh remain a concern. The management is confident of the BKC project which has been a better performing project in Mumbai in a sluggish commercial environment, despite severe concerns from the Analyst community on this project.

• GPL expects steady monetization of BKC commercial projects where it plans to complete the construction in 3 years with annual sales of 0.25 Mn.Sq.Ft from FY-14

• GPL plans to bring in PE funds to offload partial stake if the markets turns favorable failing which they would funding can be done through internal accruals.

Rising share of Residential Properties


• GPL had in FY13, a revenue share of 83% from residential segment while the commercial segment contribution was around 17%. • GPL had lower margins and profitability on account of commercial projects which were hit by a slowdown in the economy. • Going forward GPL is likely to see increased contribution from Residential projects which will improve its margins and profitability. GPL had in FY13 sold about 4.56 Mn.Sq.Ft of residential area and 0.83 Mn.Sq.Ft of commercial area and its forthcoming projects are likely to sell 29.2 Mn Sq.Ft of residential area and 3.59 Mn Sq.Ft of commercial area.

Turnaround in Operating Cash Flows


• During FY-13, GPL has generated positive operating cash flow after reporting negative operating cash flows since 2007. • The positive cash flows was generated due to better collections from rising pre-sales and minimal capital commitment in most of the recent acquisitions. • GPL has used the operating cash flow towards interest payment of Rs.2.2 bn resulting in a net debt reduction of Rs.0.6 bn to Rs.15 bn. • GPL is expected to generate positive operating cash flows going forward on account of contribution of new projects which provide better revenue and profitability.

Strong Back-Ended Cash Flow in its long gestation projects


Makings of a Quality Real Estate developer


Improving Mix of Projects


Development Manager Fee projects – A Huge Positive


• GPL is executing several projects as development manager for which it is generally entitled to about 10-11% of revenues a s development manager fee. • Going forward GPL will benefit from more number of development projects on account of the groups land bank for which they are the preferred developer. GPL is currently developing 4.36 Mn Sq.Ft of its ongoing commercial projects while forthcoming residential and commercial projects are likely to have about 12.92 and 2.36 Mn. Sq.Ft respectively.

Development Manager Projects

On Going Residential

Project Name Location Est. Saleable Area(Mn.Sq.ft) Economic Interest

Electronic City Bengaluru 1 DM Fee - 11% of Revenue

Godrej Platinum Mumbai 0.6 DM Fee - 10% of Revenue

Godrej Anandam Nagpur 2.76 Upto 784790 Sq.ft DM Fee-400/Sq.Ft & remaining area revenue based Forthcoming Residential Projects


White Field Bengaluru 1 DM Fee-11%

Godrej & Boyce,Moosapet Hyderabad 2.22 DM Fee-10% + Lumpsum payment-Rs.15 Cr

Godrej Sky Mumbai 0.3 DM Fee ` 500 million, with upside promote to GPL

Currey Road Mumbai 0.12 DM Fee-10% of Revenue

Bhugaon Township Pune 9.28 DM fee –11.09% + 162.00 / sq. ft., profit sharing if profits exceed certain threshold

Forthcoming Commercial Projects


Bhugaon Township Pune 2.36 DM Fee-11.09% +162.00 / Sq. Ft., Profit Sharing if profits exceed certain threshold

Area Sharing based projects


• GPL is executing about 4 ongoing residential area based projects with saleable area of 5.26 Million Sq.Ft. Godrej Palm grove is the largest of the four ongoing residential projects which contributes about 47.76% while Godrej summit contributes about 38.79%. •GPL is currently developing 1.81 Mn Sq.Ft of its ongoing commercial projects on the basis of area. The proportion of residential to commercial mix of projects done on the basis of area is about 75:25%.

Area Based Projects

Project Name Location Est.developable Area(Mn Sq.ft)


On Going Residential Projects

Godrej Palm Grove Chennai 2.69 2.51 Area based – 70.0% (for 12.57 acres), 68.0% (for 4.82 acres)

Godrej Summit Gurgaon 2.59 2.04 Area based – 65.0%,

Godrej Palms Mumbai 0.13 0.13 Area based – 47.5%

Godrej Alpine Mangalore 0.83 0.58 Area based for residential area – 71.5%

On Going Commercial Projects

Godrej Waterside Kolkata 2.17 1.81 Area based – 61.0%

Redevelopment Projects


• GPL has entered into redevelopment projects in a major way as they offer tremendous scope in Mumbai where land is a scarce commodity and redevelopment eases pressures of housing in the city and creates a Win-Win situation. • Redevelopment in Mumbai offers a tremendous opportunity with at least 16,000 buildings to be redeveloped in the next decade. • GPL plans to capitalize on the tremendous opportunity available in the Mumbai redevelopment market and has incorporated a wholly-owned subsidiary, Godrej Projects Development Private Limited. • GPL’s redevelopment projects having seen good traction as the company was able to add two projects in this space during the past 5 quarters. • GPL ‘s redevelopment projects also suits its asset light business model as that will allow them to enter into JV deals for such projects.

Profit Based projects – better cost structure


• GPL is executing about 3 ongoing residential profit based projects with saleable area of 4.22 Million Sq.Ft. The Trees is the largest project with saleable area of 3.5 Million Sq.Ft. The segment share is about 25%. • GPL is executing 3 forthcoming profit based projects with saleable area of 5.05 Million Sq.Ft. The share of forthcoming projects is about 31% in this segment. • GPL is executing a large commercial project in Hyderabad with saleable area of 7.19 Million Sq.Ft. GPL has a economic interest of 100% profits on this project which has the highest share of about 44%.

Profit Based Projects

Project Name Location Est.developable Area(Mn Sq.ft)


On Going Residential Projects


Godrej Edenwoods Mumbai 0.03 0.03 Profit based – 50.0%

Godrej Horizon Pune 0.69 0.54 Profit based – 51.0%

On Going Commercial Projects

Godrej BKC Mumbai 1.26 1.2 Profit based – 50.0%

Forthcoming Residential Projects

Panvel Township Mumbai 3.5 3.5 Profit based –35% with upside promote to JV partner

Godrej & Boyce Lawkim, Thane Mumbai 0.12 0.27 Profit based –32%

Undri 2 Pune 1.43 1.5 Profit based 40% Forthcoming Commercial Projects


Current Net Asset Value (NAV) of Godrej Properties


• GPL derives most of its revenues from residential segment which has been valued at Rs.15,400 Mn which gives a NAV of Rs 86.69 per share. • GPL ‘s office projects are valued at Rs.11,500 Mn which gives a NAV of Rs.65 per share. GPL’s Vikroli land has been valued at Rs.8300 Mn which gives a NAV of Rs.46.72 per share. The fair value per share for GPL is estimated at rs.216 providing an upside potential of 28.65%. • The current stock price is quoting at a 20% discount to its Net Asset Value. The stock has a history of quoting at a significant premium to its NAV.

Project Value(Rs.Mn) NAV Residential 15,400 86.69 Office 11,550 65.00 Retail 2,500 14.07 Hospitality 335 1.89 Value from Group MOUs 2,600 14.64 Total GAV 34,335 193.29 Net Debt -9,336 -52.56 NAV 24,999 140.73 Vikhroli Land 8,300 46.72 Net Asset Value 33,299 187.45 NAV Discount 4,995 28.12 Fair Value 38,294 206

Financials


Earnings Projection – P&L Account • GPL’s revenues are expected to grow by 25% and 20% in FY14 & FY15 driven by improved demand scenario and execution. We have projected very conservative numbers.

• GPL has EBITDA margins in the range 20-25%. We estimate EBITDA margins of about 25% in FY14 and FY15.

• GPL is likely to report PAT of Rs.226.79 Cr in FY14 and Rs.243.01 Cr in FY15 with an EPS of Rs.12.77 and Rs.13.68 in FY14 and FY15 respectively. • GPL interest cost in FY 13 was at Rs.3 Cr and is expected to be about Rs.3.89 Cr and Rs.4.67 Cr in FY14 and FY15 respectively. • We expect the company to grow without adding any further stress to its Balance sheet with improving cash flows from its future projects.

Specialists in discovering Multibagger stocks “

Particulars FY12 FY13 FY14E FY15E

Net Sales 770.05 1037.12 1296.4 1555.68

% Chg 70.55 34.68 25.00 20.00

Total Expenditure 612.07 751.33 964.26 1197.87

% Chg 22.75 28.34 24.23

EBITDA 157.98 285.79 332.14 357.81

EBITDA Margins(%) 20.52 27.56 25.62 23.00

Interest 5.31 3 3.89 4.67

Depreciation 3.88 4.39 5.19 6.22

PBT 198.5 288.85 333.51 357.37

PAT 128.79 197.29 226.79 243.01

EPS 16.5 25.28 12.77 13.68

Concerns & Reasoning


1.) Lack of ownership rights and clean title :

Certain parties granting development rights may not have acquired ownership rights or clear title in respect of land that the company has categorized as part of Land Reserves. Parties granting development rights may also have litigation, bankruptcy or such other proceedings pending with respect to such land. Any legal issues pertaining to ownership and title will impact the company. 2.) Suspension or Abandoning of Projects :

Disputes may arise between the company and development partners which may cause delay in completion, suspension or complete abandonment of a project, which may adversely affect the business, financial condition and results of operations . 3.) Delay in project completion will impact the company :

The company in certain developments commit to complete the developments within specified time frames, failing which, we are required to pay liquidated damages to our customers at specified rates for the delay. Further the company provides warranties for a period of up to three years from the completion of construction for construction defects and may be held liable for such defects that occur, if any. Any such acts will adversely impact the company ‘s financials. 4.) Rising Input Cost to impact the company :

GPL has procured building materials such as steel, cement, flooring products, hardware, bitumen, sand and aggregates, doors and windows, bathroom fixtures and other interior fittings from third party suppliers .Any steep increase in the prices of these materials may impact the margins and profitability of the company.

Price Chart

• GPL has corrected sharply during the past year from Rs.310 to Rs.159.

• The stock is quoting at a steep discount of 35% to its IPO price of 2010. • The selling pressure seems to have intensified after the recent Rights Issue in the stock.


Share Holding %

Sep Jun Mar Dec

2013 2013 2013 2012

Promoters 74.96 74.96 74.99 74.99

FII 15.35 15.38 14.81 13.22

DII 1.42 1.44 2.23 2.31

Others 8.27 8.22 7.97 9.48

Conclusion We have always loved businesses where a credible Management chases a huge opportunity and where there is a shareholder friendly business model to capture the business growth into Value creation for shareholders. We believe that Godrej Properties perfectly fits this bill with the incremental improvements in its business operations and the huge ambition of becoming India’s Top real estate developer. Godrej Properties like NBCC and Ashiana Housing, generates profits from increased volume of real estate development and not from increasing realizations of their Land bank. While the execution of Godrej Properties is nowhere comparable to the strong track record of Ashiana housing, the ambition levels and the huge scale up in GPL’s operations will definitely compensate for the lack of operational excellence. We look at Ashiana housing as a company which can generate strong return ratios with a moderate growth and Godrej Properties as a company which can grow at a stupendous rate with moderate return ratios. We believe that both companies provide strong returns potential for long term investors. We believe that Investors are underestimating the structural return potential of GPL’s business model and also the improvement in its quality of projects going forward. With a right intent, a strong team and a good business model, it’s only a matter of time before GPL’s starts generating consistently high returns on its capital employed. The company’s advantages over its Peers and strong Parentage would certainly help the company to achieve its ambition of becoming a large profitable Real estate player. When we are able to able to BUY such a high potential business at a discount to its NAV and at a Price to Book Value of 1.5X, we certainly believe that the stock makes for a good Investment opportunity. We certainly believe that the stock has a large probability of becoming a Large cap over the next decade and can provide Multi-Fold returns to existing investors.


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