Why Godrej Properties May Need Time to Recover | Jobs Recent


Calendar year 2022 has been a tough one for real estate companies as sentiment towards the sector soured as home loan interest rates rose slightly. But company-specific factors made the pain worse for some investors. Take the example of real estate developer Godrej Properties Ltd. The stock has fallen nearly 31% year-to-date, while the Nifty Realty index has fallen at a much slower pace of 7%.

One of the reasons the stock has fallen is that it has risen quite a bit, making valuations expensive. The company’s shares hit a 52-week high 2,125 on December 13, 2021 and closed at 1,299 per piece on Monday.

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“Furthermore, in recent quarters, the pace of new launches has been relatively slower than peers and operational efficiency has been muted,” said the analyst, speaking on condition of anonymity.

He added that with the purchase of land in attractive locations, some interest in stocks may return, but the recovery will be gradual.

In November, Godrej bought two adjoining plots in Noida. Earlier this month, it finalized the purchase of land in Kandivali, Mumbai and this project has an estimated revenue potential of nearly 7,000 crowns. This brings the cumulative expected value of provisions from projects added in FY23 to nearly 16,500 crore ahead of guidelines 15,000 crowns.

A timely start-up of business activity would contribute to long-term revenue visibility and margin profile. Analysts at Jefferies India estimate that land acquisition costs are reasonable (20-25% of sales value for total land costs for Noida and Kandivali), putting the project’s potential margins in excess of 30%.

That’s not all. By acquiring the Kandivali land, Godrej also plans to strengthen its presence in the western suburbs of Mumbai.

The company’s micro market selection is improving as strategic markets like Kandivali have limited competition from A-grade developers, pointed out Dolat Capital Market.

On the other hand, a faster-than-expected addition to the project could increase the company’s indebtedness. Jefferies raised Godre’s net debt forecast by 300-700 crore for FY23-25.

At the end of September, the company’s net debt-to-equity ratio was 0.16x. True, this key metric is currently low and cash flows are favorable. However, in a rising interest rate scenario, investors would not want debt to increase. Needless to say, any disappointment on this front would hurt the sentiment of the stock.

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