India Real Estate Stocks: Putting the Cart Before the Horse

Value investor- India mid & small caps

Bhaskar Chakraborty

Equity Bottom-Up

<p>Analysis of <a href="https://www.smartkarma.com/entities/3971" target="_blank" data-smartkarma-citation="entities:3971:1">Godrej Properties (GPL IN)</a> (GPL) Annual Reports since its IPO reveals the following-</p><ul>
<li>57% of GPL’s cumulative profits over FY12-17 has come from a single mixed-use 36acre development in Vikhroli</li>
<li>GPL’s pan-India JD/JV model of development is a failure as the cumulative losses on all such developments over FY12-17 is Rs3bn. Track record on capital allocation has been poor.</li>
<li>Instead of passing these losses through the P&amp;L, GPL passed the same through the Reserves on its Balance Sheet. This helped them report fictitious profits in their P&amp;L accounts.</li>
<li>While GPL’s share of profits on 36acres of Vikhroli land is 60%, its share on all remaining Vikhroli land (~1000acres) is only 10% of revenues. This will severely impact its revenues and profits once the 36acres are exhausted.</li>
<li>Despite selling out 95% of the premium BKC project, company’s borrowings are near lifetime peak. Cumulative operating cashflows over the life of the BKC project (last 5 fiscals) is negative Rs5.5bn.</li>
<li>While the general market perception that GPL is a major beneficiary of post-RERA real estate market has driven a 140% rally in its share price since Jan-17, we see its poor capital allocation skills in JD/JV projects and a less attractive structure on the remaining land in Vikhroli pose serious question marks on its ability to grow profits and cashflows over the medium term.</li>
</ul>

Analysis of Godrej Properties (GPL IN) (GPL) Annual Reports since its IPO reveals the following-
57% of GPL’s cumulative profits over FY12-17 has come from a single mixed-use 36acre development in Vikhroli
GPL’s pan-India JD/JV model of development is a failure as the cumulative losses on all such developments over FY12-17 is Rs3bn. Track record on capital allocation has been poor.
Instead of passing these losses through the P&amp;L, GPL passed the same through the Reserves on its Balance Sheet. This helped them report fictitious profits in their P&amp;L accounts.
While GPL’s share of profits on 36acres of Vikhroli land is 60%, its share on all remaining Vikhroli land (~1000acres) is only 10% of revenues. This will severely impact its revenues and profits once the 36acres are exhausted.
Despite selling out 95% of the premium BKC project, company’s borrowings are near lifetime peak. Cumulative operating cashflows over the life of the BKC project (last 5 fiscals) is negative Rs5.5bn.
While the general market perception that GPL is a major beneficiary of post-RERA real estate market has driven a 140% rally in its share price since Jan-17, we see its poor capital allocation skills in JD/JV projects and a less attractive structure on the remaining land in Vikhroli pose serious question marks on its ability to grow profits and cashflows over the medium term.


Godrej Properties: The Devil Is in the Details