Is Godrej Properties losing its edge?

These four new projects with a saleable area of 7 million square feet (msf) and revenue potential of ₹4,400 crore are close to the cumulative project additions of ₹4,800 crore in Q2 and Q3FY22, pointed out analysts at Motilal Oswal Financial Services. Delayed project launches dampened Godrej’s performance in Q3FY22, so the four deals inked recently bode well for outlook on project pipelines. That said, finding its lost charm may be challenging for the stock.

View Full Image

In the last one year, the Godrej stock has risen by 20% versus Nifty Realty’s 42% returns. Like-to-like comparison for real estate developers is tough given the varied portfolios, but shares of other large developers such as Macrotech Developers Ltd (Lodha), Oberoi Realty Ltd, and Prestige Estates Projects Ltd have delivered high returns.

“About a year ago, Godrej enjoyed a premium to its competitors because of its brand name, balance sheet strength, and comfort on corporate governance. Now, developers such as Lodha and Prestige have seen a meaningful debt reduction in recent quarters and their liquidity position is improving with increased sales,” said an analyst requesting anonymity. Further, the DB Realty episode was a setback for Godrej’s investors as far as corporate governance and brand value are concerned, the analyst said. “Its mojo is falling apart,” he said. Godrej had in February called off a potential investment in DB Realty for a slum rehabilitation platform after it worried investors because of the latter’s poor track record of business and low success rate of slum rehabilitation projects.

Godrej’s thrust on the asset-light model of jointly developing residential projects has held it in good stead among investors. However, returns from these projects have been dismal, raising concerns about Godrej’s earnings and cashflow outlook.

Godrej’s investments in joint ventures rose to 22% of its FY21 assets compared with 10% in FY17, though many past projects have been loss-making, pointed out an Ambit Capital report on 7 April. Its scale increased 4.2 times over FY12-21 to 10.8 msf, making it the largest developer by sales in India in FY21. However, execution was weak with completion just 0.5 times sales over FY18-21, said Ambit. Small wonder then the valuation premium of Godrej’s stock versus peers has reduced over the last decade on a price-to-book basis.