Godrej Properties target at R514

Godrej Properties is a nationwide developer that has traditionally adopted an asset-light business model. We think this is changing,as some of its new projects are expected to be investment properties rather than joint developments. This should keep its gearing at 1.2x,the highest within its peer group. The company may have to dilute equity to sustain growth. Its key market Ahmedabad is not as robust as it seems. Housing demand in Ahmedabad has been much stronger than in many other second-tier cities over the past two years. However,we believe most of this demand is speculative and not supported by commercial demand. With the ratio of residential to commercial volumes in the city at 66x (or times),versus 3-12x in other tier-two Indian cities,We don’t think current demand levels are sustainable and sales volumes may disappoint consensus.

Our FY12-14 EPS estimates are 24-37% below consensus. Our weak demand outlook for the Indian residential sector is reflected in our low sales volume forecasts for GPL and we expect the company to disappoint consensus,with fewer than expected new project launches during FY12,driven by a slowdown in the pace of regulatory project approvals across most Indian cities.

We initiate coverage with Underweight rating with a target price of R514. We value GPL at a par to its NAV (it has traded at a 22% premium since listing). Our valuation comprises R420 for its current projects,plus R95 (based on 33% probability of developing Godrej Group land in Vikhroli). For context,our best-case scenario for developing all of the Godrej Group land in Vikhroli values GPL at R703,while our worst-case scenario is R420.

We agree that GPL deserves to trade at a premium to its peers given its stronger ROE,asset-light business model (although that’s changing) and track record,but the current 160% premium seems excessive. Downside catalysts include potential equity dilution and consensus downgrades.

HSBC