Godrej Properties Limited (GPL) is tapping the capital markets with an issue to raise between Rs 462.057 crs and Rs 499.776 crs next week. The promoters of the company are M/s Godrej and Boyce Manufacturing Company Limited and M/s Godrej industries Limited.

Business
GPL is one of the leading real estate development companies in India. It develops residential, commercial and township developments. GPL entered into its first project in 1991 and initially concentrated in Mumbai Metropolitan. It then expanded to Pune, Bengaluru, Kolkatta, Hyderabad, Ahmedabad, Mangalore, Chandigarh, Chennai and Kochi. The company as of 31st October 2009 has completed a total of 23 projects comprising of 7 commercial and 16 residential aggregating approximately 5.13 million square feet (msf) of developable area.
Currently the company has land reserves of 391.04 acres aggregating to approximately 82.74 msf of developable area and 50.21 msf of saleable area. The company has also entered into memoranda of understanding with certain Godrej group companies for developing land owned by them. This includes 75 acres in Mohali (Chandigarh) and 10 acres in Hyderabad with Godrej and Boyce Manufacturing Company and 100 acres in Bengaluru with Godrej Agrovet.
The company has paid a sum of Rs 391.175 crs and has yet to pay a further sum of Rs 292.649 crs for the 391.04 acres of land bank that it has.

Unique business model
The company uses the “joint development model” for developing properties which entails entering into a development agreement with the owner of the land. An advance amount is paid at the time of executing the agreement. A typical agreement states that the land owner is entitled as compensation, to a share in the developed property or a share of the revenues generated from the sale of the developed property or a combination of both after adjusting the advance amount paid earlier. This business model ensures that there are virtually no litigations regarding land, agriculture or non agriculture status and so on.  This model de-risks the exposure to land prices significantly, is extremely beneficial in times of economic downturn and provides economic stability.

Objects of the Issue
The company proposes to raise between Rs 462 crs and Rs 499 crs.
The objects of the issue are as follows:-

Strengths
Godrej is an established brand name and clearly it is a key strength for the company. The name and group have been in existence now for 112 years and it helps in credibility especially in an industry where there are the most number of concerns. GPL has land reserves in strategic locations in growing cities such as Mumbai, Ahmedabad, Bengaluru and Pune. The company has a unique business model of joint development which is a win-win situation for all concerned and finally its execution methodology which uses IT software and systems and working with service providers which enable access third party design, project management and construction expertise.

Financials
GPL reported revenues of Rs 25.25 crs for the year ended 31st March 2009 and Rs 227.51 crs for the year ended 31st March 2008. The profit after tax was Rs 75.63 crs and Rs 75.02 crs respectively. For the half year ended 30th September 2009 the revenues were Rs 115.12 crs and the profit after tax was Rs 47.74 crs. Based on the March 09 results the EPS on the old capital of Rs 604.20 crs was Rs 12.51 while for the half year ended 30th September 2009 was Rs 7.90. If one were to annualise the same the EPS would be Rs 15.8 per share on old capital. Using the same earnings if one were to annualise half year profits and look at fully diluted earnings the same would be Rs 13.67 per share. Taking this EPS the valuation of the company on fully diluted earnings of first half annualised is about 35.85 times at the lower end of the price band and 38.77 times at the higher price band.
GPL follows ‘percentage of completion method’ of revenue recognition. 

Investment Rationale
Based on current earnings there is nothing much to talk about. The question that then comes to mind is then why? I believe the story is in the opportunity. One agrees that the present estimated saleable area is approximately 50.21 msf and out of the above roughly 27.38 msf is in Ahmedabad. Very clearly Ahmedabad is a probably 8-12 year story and is going to be a township having schools, hospitals, commercial, shopping malls and what not. If one were to exclude this from the development it would be quite prudent to believe that the company GPL is likely to develop anything between 9 to 11 msf in the next three years. Comparing this with the 5.13 msf done in the last 17 years we are talking of a eleven times jump in development per year. Simply put against the average 0.30 msf over the last 17 years we are now talking of roughly 3.3msf per year.These estimates would be based on a conservative basis, simply because GPL hires best in class contractors for its projects. This ensures quality, timely delivery and scalability. The profit or EPS from this could be calculated and assumed by any investor.

The second big trigger for the company is the green forest in the middle of Mumbai known as Vikhroli. This is a development opportunity for the company and the founders or promoters of the company. GPL  is the developer or development arm of the group and though there is no written agreement or memorandum to that effect it would be prudent to assume that any development done for sale as residential is likely to be developed by GPL.

The third trigger is the development agreements with the group companies for 185 acres in Chandigarh, Bengaluru and Hyderabad.

Conclusion
The business looks interesting, having the potential and above all coming from a group with corporate governance in place. They are in a business which is competitive, but has immense requirements. With ‘affordable’ housing being the need of the hour and huge requirement, there would be no dearth of business. There is money for investors who hold the stock for the next few months at the bare minimum. Longer term investors will make better money. If however anyone expects a huge listing gain, one should refrain from applying because that may or may not happen.

Apply for medium term gains.

SEBI disclaimer: – I intend to apply for the above issue.