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JULY <strong>2016</strong><br />
STOCK PICKS<br />
approvals and shrinkage of black money activities. The<br />
key highlights of the bill are:<br />
(i) Smaller projects with an area>=500 sq feet or with<br />
eight flats will have to be registered with the<br />
regulatory authority as compared to the previous rule<br />
of >1000 sq feet or 12 flats<br />
(ii) Builders will have to deposit at least 70% of the<br />
sale proceeds, including land cost, in an escrow<br />
account to meet construction cost for faster project<br />
execution<br />
(iii) Developers will be penalized for delaying projects by<br />
paying the same interest as the buyers.This rule will<br />
enable the developers to fast track their projects in<br />
order to avoid interest payments.<br />
(iv) Builders will be liable for structural defects for five<br />
years, instead of two years suggested earlier<br />
(v) Regulatory authorities will have to dispose of<br />
complaints within 60 days.<br />
However, the above rules will hurt the smaller builders as<br />
they will face liquidity crunch due to higher regulatory<br />
environment. Nevertheless, large organized players will<br />
benefit from the disadvantages faced by the smaller<br />
players, thereby leading to higher market share in the real<br />
estate sector. We expect GPL to also benefit from the<br />
Realty Bill and also gain market share gradually.<br />
In addition to the Realty Bill passed earlier this year, the<br />
government also recently relaxed rules on Real Estate<br />
Investment Trusts (REITs) by allowing them to invest more<br />
in under-construction projects. Sebi removed restrictions<br />
on special purpose vehicles (SPVs) to invest in other SPV<br />
holding the assets and rationalized unit holders’ consent<br />
on related party transactions. This relaxation along with<br />
the Realty Bill will bring transparency and in turn attract<br />
foreign investors likely. According to a recent report by<br />
global property consultant JLL- “Japan and China could<br />
come knocking to the Indian real estate market in <strong>2016</strong>”.<br />
Recently, China’s prominent developer- Dalian Wanda<br />
Group signed a memorandum of understanding (MoU)<br />
earlier this year with the Haryana government to develop<br />
‘Wanda Industrial New City’ and has committed an<br />
investment of $10 bn over a period of 10 years.<br />
Gezhouba, another prominent Chinese construction<br />
company, has agreed to invest Rs 10,000 crore in<br />
irrigation projects in Telangana state. Thus, with India’s<br />
growth story remaining intact while China experiencing a<br />
slowdown in its economy, the Chinese developers are<br />
pouring funds into the real estate sector. Also, with<br />
governments’ focus to improve infrastructural projects and<br />
promote ‘Housing for All by 2022’, there might be an<br />
uptick in the real estate sector going forward.<br />
Godrej Properties Ltd (GPL) has been outperforming with<br />
respect to its peers despite an overall slowdown in real<br />
estate markets over the last two years. GPL has achieved a<br />
record 88% growth in its bookings this fiscal and the<br />
company’s cash collections also went up by 60%. The<br />
company recorded a top line growth of 40% in <strong>2016</strong><br />
which is quite exceptional w.r.t its peers. GPL’s launch of<br />
projects at prime locations, effective marketing strategy<br />
and timely delivery of its projects has been the company’s<br />
strength. The company has benefitted largely due to its<br />
positioning of projects mostly across tier 1 cities -Mumbai,<br />
Bengaluru, NCR region, Kolkata, Hyderabad and Chennai<br />
comprise ~80% of the total projects<br />
The management also held back dividend as it aims to<br />
reinvest in its high growth business and maximize<br />
shareholder value creation. The management gradually<br />
aims to achieve around 20% return on capital employed.<br />
GPL’s capital light business model gives it a competitive<br />
edge- the company invests a maximum of 20% on land<br />
and follows revenue/profit sharing model. It also earns an<br />
extra fee income and promotes if the project sales are<br />
carried out better.<br />
GPL’s strategy of scaling up new launch activity, its shift in<br />
project mix towards higher profitable structures will be<br />
yielding positive results. We expect the pre-sales and cash<br />
flows to see a significant scale-up over the next two years<br />
driven by the marquee location of its assets especially the<br />
Vikhroli project in Mumbai. The recently passed Realty Bill<br />
will also benefit this organized player as smaller builders<br />
will face cash crunch from higher regulatory costs.Overall,<br />
we believe GPL is well-placed to deliver strong earnings<br />
growth over the next two to three years. At current price,<br />
the stock is trading at P/E multiple of 17.6x of FY18E EPS.<br />
We advise our investors to BUY the stock with target price<br />
of Rs. 415, valuing at P/E multiple of 25x FY18E EPS.<br />
Historically, GPL’s 5 year average P/E is 32x. So, if even we<br />
take a conservative multiple of 25x times for FY18, it is<br />
implying a target price of Rs 415. Thus, we would<br />
recommend our investors to accumulate the stock on<br />
cheap valuations and higher growth prospects.<br />
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