Analyst Corner: Maintain ‘buy’ on Godrej Properties; biz gains pace

Godrej Properties’ 2Q shows the inherent volatility in its P&L till accounting profits catch up with the underlying business scale. Pre-sales declined 30% QoQ in 2Q on lack of new launches. For 1H, pre-sales are +11% YoY, making GPL the best performer among our coverage. Business is gaining pace again with labour force 30% higher than pre-Covid and multiple new launches underway. Market share gains and an improving resi cycle are key drivers. Maintain BUY.

P&L stays weak, execution normalises. Godrej Properties (GPL) reported 2Q net profit of `71m, -77% YoY, below estimates. Revenues declined 66% YoY to Rs 0.9bn. While 2.9m sf of projects were completed in the quarter, revenues for the same don’t reflect in P&L as they were JVs with low stakes and, as such, accounted as investments. Business scale-up has meant that GPL hasn’t cut down on its employee & operational costs, which impacts reported profitability. Labourers on-site have scaled up to 130% of pre-Covid levels (62% by July) but uneven pace during the quarter did impact execution. Management guided for ‘normalized’ profit by FY22 and much-improved profit for FY23 as the scale-up reaches P&L. Also, ~20% medium-term RoE target was reiterated.

Pre-sales expectedly weaken QoQ. Pre-sales were -30% QoQ/-26% YoY at Rs 10.7bn. The sales decline QoQ is uncharacteristic of market trends though actually above our estimates of Rs 9.0bn. No new launches happened in 2Q, and we note that over last six quarters, GPL’s pre-sales of 13.0m sf are inline with launches of 12.9m sf. Management highlighted that, while 1Q sales had received a one time boost from easier financing and NRI sales, 2Q pre-sales are normalized with the financing plans discontinued from July.

Launch revival from October, pipeline strong. GPL has a 14.3m sf launch pipeline for FY21. 1 launch (1.0m sf) happened in 1H. Our checks suggest that 3 launches (2.7m sf) now have RERA approvals for marketing. Management remains confident that its largely mid-income project pipeline would see launches and good sales velocity in 2H. Medium-term target is to double sales in 3-4 years.