Shares of Godrej Properties Ltd. hit the 10% lower circuit as analysts cut price targets for the real estate developer citing its deal with DB Realty Ltd. as "unwarranted" and "surprising".
Godrej Properties' board approved a potential investment in DB Realty and setting up of a special purpose vehicle to jointly undertake slum rehabilitation and Maharashtra Housing and Area Development Authority redevelopment projects, according to an exchange filing dated Feb. 3.
"Godrej Properties will subscribe to warrants convertible into equity shares aggregating to about 10% of the issued and paid-up capital of DB Realty for an aggregate amount of Rs 400 crore," the filing said. They will each contribute an additional Rs 300 crore towards the equity platform focused on redevelopment opportunities in Mumbai.
Meanwhile, the Mumbai-based developer announced its third-quarter results, with net profit jumping more than twofold at Rs 38.9 crore.
Other Q3 Highlights (Consolidated, YoY)
Revenue up 64% at Rs 279 crore.
Total costs up 20% at Rs 331 crore.
Sales booking at Rs 1,541 crore, up 4%.
Pre-sales volumes fell 7%.
Shares of Godrej Properties slumped the most in 15 months around 9:30 a.m., after ending 6.4% lower a day before. Of the 20 analysts tracking the company, two recommend a ‘buy', six suggest a ‘hold' and 12 have a ‘sell' call, according to Bloomberg data. The average of 12-month price targets still implies a 5.9% upside.
Here's what brokerages made of Godrej Properties' Q3 performance and DB Realty deal:
CLSA
Maintains 'sell', reduces target price from Rs 1,563 to Rs 1,424, implying a potential downside of 15%.
This deal lacks merit due to the direct purchase of a stake in DB Realty, which was unwarranted and the foray into slum rehabilitation projects which are prone to getting stuck and default.
Investing in DB exposes Godrej to risk of capital misallocation and public market risk. Godrej Properties' exercise price for warrants is higher at Rs 80 compared to Rs 49.4/Rs 66.5 for DB Realty's/Prestige's promoters.
Most slum rehab developers in Mumbai have defaulted in the past (some have been penalised and some are facing imprisonment). Of the 1,500 ongoing projects by the Slum Rehabilitation Authority, 550 are stuck. About 60% of these projects are stuck due to financial constraints and 24% due to a lack of approvals, litigation and internal disputes.
With cash and equivalents of Rs 390 crore and a strong brand, Godrej Properties is the preferred partner for land owners. Amid such a favourable environment, we are perplexed by GPL's strategy to sign this deal.
Jefferies
Maintains 'buy' but slashes target price to Rs 2,000 from Rs 2,750 on lower multiples, still implies potential upside of 17%.
Q3 pre-sales disappointed on launch delays, though Q4 is promising. The company has done well to grow through stressed asset acquisitions.
However, its investment in DB Realty for a slum rehab platform and stake in the entity could be a near-term derating event given the track record of the business and DB.
Nonetheless, with Godrej Properties down 36% from peak amid a housing boom and given its own strong track record, we stay at 'buy'.
We note, though, that DB Realty has recently formed similar project JVs with Prestige Estates Projects Ltd. with reasonable progress, consequent to which Prestige's promoters have also invested in DB Realty.
JPMorgan
Maintains 'neutral', cuts target price to Rs 1,900 from Rs 2,210, still implying a potential upside of 32.5%.
Slower pre-sales on launch miss; surprise investment into DB Realty.
Earnings continue to underwhelm at Godrej Properties, even as pre-sales are growing. Our cash flow estimates suggest a 30% operating margin on projects. However, Godrej Properties' historical economics on these projects have been lower, though this could change, as most projects have had better incremental economics to Godrej Properties post-2019.
That said, the stock could remain weak until these projects are not reflected in earnings. Free cash remains negative on higher business development, though core operating cash flows have remained at the Rs 400-crore mark for around two quarters.
We are surprised at the company's move into these risky assets with DB Realty, given the historical conservatism at Godrej Properties.
Any move by the company to consolidate its interest in the project and, hence, increase its profit ownership would be positive.
Motilal Oswal
Maintains 'neutral', cuts target price to Rs 1,800 from Rs 2,100 earlier, still implying a potential upside of 8%.
Subdued quarter as its pre-sales volumes declined 7% year-on-year. Better realisations led to marginal growth year-on-year in value terms.
The JV platform is likely to provide a strong scalable opportunity to Godrej Properties in Mumbai Metropolitan Region, where it is currently struggling to retain its market share. However, the long gestation nature of these redevelopment projects is likely to create an overhang on the stock until there is clarity on the project pipeline.
On the back of a strong launch pipeline, we expect the company to deliver 23% growth in pre-sales in FY23. While growth is expected to continue at a healthy pace, we believe it is largely factored in at current levels.
ICICI Securities
Retains 'sell' with a target price of Rs 1,205 at a 60% premium to FY22E NAV of Rs 753/share. This implies a potential downside of 27.8%.
With a strong launch pipeline in Q4, Godrej Properties appears to be on track to cross FY21 sales bookings.
Not enthused by the proposed entity level investment in DB Realty and believe that this exposes shareholders to entity level risks in DBR and greenfield slum rehab projects in Mumbai which are fraught with risks.
Direct SPV level investments by Godrej after assessing project level viability is the ideal investment route.
Key upside risks are a stronger-than-expected uptick in Godrej sales volumes and double-digit residential price growth.
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