We upgrade Godrej Properties to ?neutral? from ?underweight? with a September 2013 price target of R620 (from R570 earlier) as we factor in higher pre-sales and roll forward to September 2013. Our target price is based on 12x stabilised free cash flow to equity (FCFE).
A 12x multiple is at a 20% premium to the 10x multiple used for other mid-cap players, given a strong brand name and management track record. Overall macro weakness impacting the residential market trends and delay in rate cuts are some of the key downside risks to our assessment.
Godrej Properties? Q2 earnings at R32.6 crore (up 68% y-o-y) were ahead of our expectations, driven by better margins and higher percentage of completion method (POCM) revenues.
Further, the company?s focus on improving operating margin seems to be yielding positive results. We believe the pre-sales performance of the company has been impressive for the last two quarters.
September quarter pre-sales stood at R960 crore, up 83% q-o-q, primarily driven by strong response to a Gurgaon project launch (R600 crore or one million square feet pre-sales) and overall pick-up in launch activity in the last two quarters. The momentum should sustain given a robust launch pipeline through H2FY13, with 4-5 million square feet (JPMorgan estimates) of project launches planned across key cities like Ahmedabad, Gurgaon, Mumbai and Bangalore. This should help sustain the pre sales trends ahead.
Operational cash flows have turned positive in Q2 on the back of strong pre sales. Net debt at R1,610 crore (net D/E ? 1.08x) came down by R135 crore q-o-q.
Average cost of debt remains stable q-o-q at 11.8%. New project additions (~4.2 million square feet added in H1) are being structured as profit sharing/development management agreement to limit up-front advances and ensure healthy margins. We believe that pick-up in operating trends and, a consequent scale-up in earnings over the next few quarters, should provide support to the stock.
JPMorgan
