Godrej Properties: Share Target Price at Rs. 490

India's leading real estate company Godrej Properties' (GPL) recent fund raising of Rs. 470 crore (estimated Rs. 800 crore) is not enough.

The fundraising will bring down net debt to equity only to 1.1x (still the highest among its peers), which suggests that the company will need to raise capital again by 2013-14.

HSBC anticipate GPL to raise additional equity during 2013-14 unless it is able to monetise its investment in its Bandra-Kurla Complex commercial project (30% of NAV).

GPL could be forced to look at smaller projects. We anticipate high near-term leverage will reduce GPL’s ability to take on larger projects. While it is “too early to call it yet,” a recent example is GPL’s new redevelopment project in Chembur with an implied value of $ 1.6 crore. While a large brand like Godrej should be able to maximise value on small projects, multiple small projects can exert pressure on management’s bandwidth and execution in the medium to long term.

Reiterate an underweight rating with a target price of Rs. 490 (rounded up from our NAV estimate of Rs. 481) which comprises Rw. 415 for its current projects plus Rs. 66 for its Vikhroli land agreement.

While we agree that GPL deserves a premium to its peers given its stronger ROE and track record, we believe the current premium is excessive given GPL’s high leverage which can induce further equity dilution.

Our 60 to 70% upwards earnings revision for FY13-14e is primarily owing to management’s recent decision to sell some of its commercial assets to its group company on an outright basis against leasing earlier. While the total amount of cashflow realised should remain largely unchanged, the switch would accelerate the timing of cashflow realisation.

Review by HSBC

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