Sales growth concerns for Godrej Properties

Margin trajectory and valuations likely to limit upside

Despite its highest-ever sales in a quarter and the management’s expectations of sales growth in FY22, the stock of Godrej Properties was down 4.6 per cent in trade on Wednesday. Worries that the second wave of the pandemic, lockdowns across states, and the economic impact can derail the pace of launches and absorption of India’s second-largest developer by market capitalisation led to the stock’s fall.

Helped by seven launches in the March quarter, the company reported a 77 per cent sequential increase and 10 per cent growth over the year-ago quarter to ~2,630 crore. Fresh launches accounted for 58 per cent of new sales in the quarter.

Cash collections, too, were at record levels crossing the ~2,000crore level, led by robust booking, strong execution, and pending collections. The management expects the current pace of collections to continue.

With the equity raise of ~3,700 crore in the March quarter, the company has not only strengthened its balance sheet (net cash and no leverage) but is also eyeing new projects in its four core markets of the National Capital Region, Mumbai, Pune, and Bengaluru over the next couple of years.

While the company has a healthy launch pipeline of 12.3 million sq ft in FY22 and can launch more projects on approval, analysts at Edelweiss Research say the pandemic will impact the company’s sales velocity in the near term. A recovery is expected in the second half of FY22.

How all this will reflect on the reported financials is what the Street will track. The company reported its fourth straight loss at the operating profit level. Despite the optimistic long-term projections, analysts at CLSA are cautious on the margin outlook and believe that pre-sales growth may not translate into commensurate profit growth.

The Street is also not comfortable with valuations. CLSA — which has maintained a ‘sell’ rating — points out that the valuation at 4x price to book value is higher than peers which are available at 1.5 to 2x on the same metric. Investors should await the pace of launches and bookings, as well as margin momentum before considering the stock.