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Godrej Properties IPO – Richly Priced

December 9, 2009

godrej apartments mumbaiGodrej Properties (GP) is the real estate arm of Godrej Group that has presence in FMCG, industrial engineering, appliances etc. The group reaches to almost 400 mn Indians every day and enjoys a strong brand recall.

Realty Business Model:
It works on an asset-light model by entering into joint development agreements with land owners, sharing its revenues/profits with them in lieu of bringing their land under development. The company has a land bank of 391 acres spread across 10 cities, with more than 50% in Ahmedabad [Previous Mill Land]

Cash Flow Negative: GPL has a negative cash flow from operations on account of its higher working capital requirement towards acquisition of land development rights and expenses for the development of projects.

Current IPO:
Offer size : 94 lakh shares, forming 13.5% of post-issue equity base
Offer Size – Rs 500 cr
Price Band – 490 – 530
Fully Diluted Equity – 6.99 cr shares
FY09 FDEPS – Rs 10.9

On a trailing basis the IPO is priced at ~50 times EPS [FY09] which is expensive in our view.

Taking into account any potential development of land owned by the parent company, successful execution of MoUs (185 acres) which are currently in nascent stages, optimistically in a sunny day scenario the company can be valued at Rs 450 with scope for downside. Gone are the days of SELLING Land Bank story as it didn’t really materialize into CASH flow for the company. AVOID Subscribing to Godrej Properties.

We are glad that Retail Investors on our recommendation are staying away from OVERPRICED IPOs and holding on to their CASH [ Capital Preservation, makes lot of sense too] while the FII money gets sucked by these companies, wait for the market correction to BUY other Businesses which will be at compelling valuations.

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