For investors in Godrej Properties, the devil is in the details

In Q3FY23, Godrej Properties reported record pre-sales of ₹3,252 crore, along with robust new business development. The company added 15 new projects with an estimated booking value of ₹27,500 crore on a year-to-date basis, surpassing its guidance of ₹15,000 crore of estimated booking value for FY23.

Further, with many launches slated in Q4FY23, the company’s management remains confident of exceeding its FY23 pre-sales guidance of over ₹10,000 crore. Note that in the nine-month period of FY23, its pre-sales stood at ₹8,181 crore.

In an earnings call, the management said that it expects the strong business development momentum to continue for at least the next two quarters. The company also plans to widen its presence across its top four markets. But there is fear that the company’s aggressive expansion strategy will weigh on cash flows, margins and elevated debt. In Q3FY23, its net debt increased around 90% sequentially to ₹2,586 crore, the management said.

According to analysts at ICICI Securities Ltd, while the headline sales numbers continue to impress, with just Rs1,230 crore of operating surplus generated in 9MFY23 and fresh land spend of Rs2,750 crore, the company’s net debt has increased. “With large land acquisitions lined-up in Q4FY23 and in FY24 as well, operating cash flows will be the key monitorable going forward to keep debt levels in check,” said the ICICI report dated 2 February.

Over the last one year, the stock has slumped  30%. With rising home loan rates, investor sentiment for the entire real estate pack has soured. The Nifty Realty index has declined nearly 17% in the period.

“Counter cyclically, when everyone else in the sector is deleveraging, the company’s debt is rising. That too in a rising interest scenario. Another pain point in this case is that the pace of new launches and deliveries has been relatively slower than peers,” said an analyst with a domestic brokerage house requesting anonymity.

The management, in the earnings call, said that it was confident of achieving its 10 million square feet (msf) target for deliveries for FY2023. For 9MFY23, deliveries, however, have lagged at 2.5msf. The management is hopeful of the situation improving.

“After such a steep correction, the froth in the stock is cleared, but we feel that there are too many ifs and buts that need to play favourably, for a steep upside,” added the analyst.