Why Godrej Properties investors are getting cold feet

The cause of concern lies in the lacklustre performance of its June quarter (Q1FY24) pre-sales, which witnessed an 11% year-on-year decline, amounting to ₹2,250 crore. The drop was primarily attributed to delayed new launches that adversely affected the bookings. During Q1FY24, the company managed to launch only 1.1 million square feet (msf), but it plans to counter this by launching approximately 19msf in the remainder of FY24. Godrej Properties has reiterated  its goal of achieving ₹14,000 crore of presales in FY24.

Although the company demonstrated a robust momentum in its business development by adding five new projects in Q1, with an expected booking value of ₹6,500 crore, rising debt due to increased business development activity has become a cause for investor unease. Net debt rose from ₹3,650 crore as of March 2023 to ₹5,300 crore at the end of June quarter. Furthermore, the management anticipates further increase in the upcoming quarters. Weak launches leading to lower collections only served to exacerbate the company's woes.

“Q1FY24 business development GDV is 43% of overall FY24 guidance of Rs15000 crore and with more new land parcels in the offing along with payments for upcoming launches (Ashok Vihar, New Delhi pending payments of ₹500 crore), operating cash flow generation for the company needs to significantly improve going forward to keep debt levels from rising further," said analysts at ICICI Securities Ltd.

Adding to the company's woes is a quality issue at its Godrej Summit project in Gurgaon, which was completed in phases during calendar years 2017 and 2018. To address the matter, the company set aside ₹155 crore for repairs during the quarter and offered a buyback option to homeowners. “While the monetary damage is relatively contained (Godrej Properties also plans to claim the costs from its contractors), the reputational hit could be higher—we would watch out for customer returns," said analysts at Kotak Institutional Equities.

Meanwhile, in this calendar year so far, the Godrej Properties stock has rallied 27%, marginally ahead of the Nifty Realty index. With the fear of more interest rate hikes largely out of the way, real estate stocks have garnered increased investor attention.

But company-specific issues can play a spoilsport for Godrej Properties going ahead. “While net operating cash flow shrunk quarter-on-quarter; net cash flow continues to be in the red (due to land capital expenditure), causing debt build-up. With the housing cycle turning, we expect the sales momentum to stay. The 25% run-up in the stock over the past three months has capped the upside," said a Nuvama Research report.