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Strong sales and healthy project addition momentum to continue

* Godrej Properties (GPL) reported a four-fold jump in sales bookings to ~INR80b during FY17-22, driven by over 100msf of project additions. GPL’s market share expanded to 8% in CY22 from 2% in CY16 and it was one of the biggest beneficiaries of industry consolidation.

* With a strong visibility on consolidation, GPL raised ~INR68b over FY19-21 but a large part of it remained undeployed until FY22. While the company reported a strong scale-up in project pipeline and sales bookings, subdued profitability and declining OCF trend failed to justify its premium valuation.

* In Jan’22, we initiated coverage on GPL with a Neutral rating, citing: (1) its expensive valuation, which incorporated strong business development and (2) no near-term catalysts for improvement in profitability, which has remained a key concern. The stock has corrected ~40% since then and with record project additions (GDV of ~INR300b) in FY23, the valuations have become attractive.

* During our recent meeting with GPL's management, Mr. Pirojsha highlighted that strong business development momentum is expected to continue in FY24 and the company remains on track to deliver improved profitability.

* We estimate that the company could deliver 38msf of projects over the next two years, and the improved profitability will be one of the key re-rating triggers. We upgrade the stock to BUY with revised a TP of INR1,575 implying 40% potential upside.

FY17-22: Strong scale-up in pre-sales and pipeline but subdued profitability and cash flows

* GPL pioneered the asset-light business development strategy over FY17- 20, adding ~90msf of projects through joint venture (JV)/joint development agreements (JDA) that led to a four-fold jump in pre-sales to ~INR80b through FY22.

* Though GPL’s net worth surged to INR87b in FY22 from INR12b in FY18, a large part of the increase was led by INR68b of capital raise over FY19-21 as profitability remained subdued.

*  Further, OCF declined to INR9b in FY21 from INR19b in FY18 and the declining pipeline in the high-margin MMR market failed to provide comfort on improvement in profitability that remained a key concern.

FY23 – Best year for business development; momentum to continue

* After two subdued years (FY21-22), business development momentum for GPL picked up in FY23 with the company adding 27msf of projects with a revenue potential of ~INR300b.

* The total cost of acquisition is expected to be INR35-40b, of which, the company has already spent INR25b in 9MFY23. The investment was partially funded through INR8.5b of operating cash surplus in the first 9M

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