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Foreign brokerage CLSA has said that Godrej Properties deal with DB Realty lacks merit and a purchase of a direct stake is unwarranted.

Godrej Properties entered into a deal with DB Realty wherein GPL will invest Rs 4 billion in DB Realty for a 10 per cent stake and also invest Rs 3 billion in a 50:50 joint venture with DB Realty to undertake slum rehabilitation and MHADA redevelopment projects in Mumbai.

"We believe this deal lacks merit due to the direct purchase of a stake in DRL which we believe was unwarranted and the foray into slum rehabilitation projects, which are prone to getting stuck and default.

"We believe investing in DRL exposes GPL to risk of capital misallocation and public market risk," CLSA said.

GPL's exercise price for warrants is higher at Rs 90 compared to Rs 49.4/66.5 for DRL/Prestige promoters due to tranche 1 of their investment at a lower price in January 2022 and the sharp run in DRL's stock over the past month, 85 per cent.

CLSA said most slum rehab projects have long gestation periods and prone to drain cash and get stuck. Most slum rehab developers in Mumbai have defaulted in the past, some of them have been penalised and some are facing imprisonment.

Of the 1,500 projects by the Slum Rehabilitation Authority, 550 are stuck. About 60 per cent of these projects are stuck due to financial constraints and 24 per cent due to lack of approvals, litigation, internal disputes. GPL's SRL project in Bandra too is delayed.

With cash and equivalents of Rs 39 billion and a strong brand, GPL is the preferred partner for land owners. CLSA said, "Amidst such a favourable environment, we are perplexed by GPL's strategy to sign this deal."

GPL has a sizeable portfolio in Mumbai so why is it aspiring for SRA projects, CLSA asked. GPL has 38 msf of projects, including 19 msf of upcoming projects in the MMR region. GPL has 900 acres of developable land in Vikhroli.