Unlocking Success

With an expansion model driven by joint ventures, Godrej Properties has managed to march ahead despite industry headwinds

Soumik Kar

Mohit Malhotra vividly remembers the time he joined Godrej Properties Limited (GPL) as the business development head, in 2010. The real estate arm of the homegrown consumer goods major was a relatively small player in this industry – while GPL delivered around 3.9 million square feet of real estate in FY10, fellow heavyweights like DLF and Prestige Group delivered 7 million and 17 million square feet, respectively. GPL, as Malhotra candidly describes, was a “sleepy place”.

Compare that with GPL’s current position in the industry, and Malhotra’s words are hard to believe. Alongside aggressive expansion, it has brought in transparency of business in an industry that is not known for such values. In FY18, GPL completed five projects or phases covering 2.9 million sq. ft., and added 12 new projects with a saleable area of 23.5 million sq ft. For FY19, it has 10 new projects, and eight new phases in the pipeline.

Total income increased by 38% in FY18 to around Rs.24 billion, while net profit rose by 14% to Rs.2.39 billion. In fact, growth over the past five years has been phenomenal — since FY13, while net sales jumped 2.28x, profit after tax clocked an impressive 1.69x.

In FY18, the company also saw its best ever year in terms of booking cash collections, which was up 54% to Rs.40 bn. As a result, GPL generated Rs.18.7 billion of net operating cash flow in FY18, helping it reduce its overall debt as per GPL’s FY18 annual report.

Malhotra, who took over as CEO in 2017, says, “Godrej Properties is now a brand in itself. It’s recognized as a leader in the properties business, which is a big change. When we meet our potential joint venture partners, they come with a bit of respect to you because they know this is a player which doesn’t cheat their partners, delivers projects on time and has a very large ability to sell.”

Winds of Change

The genesis of GPL was as Sea Breeze Constructions and Investments in 1985. It was acquired by the Godrej Group in 1990, and renamed as Godrej Properties and Investments. Following this, during its initial public offering (IPO) in 2010, the company was christened Godrej Properties Limited. Its IPO was oversubscribed by 3.56 times, but it was a tough market that GPL was eyeing.

“After the global financial crisis in 2008-09, the real estate industry was badly hit. Both residential and commercial real estate saw abysmal levels of transaction and haven’t shown much recovery,” says Samantak Das, chief economist and national director — research and REIS at JLL Research.

A year after Malhotra joined the company, in 2011, the company focused on creating organisations regionally. It was one of the changes Malhotra brought in, learning from his stint at Unitech and Dutch private equity firm Redevco, to scale up GPL. He believes that ‘execution’ is where most of the real estate giants failed.

“You can’t take centralised decisions in a business like properties, which is a local business. We are now in the top four cities, but we don’t run this company nationally,” he says, adding that while brand, capital and risk are managed centrally, decentralisation has happened for managing the ‘people’. The company invests in people and capability development, and the vision is to make these local entities as large as GPL in their own territory.

Another change that Malhotra brought in was a strong process for underwriting. In 2006-07, Malhotra says that business development was often done on gut. “I came from a consulting background, where people took as much as six months before investing. I was clear that investing without any analysis can have a damaging impact. So we put in the entire principles of private equity and consulting into how a deal has to be evaluated,” he explains. The third change — that actually put the company on a high growth trajectory — was to focus on joint venture deals to scale up operations.

Joint approach

Unlike other major developers, Godrej Properties follows a differentiated business model of joint development (JDA) — either with its own group companies, or with third party ones. “From 2011, we have been doing 7 to 8 deals per annum,” mentions Malhotra.

In FY18, about 83% of the area added was in partnership with other developers. From 14 million sq ft in FY11 under 14 JVs, the company as of Q1FY19 has 34 JVs covering close to 60 million sq ft, while its own land under development is 39 million sq ft covering 27 projects. (see: Co-creating growth)

Players such as DLF or Mumbai-centric Oberoi Realty prefer to develop their own land bank, while Godrej prefers the partnership model, under which the joint development partner, who contributes the land, is entitled to either a share in area of developed property or a share in revenues/profits arising from the sale of such property.

“GPL’s focus on increasing business scale by adding projects under joint venture and joint development route is resulting in significant market share gains. Case in point is GPL’s presence in oversupplied NCR market, where it has leveraged its execution skills and brand strength to gain market share where customers have remained apprehensive about the capability of local developers to complete projects,” says Abhishek Anand, vice president, equity research, JM Financial.

In a revenue share model, the land owner gets a 30-35% share from the topline, and the rest is managed by GPL. But if the developer is not going to make money, eventually they will have to shut down because there is no profit in that enterprise. Hence, GPL shifted to a profit sharing model, wherein, out of 100, around 60-70% is spent on covering costs and the remaining amount is split between the two parties. Essentially, instead of topline, the two parties share the bottomline. In such a scenario, the money of both parties is stuck in the project, which ensures complete alignment of interest. “Before 2010, all our JVs were on revenue share, but over the past seven years, we have only done profit share deals,” says Malhotra.

In cases a land owner is not interested in a JV partnership and just wants to sell his land, he can simply sell his land to Godrej Fund Management (GFM), the private equity arm of Godrej Group, which was initially a subsidiary of GPL. After raising money from external investors, it now operates as an independent PE firm. “Development management is a model we created. If an owner wants to cash out, GFM buys the land and enters into a JV with GPL,” says Malhotra. The GFM move, conceptualised in 2012, is a fairly large business today with about five upcoming projects. GPL gets about 13-15% of the topline in these joint ventures.

The JDA model is expected to work well for GPL, especially after RERA. As projects need to be tightly executed, strictly sticking to timelines, land owners may choose to sell out their land parcels or partner with prominent names such as GPL. Muted real estate prices also may force land owners to favour joint developments.

Smaller players such as Ram Manekcha, owner and director of Vakratunda Realty, also look for expertise from Godrej. “I can manage to get the approvals in time, while GPL brings in the expertise. So, it is beneficial for both,” says Manekcha, who is currently working with GPL to develop Godrej Vihaa at Badlapur. The 18-storey building with 504 units is under construction, spread over 13 acres of land.

He states that his experience of working with GPL has been very good. “The team is very transparent, cooperative, grounded and professional. They ensure that all the safety precautions and approvals are taken,” he adds.

Analysts opine, this is the right approach to scaling the business, as residential real estate business remains primarily localised. Players with in-depth knowledge of local dynamics — from approvals to consumer preference — will have a significant competitive advantage. “Godrej has operated as a decentralised organisation, with 150-200 people deployed in each geography. The projects are undertaken to suit the local requirements, and each market works as separate business segments. This, in our view, ensures steady operations improvement,” says Anand.

Last year, the company collaborated with debt-laden Nirmal Ventures to develop a township project in Thane. Dharmesh Jain, chairman & managing director, Nirmal Ventures, was quoted as saying that it is difficult for any developer to construct more than one million sq. ft. at one go, especially considering the target timelines. Hence, he collaborated with Shapoorji Pallonji, L&T Realty and GPL for residential projects in Mumbai.

But, none other than GPL is doing joint development as aggressively. GPL is also relying on JDA to make inroads into regional markets. Recently, the company also entered into joint ventures with Royale Builders and Sai Srushti Group in Bengaluru. From only five projects in 2012, GPL now has 17 projects in the city.

Concentrated bets

Pirojsha Godrej, executive chairman, GPL, states that FY18 has been the best year ever for Godrej Properties. In the company’s annual report, he highlights that the company set two financial targets that they wished to achieve over the next five years — establishing themselves among the top three real estate developers by value of the top four markets in the country — Mumbai, Bengaluru, Delhi NCR and Pune, and doubling their return on equity to 20% from the current 11.43%.

At present, the company is the market leader in Delhi, holds second position in Mumbai and Pune, and third in Bengaluru. In the last financial year, GPL sold over 1.25 million sq. ft. with booking value of over Rs.8 billion in each of the four markets. Over the past year, net sales for GPL grew by 19.35%, while Oberoi Realty’s grew moderately at 13% and DLF’s fell by 18%. Prestige Group saw a growth of 15%. Robust sales, significant new business development and improved operating cash flows ensured that GPL is on track to achieve its ROE target. (see: It’s a real rise)

Anand believes that brand strength, management focus on maintaining brand with customer-centric policies, on-time execution, presence across segments, access to low cost capital (8% cost of debt), business upscaling with asset-light model and a focus on market strategy are factors that have augured well for GPL.

Interestingly, consumers too have become extremely choosy about the company they want to partner with, especially when the project will get completed over a few years. And the greater that risk is in the consumer’s mind, the more beneficial it is for a large brand like Godrej. “When we entered Greater Noida, it was a really bad time. Annual sales of that entire market used to be about 500,000 sq. ft in 2016. But we sold 2 million sq ft in that project in less than two years,” says Malhotra.

To retain this confidence, it was important to deliver on time, which is often a challenge in the real estate business. Several factors come into play before a project is launched — regulatory permissions, finances, design and so on. GPL, on its part, is already working on shortening the timeline for the launch of the project. “The current timeline from the day you get the project to the day of launch is 12 months. In FY18, we designed, got approvals and launched the Greater Noida project within six months of signing,” says Malhotra.

Anand points to GPL’s presence in the over-supplied NCR market. “The company has leveraged its execution skills and brand strength to gain market share where customers have remained apprehensive about the capability of local developers,” he adds.

Anuj Puri, chairman, Anarock Property Consultants, agrees and adds that the Godrej Group is extremely well capitalised and have excellent standing with lenders. “This gives them the ability to complete projects on time and in line with promises,” adds Puri. As per the FY19 annual report, GPL raised Rs.10 billion of equity capital in June 2018 from a leading global investor to ensure they have the financial resources to sustain the rapid growth. As a result, the net debt of the company has nearly halved from Rs.3,499 crore in FY17 to Rs.1,776 crore in Q1FY19, thus lowering its D/E to 0.70x as of June 2018. (see: Debt end) Its borrowing costs too have fallen to 7.86% against 8.8% in FY17.

Though GPL has scripted a success story in a tough business environment, Malhotra admits that it still is a nightmarish situation. International property consultants Knight Frank, in its India real estate (July-December 2017) report, notes that unsold inventory and RERA pressures have derailed the residential market. Sales volumes in top metropolitans have hit a seven-year low, and there has been an effective price discount of 10-15% in cities such as Mumbai and NCR.

Das believes that while the long term impact of RERA is positive, it is likely to have an adverse effect in the short run, as real estate players have had to recalibrate their business models. “Traction is coming back in the affordable, mid- and warehousing segments, which is good because the base of the pyramid is solidified. However, the premium segment continues to struggle,” he adds.

This makes it difficult to increase prices in the market. Although the company charges a premium, Malhotra maintains that it isn’t an unreasonable premium. “Typically, I would say that our prices are 10-20% higher than that of our neighbourhood,” he says.

With a clear focus on expanding in select geographies, GPL seems to have got its act spot on. The company has maintained a constant pipeline of doing over eight deals every year since 2011. Anand believes that while there could be quarterly volatility, they expect GPL to be a key beneficiary of sector consolidation as it leverages the ground work done over the last five years in its four key markets.

Puri adds that GPL started the right kinds of projects in all the right growth corridors, at the right price points and with just the right degree of incentives for buyers, such as allowing them to make 10% of upfront payment on their real estate purchase, and giving an option to pay the rest after three years. Godrej also offers affordable pre-EMI options starting at Rs.9,999. “As such, they are able to dominate this space with an extremely good track-record and a long history of credibility and brand entrenchment,” he states.

However, some analysts are concerned given that GPL has been aggressive in acquiring new projects in FY18 (23 million sq ft). Param Desai of Elara Capital states in his report that the move is likely to put pressure on cashflow as payments need to be made for approvals. However, Malhotra is not too worried. “It’s not that the consumer has gone away. It’s just that consumers are increasingly turning risk averse and that, in fact, works in favour of our brand.”

GPL’s ambition is to be the number one player in every region they are present in. Once the industry emerges out of recession, the investment could rise exponentially, believes Malhotra. 

It is evident that the change from a small player to a dominant company with an enviable balance sheet has been possible due to several strategic changes. What stays constant, is the focus on picking ‘winners’, and winners seldom lose.