>GODREJ INDUSTRIES: Rich legacy

■ Focused mid-income housing player with an asset-light model: Godrej Properties (GPL) is a focused mid-income housing player, with a pan India presence and a differentiated business model. Almost ~77% of GPL's land bank of ~50msf comprises of joint development (JDA) projects. The JDA approach allows GPL to enjoy a low risk, low capital intensive business model. The advantages of GPL's model are reflected in its superior RoEs.

■ Ability to emerge as a leading pan India player: Several RE players have been trying to position themselves as pan-India players. Nonetheless, most RE companies have not been successful in their pan India expansion attempt because of the lack of brand recognition. Godrej group enjoys tremendous brand recall and trust across the country. Hence, we believe GPL has the potential to emerge as a leading pan India RE player, going forward.

■ Option value provides significant upside potential: GPL's parent, Godrej Industries Limited (GIL) and its group/ promoter companies have strategic land holdings across India. GPL has been identified by the Godrej group as the RE development vehicle for developing these key land holdings through the JDA model. It already has MoUs with Godrej group companies to develop ~185acres. We have attempted to capture this option value by valuing all the disclosed MoUs and assuming an incremental development on 100acres at Vikhroli (Mumbai). Based on our probability-weighted methodology, we arrive at an option value of Rs177/share. Our option value still does not capture possible upsides from (i) new MoUs with group companies for their existing land bank and (ii) the full developmental potential of the 500-acre Vikhroli land.

Expect valuation to remain at premium to NAV due to high growth visibility: We expect GPL to trade at premium to NAV due to its strong growth visibility, asset-light model and brand equity. We estimate GPL's FY12E core NAV at Rs538/share and probability-weighted option value NAV at Rs715/share, which is our price target (33% premium to core NAV). GPL currently trades at 46% premium to FY12E core NAV and 10% premium to option-adjusted NAV. It is richly valued at 4.6x FY12E BV of Rs167 and 24x FY12E EPS of Rs32. Going forward, the key catalysts which could further re-rate GPL are (i) traction on disclosed MoUs, (ii) visibility on development of other group land bank (particularly at Vikhroli) and (iii) continued momentum on new third party JDAs. We initiate coverage on GPL with a Neutral rating.

To read the full report: GODREJ INDUSTRIES