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| Pirojsha Godrej |
This Q&A first appeared in DNA Money edition on Friday, November 2, 2012.
Pirojsha Godrej, managing director and chief executive officer of Godrej Properties Ltd, cannot hide his glee. The company posted a whopping 67.5% on-year growth in net profit for the second quarter of the financial year 2012-13 on Thursday, and appears intent on sustaining the momentum. In an interview soon after announcing the results, Godrej took stock of the current property market, consumer sentiment and the road ahead for his company.
Will there ever be a correction in real-estate prices? Prices seem to be heading only north.
Pricing and price correction... very tricky question that, something we get asked very often. Six months ago, there was talk about a possible price correction; but the answer is, most probably, it won't happen, though prices always can come down. One needs to appreciate that there are factors on all sides. The developers are also facing constraints — whether in the form of much higher input costs, labour cost, and cost of funds, which hurts both the developer as well as the customer looking to buy an apartment. The substantial increase in costs over the last couple of years makes meaningful price cuts quite unlikely.
Anybody who claims to know what will happen to prices in a complex market like real estate is probably fooling himself. There are more signs that point to prices holding steady or going up than there are of them coming down. We didn't think prices would come down even when the economic conditions and consumer sentiment were [at their] worst. Predicting price trends in the very near term is very difficult. I don't think there is a compelling case for prices trending lower in the next 6-12 months.
What is your sense of the overall business environment in the Indian real-estate sector?
The sector clearly has gone through a bit of a difficult period over the past 12 months. Interest rates have been high, gross domestic product (GDP) growth has obviously been under pressure. Our sense is that particularly in the residential space, there is good demand for good quality projects in the right locations at reasonable price points. And we have seen evidence of that from the market response to some of our recent launches in Bangalore and Gurgaon. Across cities, we have been able to maintain fairly good traction. That said, we certainly think there are some things on the horizon that are likely to improve the momentum in the sector, including, hopefully, interest rates starting to come down. It is very positive to see the momentum the government has gained now on reforms and, hopefully, that can be taken to a logical conclusion.
But consumer sentiment doesn't appear to be improving. One look at the flat registration numbers of recent times explains it all. Where is the traction?
That may be true for the sector as a whole, which clearly has not seen good traction; but we have not really witnessed a decline in sales and the consumer sentiment. We had launched the second phase of our Vikhroli, Mumbai, project last year and the price per square foot for the recent third phase launch is 35% higher than what it was in the same period last year. We have received great response from the market even at the increased price point. So, fundamentally, the demand exists and we have already witnessed it.
What do you think needs to be done to improve consumer sentiment? Are the necessary steps being taken in that direction?
In my view, consumer sentiment would be better if the economy and people's perception of it get back on track. On that front, while we have had a very disappointing 12-18 months, the last 30-45 days have been very encouraging. If that kind of momentum can be sustained by the government on the policy side, it will be very good news. I think over time we are hopeful that the RBI [Reserve Bank of India] will also be supportive of this kind of growth through interest rate reduction which most people expect to unfold in the coming months. What is also very encouraging to see is that the momentum/thinking is correct and now it is all about making sure they are able to get the results as expected. I think the finance minister has done a fabulous job of coming in and very quickly announcing a set of measures that I think would go a long way in increasing business confidence as well as the consumer sentiment.
The second quarter has been quite exciting for the company. Could you share the key business highlights?
It certainly has been a good one on most operating metrics. We have seen strong growth in total revenue to the extent of 64% over the corresponding period last year. Booking growth, which is new sales and indicative of the likely growth that will come in revenue in the future, has been more strong with growth in value terms of about 327% for the second quarter this fiscal. A lot of booking growth has actually come from the launch of Godrej Summit in Gurgaon. We were able to sell the entire first phase of the project constituting about 1 million square feet in one day. Our ebitda [earnings before interest, tax, depreciation and amortisation] increased by more than 100% from Rs34.6 crore to Rs72.3 crore while net profit grew from Rs19.5 crore to Rs32.6 crore, representing an increase of 67.5% on a year-on-year basis. So, all in all, it has been a very satisfying second quarter.
Could you share some details about new launches in the coming months?
We have several project launches coming in. In October, we launched two projects in Bangalore — Godrej Gold County and Godrej Electronic City. Over the next couple of months, we will be launching the second phase of Godrej Summit, Gurgaon. We launched on Dussehra the third phase of our Vikhroli project in Mumbai and will have additional phases of project launches in Pune, Nagpur, Kolkata and Ahmedabad. Mumbai will see several new projects getting launched. One of them is a redevelopment project called Godrej Central in Chembur and another is our commercial project in the Bandra Kurla Complex (BKC) which is a joint venture with Jet Airways.
Are you looking at financial partners for the Chembur and BKC projects?
We have already done a private equity (PE) partnership with Sun-Apollo for the Chembur project which would be a 6-7 lakh square foot development. For the BKC project, we are open to a PE partnership though nothing has been finalised. We don't have any particular amount in mind, it will depend on the structure of the deal. The total project size of the BKC development is a little bit larger than we had anticipated, which is positive news. We expect it now to be about 1.25 million square feet. Of that, a little over 2 lakh sq ft will be used by Jet Airways for their corporate space, so we will have slightly over a million square feet available for sale and/or lease. The exact ratio between sale and lease is something that will be decided as the project unfolds.
What is your outlook for the coming quarters?
I would imagine the second half of the fiscal will be a busy period with a host of launches starting from the festive season. The third quarter has also started on a good note. We have had a few good launches in Bangalore and many more are slated over the next couple of months and the upcoming financial year. And we hope to maintain the strong sales momentum in these developments. We maintain that even if things don't improve, we feel pretty good [that] given the kind of projects we have added and the launches we have in the pipeline we would be able to deliver strong growth picture. Clearly that ability would be further enhanced if the economic climate in general improves in the coming quarters.
Pirojsha Godrej, managing director and chief executive officer of Godrej Properties Ltd, cannot hide his glee. The company posted a whopping 67.5% on-year growth in net profit for the second quarter of the financial year 2012-13 on Thursday, and appears intent on sustaining the momentum. In an interview soon after announcing the results, Godrej took stock of the current property market, consumer sentiment and the road ahead for his company.
Will there ever be a correction in real-estate prices? Prices seem to be heading only north.
Pricing and price correction... very tricky question that, something we get asked very often. Six months ago, there was talk about a possible price correction; but the answer is, most probably, it won't happen, though prices always can come down. One needs to appreciate that there are factors on all sides. The developers are also facing constraints — whether in the form of much higher input costs, labour cost, and cost of funds, which hurts both the developer as well as the customer looking to buy an apartment. The substantial increase in costs over the last couple of years makes meaningful price cuts quite unlikely.
Anybody who claims to know what will happen to prices in a complex market like real estate is probably fooling himself. There are more signs that point to prices holding steady or going up than there are of them coming down. We didn't think prices would come down even when the economic conditions and consumer sentiment were [at their] worst. Predicting price trends in the very near term is very difficult. I don't think there is a compelling case for prices trending lower in the next 6-12 months.
What is your sense of the overall business environment in the Indian real-estate sector?
The sector clearly has gone through a bit of a difficult period over the past 12 months. Interest rates have been high, gross domestic product (GDP) growth has obviously been under pressure. Our sense is that particularly in the residential space, there is good demand for good quality projects in the right locations at reasonable price points. And we have seen evidence of that from the market response to some of our recent launches in Bangalore and Gurgaon. Across cities, we have been able to maintain fairly good traction. That said, we certainly think there are some things on the horizon that are likely to improve the momentum in the sector, including, hopefully, interest rates starting to come down. It is very positive to see the momentum the government has gained now on reforms and, hopefully, that can be taken to a logical conclusion.
But consumer sentiment doesn't appear to be improving. One look at the flat registration numbers of recent times explains it all. Where is the traction?
That may be true for the sector as a whole, which clearly has not seen good traction; but we have not really witnessed a decline in sales and the consumer sentiment. We had launched the second phase of our Vikhroli, Mumbai, project last year and the price per square foot for the recent third phase launch is 35% higher than what it was in the same period last year. We have received great response from the market even at the increased price point. So, fundamentally, the demand exists and we have already witnessed it.
What do you think needs to be done to improve consumer sentiment? Are the necessary steps being taken in that direction?
In my view, consumer sentiment would be better if the economy and people's perception of it get back on track. On that front, while we have had a very disappointing 12-18 months, the last 30-45 days have been very encouraging. If that kind of momentum can be sustained by the government on the policy side, it will be very good news. I think over time we are hopeful that the RBI [Reserve Bank of India] will also be supportive of this kind of growth through interest rate reduction which most people expect to unfold in the coming months. What is also very encouraging to see is that the momentum/thinking is correct and now it is all about making sure they are able to get the results as expected. I think the finance minister has done a fabulous job of coming in and very quickly announcing a set of measures that I think would go a long way in increasing business confidence as well as the consumer sentiment.
The second quarter has been quite exciting for the company. Could you share the key business highlights?
It certainly has been a good one on most operating metrics. We have seen strong growth in total revenue to the extent of 64% over the corresponding period last year. Booking growth, which is new sales and indicative of the likely growth that will come in revenue in the future, has been more strong with growth in value terms of about 327% for the second quarter this fiscal. A lot of booking growth has actually come from the launch of Godrej Summit in Gurgaon. We were able to sell the entire first phase of the project constituting about 1 million square feet in one day. Our ebitda [earnings before interest, tax, depreciation and amortisation] increased by more than 100% from Rs34.6 crore to Rs72.3 crore while net profit grew from Rs19.5 crore to Rs32.6 crore, representing an increase of 67.5% on a year-on-year basis. So, all in all, it has been a very satisfying second quarter.
Could you share some details about new launches in the coming months?
We have several project launches coming in. In October, we launched two projects in Bangalore — Godrej Gold County and Godrej Electronic City. Over the next couple of months, we will be launching the second phase of Godrej Summit, Gurgaon. We launched on Dussehra the third phase of our Vikhroli project in Mumbai and will have additional phases of project launches in Pune, Nagpur, Kolkata and Ahmedabad. Mumbai will see several new projects getting launched. One of them is a redevelopment project called Godrej Central in Chembur and another is our commercial project in the Bandra Kurla Complex (BKC) which is a joint venture with Jet Airways.
Are you looking at financial partners for the Chembur and BKC projects?
We have already done a private equity (PE) partnership with Sun-Apollo for the Chembur project which would be a 6-7 lakh square foot development. For the BKC project, we are open to a PE partnership though nothing has been finalised. We don't have any particular amount in mind, it will depend on the structure of the deal. The total project size of the BKC development is a little bit larger than we had anticipated, which is positive news. We expect it now to be about 1.25 million square feet. Of that, a little over 2 lakh sq ft will be used by Jet Airways for their corporate space, so we will have slightly over a million square feet available for sale and/or lease. The exact ratio between sale and lease is something that will be decided as the project unfolds.
What is your outlook for the coming quarters?
I would imagine the second half of the fiscal will be a busy period with a host of launches starting from the festive season. The third quarter has also started on a good note. We have had a few good launches in Bangalore and many more are slated over the next couple of months and the upcoming financial year. And we hope to maintain the strong sales momentum in these developments. We maintain that even if things don't improve, we feel pretty good [that] given the kind of projects we have added and the launches we have in the pipeline we would be able to deliver strong growth picture. Clearly that ability would be further enhanced if the economic climate in general improves in the coming quarters.
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