To focus more on residential real estate ahead: Godrej Prop

Godrej Properties' consolidated net profit rose stronger-than-expected, 67.6 percent, year-on-year to Rs 32.6 crore in the July-September quarter of current financial year.

In an interview to CNBC-TV18, Pirojsha Godrej, managing director and chief executive officer of Godrej Properties says the company's focus, from a strategic perspective, is going to be more on residential real estate.

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee.

Q: There is a lot of excitement about Godrej Summit. How well that’s done for you? Can you take us through the numbers? What your expectations are from the Gurgaon market in general?

A: We did have a positive quarter in Q2. Godrej Summit was a key part of that success. As has been reported, we sold about one million square feet or almost 700 apartments in that project in a single day. That led to a booking value of about Rs 600 crore for the company. That certainly drove our overall booking figure, which ended the quarter at Rs 965 crore, about a 330 percent increase on a year-on-year basis.

We also had strong growth in revenues, which grew about 64 percent to Rs 233 crore. Our EBITDA grew by more than a 100 percent to Rs 72 crore. Our net profit ended at Rs 33 crore, about a 68 percent increase. All of those numbers, ofcourse, don’t factor in the Godrej Summit numbers. Because of the percentage completion accounting method that we follow, the Godrej Summit and other new launches that we had, those numbers will only start coming in to the revenue stream over the next few quarters.

Q: What kind of average rates are you selling at in Gurgaon?

A: In Gurgaon, for the second quarter, we ended at an average rate just a shade under Rs 6,000 a square feet. When we will launch the second phase of that project in the next few days, we do expect to launch that at a substantial premium, given the strong success of the first one. On the second phase, I think the goal will not be so much to try and replicate our success with volumes, but rather make sure we push for good strong pricing to further improve already strong margins on the project.

Q: On hindsight, should you have priced Summit a bit higher the way it flew off the shelf?

A: It is a great question. Our honest answer is no. We certainly feel we could have probably sold at a slightly higher price. But, at the same time, this price was already much higher than we expected it to sell at. Just a few weeks before we launched, we took a price revision even within that one day. We are quite happy with the price we received.

Given the response, we could have probably even sold at a slightly higher price, but it was more important for us to achieve the kind of volumes we have at very good pricing. And I do think that our general philosophy is to focus quite a lot on volumes and make sure that we are successful in creating those volumes because I think pricing will always follow once the project is successful. Keep in mind, it is a 2 million square feet project. So, we only sold half the project in the first phase. The strategy on the remainder of the project will be now that we have this very strong base in place to focus almost entirely on margins.

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Q: How is the Bangalore market shaping up for you with specific reference to your Gold County project?

A: We have had two launches in Bangalore over the last month, both have done very well. Gold County project is a villa project. It is a high end project. That has done quite well. We have sold a little over 40 percent of the launched inventory.

Our project Godrej E-city is a greater success. It is an apartment complex in the electronic city area of Bangalore. We have had outstanding volumes there, about a quarter million square feet sold just under a month, since that project has been launched. So, the Bangalore market is looking good for us as is the NCR market.

Ofcourse our Mumbai market, which is a very important for us, has also been looking good. We launched the third phase of our project in Vikhroli – Godrej Platinum, little over a week ago. We have seen great responses there. We are selling now at prices that are about 30-35 percent higher than the price we launched the first phase at almost exactly a year ago. There too we have seen great volumes, with almost 50 percent of the inventory in that phase sold within one week.

Q: More than just over half your revenues for the quarter came in from Godrej One. Will you exhaust your entire inventory on Godrej One within this fiscal year? As you go into FY14, do you still expect to clock the kind of margins that you are clocking now, if Godrej One is exhausted by then?

A: We will recognise additional revenue from Godrej One this fiscal year. I don’t expect it to be entirely depleted by the end of this financial year. But certainly I think this financial year we will see more revenues coming from Godrej One than next financial year will.

I think our margins have been a little bit under pressure on some of our projects, particularly commercial projects in tier-II cities and some of our middle income residential projects because of the huge uptick we have seen in construction costs over the last couple of years. With those construction costs now plateauing and with new launches coming up at higher price points, we are quite confident that next year the margin profile on all our other projects will be higher.

Also, keep in mind, Godrej One is a 750,000 square feet project, total of about 3.7 million square feet that we expect to develop in this Vikhroli project. We expect the remainder of the project to be as high margin as Godrej One. We hope to start work on the remainder of that project next year. So, The Trees, which is the project of which Godrej One is a part, is a project that we will be contributing to our revenue for the next four-five years at least. So, I do expect strong margins from that project to benefit us for the next few years.

Q: How quickly can you bring down debt on your balance sheet? As cash flows remain strong through the next few quarters, have you set any targets or way to bring down your overall gearing by because that is probably an area of mild concern for analysts who track your company?

A: We have had a slightly divergent view from some of those analysts on this matrix. We think we are at quite a comfortable level. Our current gearing level is just over 1:1. We ended quarter 3 of last financial year with a gearing level of 2:1. Our absolute net debt has also decreased by almost Rs 400 crore. So, we feel fairly good about where things are currently.

Our focus, from a strategic perspective, is going to be more on residential real estate. We do think that will allow us to operate at a more efficient debt level. We do feel that if we are able to unlock some of these tier-II city commercial projects that we have. That has been a more time consuming affair than we would have liked.

As we start further monetising Godrej One in Vikhroli and as we launched Godrej BKC our important project in Bandra-Kurla Complex, which we hope to launch this quarter, we do expect to be able to reduce our gearing levels further. But I wouldn’t say that that is a key focus or that we have some particular target in mind for that.

We already feel our gearing levels are at reasonable levels. I think what some of these matrix miss is things like our Vikhroli Project, which gives the company a huge flow of cash flows over many years. For that, we don’t have to invest in the construction. So, something like that isn’t fully captured in a gearing ratio. But will create thousands of crore of cash flow for the company over an extended period of time.