Stock markets message to Godrej Properties: Grow fast, but not at all cost

Godrej Properties has created such steep growth expectations that it needs to look at every avenue for land acquisition.

On February 3, 2022, the most unlikely partnership in Mumbai real-estate was announced. The most image-conscious developer of India, Godrej Properties, announced that it would be exploring a partnership with controversial developer, DB Realty.

Since then Godrej's board has cancelled the investment.

The deal had been structured as given below:

- Godrej Properties to invest Rs 400 cr in DB Realty via a warrant issue that is convertible into shares.

- Godrej Properties to eventually hold a 10% stake, the Prestige Estates promoter to own a 18% stake while promoters of DB Realty to hold 54% stake.

- A platform to be created that will source and develop slum redevelopment and MHADA projects.

- Godrej Properties to have Right of First Refusal for all new deals that DB Realty gets to the table.

Read also: Budget 2022 aims to long-term growth of real-estate sector

A day later, Godrej Properties took a step back from the deal after feedback from investors as well as a brutal attack on its stock price that saw its market value fall by over Rs. 4,000 crore. The company said that they would no longer pursue the equity ownership with DB Realty but would continue to evaluate deals on a case-by-case basis.

There are three primary reasons for the hostility to the proposed deal between Godrej Properties & DB Realty:

1) Memories are short but given the voluminous coverage on the 2G telecom scandal, the perception and reputation of DB Realty continues to be scathingly negative.

2) Godrej Properties has cultivated a premium brand that symbolises the highest level of ethics and governance. How else does one explain the partnership between Prestige Estates and DB Realty going through without any fuss from investors but an adverse reaction when Godrej Properties does something similar?

3) The deal structure was questionable. The market may have absorbed a deal between Godrej Properties and DB Realty at a project level – but it was completely against a deal at the company level.

There were certain parts of the deal that I did not fully understand. Example: How did Godrej Properties manage to extract a Right of First Refusal from DB Realty despite having an eventual shareholding that would be lesser than that of the Prestige Estates’ promoter?

Secondly, I do believe that a more judicious approach would have been if the promoters of Godrej Properties had opted to acquire the stake in DB Realty – instead of Godrej Properties itself doing the acquisition. It may still have created ripples but I suspect the blowback would have been lesser.

I must confess that while I understand the concerns of analysts with regards to DB Realty, the truth is that such a move was inevitable. Godrej Properties has created such steep growth expectations that it needs to look at every avenue for land acquisition. That means partnering with players who have a meaningful land bank. Additionally, land acquisition at scale hinges to a great degree on slum redevelopment. It’s a complex maze and partnerships with other players in slum redevelopment have so far not yielded results for Godrej.

Enter DB Realty. I make no moral judgement on the company. I however do make a judgement on its exceptional land bank, its ability in land acquisition and its current strength in securing approvals and permissions.

Branded players may provide the glitzy towers and fancy swimming pools but they enter the party after the land is cleaned and cleared. And the ground reality of real estate in Mumbai and India is that land acquisition is a cesspool of monumental proportion. It needs specialists and clearly Godrej Properties recognized those strengths in DB Realty when they announced the deal.

Did Godrej Properties surrender too soon in cancelling the deal? Personally, I believe they did. I am aware that investors and stock price are of significant importance to Godrej Properties but I disagree with the premise that financial markets should hold business strategies to ransom with such a tight grip.

What happens now?

For DB Realty, the road ahead has become complicated. Listed players will shun any structured arrangement given the assault on Godrej Properties. Private unlisted players have greater leg-room to do deals. The simpler part is that it can revert to associating with multiple players for its diverse land parcels.

For Godrej Properties, it’s a hit on their growth plans. New project additions had anyway been on the slow lane. Now in a model where deals will be evaluated on a case-by-case basis with DB Realty, it is an open field where other developers can compete. That means greater competition and resultantly higher bids by Godrej Properties.

At its core the cancellation of the Godrej – DB deal is a potent reminder of investor expectation from the heavyweight builder: Grow fast, but not at all cost.