Eye 50% gross margin from Godrej's BKC property: Religare

Shares of Godrej Properties and Jet Airways shot up after the two launched BKC (Bandra-Kurla Complex) project in partnership on Tuesday.

Arun Aggarwal of Religare Capital Markets who track Godrej Properties told CNBC-TV18 that Rs 3,500-4,000 crore revenue estimated by the company is not a big number, but since it is a commercial property the payment will take atleast a period of three and half-four years.

When talking about the margin, Aggarwal expects a gross margin of about 50 percent without taking an impact of interest there. "As far as debt is concerned, the upfront sales of this property should be limited and hence there should not be significant positive cash flows coming in for Godrej Properties which could lead to some reduction in debt," adds Aggarwal. He expects some cash outflows on a net basis from this property through Godrej Properties.

Below is the verbatim transcript of Arun Aggarwal's interview on CNBC-TV18

Q: Give us some details about the Bandra-Kurla Complex (BKC) project and how much it is going to bring about in terms of revenues for Godrej Properties? What is your view on what has come out so far and how would you approach the stock?

A: Godrej Properties is trying to monetise some part of this asset to make sure that some cash outflow towards construction and floor space index (FSI) premium cost can be paid out of it. Given the status of commercial markets in Mumbai, specifically in BKC, the quantum of sale that they will be able to do would be limited and hence the cash flow mismatch should remain for the time being.

Q: Godrej Properties is looking at a revenue target of Rs 3,500-4,000 crore. Is that overestimated or will it take a while to get that money?

A: The number does not seem to be a very high, but it will be more back-end loaded than a front-end loaded number. It is a commercial property, so it will be delivered in three and half-four years time. Construction will take time and anyway the sales would mostly be back-end loaded. To sell a commercial property which is being constructed now, should be slightly slower to start with.

Q: What will be the margin? How much would it cost? How much will they make and will you factor in any paring of debt for the company in FY14 itself?

A: On an average, gross margin should be about 50 percent without taking an impact of interest there. As far as debt is concerned, the upfront sales of this property should be limited and hence there should not be significant positive cash flows coming in for Godrej Properties which could lead to some reduction in debt.

We need to take into consideration that a significant portion of FSI premium is yet to be paid. Also, you will start spending construction cost for the whole of the property and considering this is an under construction property, the advances from sales should not be significantly high. I would still expect some cash outflows on a net basis from this property through Godrej Properties.

Q: What kind of average realisations do you expect this project to give Godrej Properties? How are you positioned on the stock now, because it had some good launches with respect to the Phase II in Bangalore? How are you positioned on Godrej Properties now?

A: As far as average realisation is concerned, I would be looking at Rs 25,000 for Godrej Properties to start selling this property. Over three and half-four years depending upon how commercial market takes up, the average realisation can go out to Rs 30,000-35,000 a square feet. That is a broad average realisation that I will be looking at.

On the stock the kind of scale up that they have done on the launches and on the land acquisition is commendable, but at the same time the cash flow may still remain strained because a lot of these properties are at a very nascent stage of construction. So net-net on the cash flow side there still might be some pain.