Motilal Oswal Financial Services has issued a 'Buy' recommendation for Godrej Properties (GPL) following a stellar performance in the second quarter of FY25. The company reported strong pre-sales and significant revenue growth, driven by favorable market conditions and a robust project pipeline. The brokerage house believes that GPL is well-positioned to surpass its full-year pre-sales target of INR 270 billion. Despite an increase in net debt, GPL remains on a strong growth trajectory. The target price (TP) has been set at INR 3,725, implying a 26% upside from the current market price of INR 2,964.

Strong 2QFY25 Performance and Robust Sales

Record-breaking Pre-sales of INR 52 Billion:
Godrej Properties (GPL) achieved its highest-ever pre-sales of INR 52 billion in 2QFY25, driven by strong demand across multiple regions. The company saw a 3% year-on-year (YoY) increase in demand, with 53% of sales coming from new launches and 47% from ongoing projects.

Launches Continue to Drive Sales Momentum:
GPL launched INR 61 billion worth of projects across 5.6 million square feet (msf) of saleable area, with 45% of this inventory sold during the quarter. The Mumbai Metropolitan Region (MMR) saw a massive 4.5x increase in sales, contributing 42% to total volumes. Other key markets like NCR and Bangalore contributed 23% and 14% respectively.

Positive Outlook for H2FY25

Management Confident of Surpassing FY25 Targets:
GPL launched 49% of its planned projects for FY25 in the first half of the fiscal year, achieving 51% of its pre-sales guidance of INR 270 billion. The management remains confident of exceeding its full-year pre-sales and launch targets, citing robust demand across regions.

Upcoming Projects to Fuel Growth:
The company has a strong pipeline of projects slated for launch in key locations such as Worli (Mumbai), Golf Course Road (Gurgaon), Sector 44 (Noida), Bangalore, Pune, Kolkata, and Hyderabad. The management expects these launches to further accelerate sales and cash flows.

Financial Performance Highlights

Revenue Surge and Margin Stability:
GPL's revenue for 2QFY25 soared by 219% YoY to INR 10.9 billion, exceeding expectations by 110%. Despite higher expenses due to the new launches, the company maintained healthy gross margins of 44%. Net profit (PAT) surged fourfold to INR 3.3 billion, aided by higher other income of INR 2.5 billion.

1HFY25 Performance Strong Across Key Metrics:
For the first half of FY25, GPL reported a revenue of INR 18.3 billion, up by 43% YoY. The company delivered 9.3 msf of projects during this period and significantly reduced its operating loss to INR 931 million. Net profit for 1HFY25 was INR 8.5 billion, representing a remarkable 313% YoY growth.

Debt and Cash Flow Management

Net Debt Increases Due to Land Investments:
GPL's gross collections jumped by 63% YoY to INR 43 billion in 2QFY25. Despite this, the company spent INR 16.8 billion on new land investments, resulting in a cash shortfall of INR 1.4 billion. Net debt increased to INR 75.7 billion, with a debt-to-equity ratio of 0.7x.

Healthy Cash Flow Outlook for FY25:
The management expects record cash flow generation in H2FY25, driven by continued strong sales and collections. GPL is holding INR 30 billion in its RERA accounts, which will be used to fund construction as projects progress. The company is also focused on replenishing its land bank to sustain future growth.

Market Dynamics and Pricing Trends

Demand Remains Strong Despite Concerns of Overheating:
While some market analysts have raised concerns about overheating in the real estate market, GPL’s management remains bullish on demand for its projects. The company has observed strong sales in premium markets, particularly in NCR and Bangalore, where pricing has seen significant growth.

Land Value Appreciation Supports Margin Growth:
The company highlighted that land values are keeping pace with property prices, supporting its disciplined land acquisition strategy. GPL targets an internal rate of return (IRR) of 20-25% on its projects.

Valuation and Target Price

Maintain Buy with a Target Price of INR 3,725:
Motilal Oswal values Godrej Properties using a sum-of-the-parts (SoTP) methodology. The company’s ongoing and upcoming projects are valued based on discounted cash flows (DCF) with a weighted average cost of capital (WACC) of 10%. The research firm also uses the net asset value (NAV) approach for GPL’s development management and commercial project pipelines. This results in a target price of INR 3,725 per share, representing a 26% upside from the current market price.

Investment Thesis

Strong Pre-sales and Cash Flows:
Godrej Properties is well on track to exceed its pre-sales guidance of INR 270 billion for FY25. With a robust pipeline of launches and strong market demand, the company is expected to generate significant cash flows in the coming quarters.

Land Bank Expansion and Strategic Acquisitions:
GPL's investment in land acquisitions during the quarter reflects its strategy to maintain a strong land bank to fuel future growth. The company’s disciplined approach to land acquisition ensures that it can continue to develop premium projects in high-demand markets.

Operational Efficiencies to Improve Margins:
While operating expenses have increased due to the scale of operations, GPL is expected to recognize sales from higher-margin projects in the coming years, particularly after FY26. This should help alleviate investor concerns about operating profitability.

Conclusion:
Godrej Properties is poised to continue its strong growth trajectory, supported by a robust project pipeline, healthy demand, and strategic land acquisitions. Investors should consider accumulating the stock with a medium- to long-term horizon, as the company remains a strong play in India's booming real estate sector. Motilal Oswal maintains its 'Buy' recommendation with a target price of INR 3,725, implying a 26% upside from current levels.