Government's must not get worried for individual sectors; but should focus on GDP's health: Pirojsha Godrej, Godrej Properties
The corporate tax cut is a positive step but I don't think the government should spend too much of its time worrying about each sector concerns.
The corporate tax cut is a positive step but I don't think the government should spend too much of its time worrying about each sector concerns but it should make sure that Indian macroeconomic story is firing on all cylinders and overall GDP growth healthy, says Pirojsha Godrej, Chairman, Godrej Properties. During an interview with Swati Khandelwal, Zee Business, Pirojsha said, " Affordable housing is a huge opportunity but I think that it is a poorly-defined term and a lot of people are now using affordable housing because it is a flavour to define almost any kind of housing". Edited Excerpts:
Announcement from the government speaks loudly about its intention that is to uplift the sector, which was going through a bit of slowdown. Do you think what needed to be done is done or there is a need for something more?
A: The sector is of great importance for the Indian economy, so I think it's natural for any government to bring the growth of the sector on track. I think the importance of it is in a few different ways (i) it is the largest job-creation engine in the Indian economy after agriculture and (ii) several ancillary industries like paint, cement, tiles, steel are dependent on the real estate. And, it is good to see the government has taken certain steps particularly to promote the affordable housing and I commend them for the step. I think, the sector has been going through a cyclical downturn and there is no doubt about it and that weakness continues to persist. I think some issues need to be worked out. Still, there are liquidity issues for the broader segment but I do think the government has done what was needed to be focused like getting the animal spirit in India going on. Corporate tax cut announced this week is certainly, a positive step in that direction. But actually, I don't think the government should spend honestly too much of its time worrying about each/individual sector concerns. I think the real estate sector will take care of itself, the auto industry can take care of itself but what the government's work is to make sure that India's macroeconomic story is firing on all cylinders, the investment is happening. The overall GDP growth is in the healthy zone and then each of these sectors to make sure to capitalise on that underlined economic growth.
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Do you think that the corporate tax rate cut will show some great results as the step was taken to propel demand in the market?
I don't think that there is anyone silver bullet for this. I don't think that by reducing the corporate tax you will immediately, the next day, can see a complete change in demand. But, certainly, it was an extremely positive step. I think one of the big problem in India, today, is that there has been a lot of pessimism about the economy for the last 6-12 months, with some of the issues that we have seen on the liquidity side because of the NBFC crisis and so for. I think, getting corporate sentiment positive and getting people investing again - which will create the job and bring income in people hand - which in return will lead to demand. But does the corporate tax cut leads to an increase in demand the next day, no? It starts a change of events which increases demand over the medium term. So, I think that it was a positive and a needed step and we will look forward to the government to focus on a package of structural reforms. I think the Indian economy doesn't need what the individual sector don't need is tinkering around the edges. That creates more problem than it solves as it creates more uncertainty in which you keep shifting GST rates and others. Thus, not dislocating sectors like that but focusing on long-term reforms like land and labour reforms and disinvestment. These are the triggers that I think will get the economy going, which in turn over time translate into far improved demand.
The government and the Reserve Bank of India say surplus liquidity is available in the market. Do you agree with it?
I agree. But to an aggregate level but is that liquidity available to the broader sector industry? Not available. Speak to 90% of real estate develop today they will tell you even funds committed from NBFCs are not being disbursed. A huge amount of conservatism has built in the system at the moment. SO, I think it is a combination of measures that enhance overall liquidity in the system but also ensure that the liquidity reaches to every person at the last milestone, where it is needed.
Do you think that the transmission of rate cuts is a good step and is resulting in some concrete numbers?
We have seen SBI reducing rate as a result of it but I am not sure that the government will mandate some of this rather than playing a facilitator role. But, I can understand, where the finance minister's comment that this transmission is hasn't been happening. So, I suppose there was no alternative but I do think that it is a tricky problem to solve and think it is very important particularly for the real estate sector.
Do you think the government should be some change in tax for salaried people to revive customer sentiment?
I think, there was an increase in the surcharge in the recent budget and I think it was an avoidable step. But it is easy to say that the government should do this and that. Obviously, in an ideal world you want both very low taxes and high social spending but getting that balance right is a tricky thing and the government is the best place to do that. I do think that striking a balance and not overdoing one Vs to the other is very important because growing the overall pie of the economy is critical and that is what ultimately what will reduce poverty in the country and generate wealth for it. At the same time, you will have to redistribute it appropriately so that the weaker section of the society is benefitted immediately. Because it is not reasonable to ask people who are suffering to wait many years for relief. So getting that balance right is a tricky thing to do. But certainly given the economic environment where currently we are in my advice to the government is to focus more on growing the overall pie, more on the growth policies and figure out how best we can control the deficit and enhance the distributed benefits once when the economy is in a better position.
Godrej Properties has been doing very well amid all this gloom and doom. What has been the success recipe for your company?
Godrej Properties has a long way to go and there are a lot of things that we could be doing much better. I think we have had a reasonably good run because of certain things like you are coming from a group with a heritage of very strong brand having a legacy of very good governance and a focus on appropriate risk management. We haven't stretched ourselves to a point where if the market turns adversely, we will not be able to manage that. So, some of our strategies include not buying land outright by large and therefore taking a lot of leverage on the balance sheet, rather, partnering with the landowners and using the cash flow from the development to fund the lands. I think that is one of the reasons that we have been able to scale up quite fast without having a too heavy balance sheet. I think, we have also tried to look at the appropriate time to raise equity to further strengthen the balance sheet. The current period is one of a lot of opportunities while there is a lot of gloom and doom in the sector as a whole but there is also clearly a huge opportunity for consolidation within the sector. Godrej Properties has been fortunate to be the largest listed developer by the value of residential sales over the last few years. But, if you look at our market share then it is under 2 per cent, which speaks to the level of fragmentation in the industry, the level of opportunity for growth, consolidation even if the industry is not growing. We very much expect that over the next decade or two the industry will grow very fast. Thus, hopefully, the focus on leveraging the strength of our brand, maintaining prudence of our operations, enjoying a healthy balance sheet and focusing on being as good as we can be in terms of residential real estate developer in the country, hopefully, that will allow for a bright future of the company.
Godrej Properties which is planning to enter the affordable housing is known mainly for premier housing and has a good presence in the domain. Can you tell the kind of opportunities that you are eyeing in the affordable housing segment?
Affordable housing is a huge opportunity but I think that it is a poorly-defined term and a lot of people are now using affordable housing as it is a flavour to define almost any kind of housing. I would say that we will focus on mid-income housing and I would say that at the lowest end the apartments start around Rs20 lakh per unit and can grow into several crores per apartment but I wouldn't say that we are not catering. The government's definition for affordable housing today is Rs45 lakhs/unit and certain size limits. So, a large percentage of our current inventory does fit in that segment. But, to call it affordable housing in a country like India is still not affordable for lots of people and 50 lakh homes are still not affordable for a majority of Indians. That's why we call it as mid-income housing but that is a big part of our business and certainly something in which we would like to focus on. To move into more disruptive and kind of truly affordable housing, we do see some challenges on the supply side, if we try to build homes like 10-15 lakh units then we do think that there are certain challenges to do that in that scale with profitability.
What are the kind of projects that you will take up that will set you at par with others? What will differentiate you from them and seems to be an opportunity?
I think, the opportunity, I would define not as an opportunity of saying that at this price point or size or market, but rather what we are offering to a customer. The big challenge in the India real estate sector today has been the customer has largely had a terrible experience. If you have a look then the whole process of owning a home has become about the process of buying a home. Even, getting your home is almost an accomplishment sometime in the industry. So, we want to make sure that the process of buying homes is a smooth thing like on-time delivery. There is very hygiene level consideration, where we will be able to consistently deliver again. But, I think, we want to go much beyond that and ensure that once people move into these homes, and start living in a Godrej development they feel the difference. From bigger things like sustainability and make sure that we go to develop environmentally friendly designs in all our projects to very small details that can make anyone's life convenient. So, we will be the first to say that there is a long way to go to meet this goal. Currently, we are relatively well placed in the industry today. I think, to truly create customer delight and do we able to do it consistently and able to do it across all our projects, which is something where we are working very hard. Owning that proposition being a developer is considered in India as the most customer-friendly developer and that is a proposition stands at.
Are you open to acquiring certain properties or companies or land or so on at a time when the market is down?
First of all, our model is to acquire land through a partnership by large and we are open to buying lands in a certain situation as well, but by large, the way we operate is through partnerships. Interestingly, over the last five years, the partners with whom we are partnering have changed from being companies or individuals not involved in the real estate sector to almost entirely other real estate developers. So, today about 90% of our new projects are in partnership with other real estate developers who have a piece of land and feel that we can add value to the project by coming in and feel that we can add value to the project by coming in and taking over development activities. So, that certainly remains a key area of focus. We think that the current environment is an ideal one for a look at investments because many developers are struggling with liquidity issues and are looking to monetise. Land parcels are more reasonable today in terms of valuation expectation that they have 3-4 years ago. At the same time, we got the capital on our balance sheet and is ready to invest. So, we are actively looking in this market to press on the gas and hopefully significantly increase the size of our portfolio, which in turn will increase the size of company's operation in next a year or two.
We are also open to looking at the acquisition of bigger nature for example last year we partnered with a developer in Pune on a portfolio of six projects, in which the partner in total had 25 million square feet. So, it was somewhere in between partnering at a project level and acquiring an entire company. We are also open to looking at entity level acquisition. But in this sector, I think, that tensed to be a little bit more tricky with companies gearing and potentially other issues and also given that in unlike say in FMCG business where you will be acquiring brands and things but here that's not very relevant. So, really what is interesting us is the land bank of other developers, which is easier to probably acquire by directly partnering for projects.
Have you reached to a duly diligence level in something till date or it is just a thought?
At any given time, we are looking at probably 100 different pieces of land.
What is the investment that you will need for this?
Over the last two years, in two tranches, we have raised about Rs3,000 crore from the equity capital. Our company's gearing level today is about 0.3: 100. We didn't want to be that low because having some debt on the balance sheet is an appropriate part of our growth strategy. So, we would be looking to invest about Rs5,000 crore over the next couple of years in acquiring new projects or portfolio as a project.
Do you feel that there is an opportunity to get into the NBFC space?
It is an interesting opportunity. I think some of the dynamics that we are seeing in the NBFC industry are not similar to what is happening in the real estate sector. There is a lot of challenge when you look at the industry as a whole but when you start looking at the leading players in the industry then there is a lot of opportunities including by taking over the portfolios of other NBFCs that have liquidity issues. So, we think that there is an opportunity to build a long-term focus, customer focus and NBFC and that is something we are looking at the present.
What is the mid-term target for your company in terms of the top line, bottom line and the margins?
Unfortunately, I will have to duck that one because in this business even if you try to project what is going to happen tomorrow have its tricks of projecting own term. But, I think that we have publicly guided towards include we want to make amongst the top three developers by the value of the real estate in each market we operate in. Giving that we are the only developer at present that is operating in these many markets, we do think that this leads to a national leadership position, which we would like to maintain. We also like to see our return on equity, a very significant increase to about 20%. It has been more in the 10-12% range over the last few years, and we will like to see it almost double to about 20%. And, the industry as a whole has not done well on this important matrix and there is no point of really scaling the business from a revenue perspective if you are not generating returns, which you would say at least generating very well in excess of our cost of capital. So, if you can do that and ensure from the growth perspective that we are doing well and leading the industry in each market and if that able to combine with20% kind of our ROE then it is pretty powerful and self-sustaining value creation. These are the two big financial matrices on which we are focusing on. Perhaps even a bigger focus for us is getting this positioning where we are differentiating ourselves in the customers' mind.
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