Why are all eyes on Pirojsha Godrej?

Pirojsha Godrej, managing director and chief executive of Godrej Properties, the realty arm of the 115-year-old Godrej Group, has come into his own.

On May 5, during a media meet to announce Q4 results, the 31-year-old, seated in the centre of the dais, turned to his father Adi Godrej, chairman of the company, only once to seek his opinion on the issue of policy paralysis impacting realty sector whereas in the past, he would sit on his father's side and occasionally respond to a query.

This youngest child of Adi Godrej is a scion in the hot seat, expected to chart the fortunes of this venerable corporate house in coming decades and steer it ably.

Pirojsha would have hoped to ease into his official position, surrounded by good tidings and a robust sectoral climate.

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Instead, the world continues to hurtle towards yet another downturn -- Europe frequently promises to tip over Indian industry says it will slash capital expenditures here and invest abroad while the real estate market continues to remain in a prolonged slump.

This will undoubtedly impact the wallets of home-buying Indians whom Pirojsha urgently depends upon.

His father and group patriarch hasn't helped any by creating an aggressive vision for the company, which sees revenues reaching Rs 20,000 crore (Rs 200 billion) by 2021 from the Rs 820 crore (Rs 8.2 billion) it recently posted in FY2012.

In the past, Adi Godrej has said that the 22-year-old company is expected to become the biggest contributor to the group's profits in less than seven years, surpassing the 82-year-old FMCG business.

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It's the kind of pressure that Pirojsha could have easily done without. On the other hand, weathering these adverse climes -- and succeeding -- could make him the best of breed amongst all the young corporate turks trying to fill their parents' outsized shoes.

Godrej Properties has been undeniably successful, growing at astronomical rates and making money while at it.

"We have grown at a 50 per cent CAGR (compounded annual growth rate) in the past five years and we would like to sustain that," says Pirojsha, the youngest child of Adi Godrej and first among siblings to head a group company.

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He is savvy enough to instantly defuse dad's lofty goals -- he denies that Rs 20,000 crore (Rs 200 billion) is "a target," and calls it just an "aspiration" -- but this is just rhetoric that masks a raw aggression that Godrej has become known for across its businesses.

Hungry for deals, Godrej Properties plans to treble the number of project launches in the current financial year, from five launches in FY2012 to 15 in FY2013.

The company, which does joint development projects with land owners as against the outright buying of land, has signed 10 development deals in FY2012, the highest for the company, at a time when most of the big realty companies have been cautious in launching new projects.

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Caught in a slump

It's a strategy at odds with the kind of real estate market it finds itself mired in. To begin with, the property markets in key cities such as Mumbai and national capital region (NCR) are still sluggish.

The sale of residential and commercial properties in Greater Mumbai during January-March 2012 has fallen by an average of 14.80 per cent compared to 9.11 per cent during the corresponding period of last year, according to data compiled by the Maharashtra Stamps & Registration department.

Godrej Garden City in Ahmedabad, one of the major projects for the company, is seeing challenges due to high investor interest and competition from local players while nearly 50 per cent of phase two of Godrej Waterside commercial project in Kolkata is still unsold, said Aashiesh Agarwaal of Edelweiss Securities in a recent report.

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"I know that not everything is rosy and the sector is going through difficult times," says Pirojsha. "We believe it is right time to enter the sector as you can get better valuations. We believe in managing risks prudently and tapping new opportunities," he adds.

While expanding during a downturn can be a smart contrarian strategy, what has analysts' eyebrows raised is Godrej Properties' high profile deal with Jet Airways in Bandra Kurla Complex (BKC), Mumbai. In the second quarter of FY2012, the company entered into a deal with Jet to develop the latter's 2.5-acre land parcel in BKC.

Godrej Properties needs to spend an estimated Rs 2100 crore (Rs 21 billion), which has increased its leverage positions. Though it plans to rope in an investor in the project, high office rentals (Rs 220 to Rs 260 per sq ft for commercial A-grade spaces), oversupply from existing inventory as well as new supply and high cost of the project have made it unattractive for investors, says Agarwaal of Edelweiss.

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Pirojsha is hopeful that the project will be a success. "Though BKC is a capital-intensive project, our break-even price is way below the market price and it is extremely strategic for us. If people assume it is weak and growth will never happen, then we can't do anything about that," he adds.

He then tempers this statement by saying, "We know that BKC is getting a lot of eyes, but it is just one of the ten deals we have entered last year. In fact, cash flows from our project with Godrej & Boyce is much higher than the BKC one."

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Debt concerns

Then, there's the issue of debt, which is more often than not the bane of real estate companies.

While the company pulled off its institutional placement programme (IPP) of Rs 470 crore (Rs 4.7 billion) successfully and reduced its gearing levels to 1.06 times, HSBC analysts Ashutosh Narkar and Chirag Gupta believe that the debt to equity is still the highest among peers and the fund raising insufficient. The company needs to raise funds in FY2014, they add, unless it gets investors for the BKC project.

Pirojsha says the debt to equity levels have come down from 2:1 to1.06:1 and the company has no problem in accessing capital.

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"Gearing is one thing but if you look at our total debt on the books, and number of projects we are undertaking, we are at a comfortable level," he says. Is the company overstretched? "The slew of launches is not a concern. I am worried if they had taken up a big project in South Mumbai where a single bungalow or plot of land costs Rs 500 crore (Rs 5 billion). Their new projects are all mass market," says Ajay Parmar, co-head, investment banking, Emkay Global Financial Services.

Pirojsha says the company will continue to focus on the joint-development model as well as development-fee model to keep capital requirements and debt levels under check. "We want to focus on projects which give profits of Rs 70 to Rs 100 crore (Rs 700 million to 1 billion) and give us certain scale," he says.

Pirojsha will oversee two major changes in the company's strategy. One, the firm's altered focus from commercial to residential in the last one year, from where 90 per cent of its revenues are expected to come going ahead.

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Two, redevelopment will also become a key area. The company recently announced a redevelopment project in Byculla in Mumbai, where it will act as a development manager and be responsible for the conceptualisation, design, sales, and marketing of the project in return for a certain fee.

It also signed an agreement to redevelop 18 residential buildings in Sahakar Nagar in Chembur area of Mumbai, where the company will be entitled to 87.5 per cent revenues.

From all accounts, Pirojsha's company is a steady ship compared to other players, has utilised its own land while reducing risk by getting into joint ventures, and launching new projects only after reaching critical mass on existing ones.

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Old Godrej hands are fond of Pirojsha and think he's the right man for the job despite his youth.

"I think for his age, he has developed a lot of maturity. He seems to be focussed and does not have the air of a rich man's son," a top executive in the group who has known Pirojsha for many years told Business Standard recently. Years of good grooming and education have also shaped him as a sharp-nosed businessman, he adds.

These are good tidings for a company navigating its way through choppy economic seas.