Land bank located in IT/ITES-centric regions: Prestige Estates Projects Ltd. (PEPL) is
mainly present in Bangalore, which accounts for 73% of its current land bank.
PEPL is in the process of geographically diversifying and expanding its real estate
development business into other cities of southern India, including Chennai,
Cochin, Hyderabad, Mysore and Mangalore. We believe PEPL will benefit from
the recovery in the IT/ITES sector, with increased job security and salaries leading
to higher housing demand in the southern region.
Proven execution and diversified portfolio: PEPL has a successful track record of
execution. The company has completed 11.5mn sq. ft. of residential, 7.4mn sq. ft.
of commercial and 1mn sq. ft. of retail and hospitality projects since the last five
years. The company is a strong brand in Bangalore, which offers premium pricing
to its projects. Going forward, PEPL has a diversified portfolio of real estate
development, which includes 28mn sq. ft. of saleable area and 11mn sq. ft. of
leasable area. Further, the company has entered into property management
services and has acquired a construction company, which ensures smooth
execution of projects.
Stretched balance sheet: As on June 10, 2010, PEPL had total debt of ~Rs20bn,
implying gross debt/equity of 2.6x. Post proceeds from the IPO, the company’s
debt/equity will be 1x. The high debt is attributable to the company’s decent
amount of exposure towards the non-residential segment (50% of its land bank),
where cash inflow is back-ended. Further, the company largely focuses on the
joint development model, which gives limited scope of improvement in margins.
Premium to peers and our one-year forward NAV: We have assumed an
eight-year development period based on PEPL’s existing land bank. We have
assumed average realisation of Rs6,000/sq. ft. on PEPL’s saleable interest based
on its geographical presence, which gives us a fair NAV of Rs164/share. At the
lower band of the issue, PEPL will trade at 2.5x FY2012E P/BV and 4% premium
to our one-year forward NAV, which is at a premium to its peers. Thus,
we recommend Avoid to the issue.
Objects of the issue: PEPL intends to use Rs622cr of the net issue proceeds
towards the construction and development of three residential, two commercial
and two retail projects, either directly or through subsidiaries. PEPL has also
earmarked Rs21cr for acquiring land in Goa and Bangalore. Further, PEPL
intends to repay Rs280cr of loans taken from various financial institutions.
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