Prestige Estates Projects (INR 172-183, Do Not Subscribe)
Prestige Estates Projects (Prestige) is tapping the capital market to raise INR 12.0 bn through an IPO in the INR 172-183 per share price range, giving post-money valuation of INR 57-60 bn. As per issue terms, 66-70 mn shares will be issued at the lower and upper band, resulting in dilution of 20-21%, respectively.
n Developer with proven track record in Bengaluru
Prestige is established in Bengaluru and has developed ~34 msf of real estate projects. The company enjoys a strong brand in Bengaluru along with premium pricing for its projects. It has development rights over ~57 msf area across South India, of which Prestige’s share is ~39 msf which includes ~28 msf of saleable area and ~11 msf of leasable area with over 70% of its land bank in Bengaluru.
n JDA land acquisition model may lead to lower margins
Prestige focuses on the Joint Development Agreement (JDA) model for project acquisition, unlike its’ peers like Sobha Developers and Puravankara Projects which focus on a capital-intensive model of land acquisition. This may result into lower EBITDA margins, offsetting any possible gains of premium positioning in Bengaluru.
n Balance sheet strained with debt/equity of 2.6x
Although the company follows the less capital-intensive JDA model, it carries a debt of ~INR 20 bn as on June 30, 2010, on its books with consolidated D/E ratio of 2.6x. We believe the high exposure to commercial/retail/hospitality rental projects has resulted in the high debt level. Going forward, effective utilisation of cash will be a key monitorable for the company.
n Valuation: Limited margin of safety; ‘DO NOT SUBSCRIBE’
Our NAV for Prestige stands at INR 57.9 bn or INR 174-176/share and the issue is available at 1% discount/4% premium to NAV at the lower/upper price bands, respectively. However, considering factors such as RoE of ~20% with a JDA model, high gearing level (2.6x as of June 2010), and presence of structured instruments/variable rate entities and minority stakes in many rental projects, we believe the issue price offers limited margin of safety. We, therefore, recommend ‘DO NOT SUBSCRIBE’ to the IPO.
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