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UBS Investment Research
Prestige Estates Projects
Best proxy to Bangalore growth
Strong brand with a robust track record
We initiate coverage of Prestige Estates Projects (Prestige), an established
Bangalore-property developer, with a Buy rating and a price target of Rs220.00 We
believe its: 1) joint development model, which gives it access to a prime landbank
of 51msf; 2) strong track record in value creation; and 3) mix of luxury and mass
housing, and rental and saleable office and retail assets, differentiate it from peers.
We think Prestige provides the best exposure to Bangalore’s growth potential (84%
of our NAV estimate).
Bangalore: India’s IT hub with significant growth potential
Our recent visit to Bangalore and channel checks support our outlook for strong
real estate demand in Bangalore. We believe Bangalore real estate has significant
growth potential, due to: 1) strong IT hiring, leading to higher leasing volumes; 2)
rising residential pre-sales volumes on end-user demand; and 3) favourable
demographics and affordable prices and rentals driving demand for new launches.
Key catalysts: pre-sales and rental growth, execution momentum
We expect strong pre-sales from the 4-5msf of launches over the next six to 12
months; a 19% CAGR in rental income for FY11-13, and execution momentum in
ongoing projects (67% of NAV) to be near-term catalysts. However, its relatively
high exposure to luxury housing (amid rising interest rates) and oversupply in
some areas of Bangalore could be risks.
Valuation: attractive at a 40% discount to our NAV estimate
We base our price target on a 20% discount to our NAV estimate of Rs275.00,
which factors in the Bangalore exposure, a superior ROCE, a good track record,
and a healthy balance sheet. We view recent share price weakness (down 18% in
the past month) as a buying opportunity
Investment Thesis
We believe Prestige Estates Projects (Prestige) is the best proxy to potential
real estate demand growth in Bangalore (84% of our NAV estimate), India’s
IT hub. Prestige’s joint development model gives it access to prime landbank
of 51msf and provides it with a well balanced portfolio of high-end residential
(20% of NAV), mass housing (11% of NAV), office-for-sale (27% of NAV),
rental assets (23% of NAV) and retail/hotel (9% of NAV) developments.
We have a positive outlook for real estate demand in Bangalore. Our view is
supported by our recent visit and channel checks which suggest: 1) strong IT
hiring, resulting in a healthy take-up in office space (25% of India’s office
absorption); 2) strong residential pre-sales volume growth, up 14% YoY
YTD, driven by end-user demand for residential property in the Rs5-20m
price range; and 3) good response to new launches at affordable prices and
rents. Prestige’s superior product quality, strong execution track record (it has
delivered 34msf) and value creation for customers differentiates it from peers,
in our view.
We ascribe 67% of our NAV estimate to ongoing projects and existing rental
assets (23% of NAV); with 40% of NAV contributed by CBD-located
projects, we expect more visibility on execution and absorption. That said, its
joint development agreement (JDA) model (53% of landbank) lowers land
costs and provides superior ROCE of 13-15% (compared with 4-7% for
peers). Although, its premium pricing in an economic slowdown and high
concentration in Whitefield (15% of NAV), an oversupplied market, is a risk,
we believe the positives outweigh the risks, given Prestige’s superior business
model and its valuation, which is at 40% discount to NAV.
Given its healthy balance sheet (0.6x D/E) and the 18% share price correction
over the past month (11% below its IPO price of Rs183.00), we initiate
coverage of Prestige with a Buy rating and a price target of Rs220.00, which
is based on a 20% discount to our NAV estimate of Rs275.00.
Key catalysts
Encouraging pre-sale volumes from strong pipeline of new launches.
Prestige’s residential projects have generally been well received by buyers—
most of the company’s projects launched before 2009 are more than 90%
sold. This trend is visible in H1 FY11 as well, with a good response to:
1) Kingfisher Towers a super-luxury residential project in Bangalore, priced
at Rs22,000/sf; and 2) healthy pre-sales in the first month of the launch of
Silver Oak, Whitefield, at Rs9,600/sf. We believe the continuation of the
encouraging pre-sales volume trend for its new launches of 4-5msf over the
next six to 12 months will reinforce the company’s strong brand image, its
ability to command premium pricing, and rapid project execution
Healthy growth in rental annuity business. We believe the company’s
strategy will help it expand its rental annuity portfolio and result in long-term
benefits. Its existing portfolio of 3msf in leased assets, a mix of office, IT,
retail space and hotel assets, yields rents of Rs1.46bn pa, and contributes 33%
of our NAV estimate. With 1.5msf of ongoing developments in its lease
portfolio, the company expects 0.8msf to be leased by H2 FY11 and the
balance by end-FY12. We forecast healthy growth for the rental annuity
business and expect rentals to increase 50% to Rs2bn by FY13. In addition, we
expect its pipeline of 4msf (mix of IT offices and mall assets) to generate rents
by FY14-15, increase the rental portfolio, and help diversify earnings risk.
Best exposure to potential property market growth in Bangalore: We
think Prestige provides the best exposure to potential Bangalore property
market growth, with 84% of its diversified land asset (39msf) portfolio based
in this city. Bangalore is India’s IT hub and is leveraged to global and Indian
IT sector growth. Its high per capita income, growing migrant population of
professionals, double income families with improving lifestyles, and
progress in infrastructure projects, make the city a potentially strong property
market. Residential property sales growth of 15% YoY YTD, and affordable
pricing have added stability. We think incremental data points on IT space
leasing and residential pre-sales will be catalysts for share price performance.
Signs of execution gaining momentum. With 67% of our NAV estimate
based on Prestige’s ongoing projects (12msf of the total of 45msf) including its
existing lease portfolio (33% of NAV), we expect increasing newsflow on
successful execution to be a key trigger for Prestige’s share price performance.
The company has a strong execution track record, delivering 34msf YTD
(including its landmark township project, Shantiniketan, of 14msf), with 10msf
delivered in past three years, and management expecting to deliver 17msf in
FY11. Once deliveries have normalised, the company plans to ramp-up
deliveries to 6-8msf pa over the next two years. In addition, we expect a bigger
office and mall asset lease portfolio to increase revenue visibility.
Risks
We believe the key risks for Prestige are: 1) dependence on the Bangalore
market with 84% of its total landbank in the city. This exposes the company to
any slowdown in the IT sector globally and in India; 2) its relatively high
exposure to premium residential housing (20% of NAV) which is more pricesensitive
to a slowdown in the economic recovery cycle; and 3) intensifying
competition in Bangalore and oversupply concerns in specific areas such as
Whitefield (17% of our NAV).
Valuation and basis for our price target
We believe Prestige’s core business in Bangalore’s residential and commercial
real estate markets, prime location land assets, expertise in residential,
commercial and integrated development projects, high proportion of rental
assets, and strong brand name, differentiate it from peers. An NAV-based
valuation methodology is the most appropriate for Prestige, in our view, as it
factors in: 1) the value of its land assets; 2) the scale of development opportunity
and the diversified asset-geographic mix across different timeframes; and 3)
execution. When comparing Prestige with Indian peers and factoring in business
model risks, we expect the stock to trade at a discount to NAV.
We base our price target of Rs220.00 on a 20% discount to our September 2011
NAV/share estimate of Rs275. While the level of the NAV discount is a
subjective assessment, we believe our base case of a 20% discount to our NAV
estimate is fair. Our lower discount for Prestige than for peers (25-40%) largely
factors in: 1) Prestige’s dominant position and diversified asset mix in the
Bangalore market, which we think is attractive; 2) large contribution (23% of
NAV) from rental assets that have growth potential; 3) strong track record and
brand franchise; and 4) concerns of oversupply.
Our NAV/share estimate of Rs275 assumes: 1) development volume of
44.85msf; 2) a 9% cap rate for rental assets; 3) no price escalation; 4) average
cost of capital of 13%; and 5) a tax rate of 25%.
Bull-case and bear-case NAV
Our bull-case scenario builds in: 1) 10% higher prices than our base case; 2) a
faster execution cycle for development projects; and 3) faster leasing of
commercial assets. Our bear case: 1) factors in five-year development visibility
(14msf); 2) values the balance as undeveloped landbank; and 3) a higher than
our base case cap rate of 11%for rental assets. We believe this provides a good
perspective on NAV risks and upside potential.
Attractive at a 40% discount to our NAV estimate
We believe the stock is trading at an attractive valuation of a 40% discount to
our NAV estimate. While the stock has corrected 18% over the past month, it
has outperformed its peers by 10% over the same period. We expect the
outperformance to continue, given its strong positioning in a growth market such
as Bangalore, and its higher-than-peer ROCE. We believe there is upside
potential to its current valuation.
UBS versus consensus
As the company was listed on 27 October 2010, there is little coverage by
brokerages and hence no meaningful consensus estimates are available. Its
listing price was Rs193.15/share.
Sensitivity analysis
We have conducted a sensitivity analysis on a NAV valuation range, based on
10% higher/lower prices to our base case, discount rates of 13-15%, and delays
of 12-24 months.
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