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Prestige Estate Projects Limited
Initiation
Overweight
PREG.BO, PEPL IN
Steady it goes; till IT grows. Initiate with OW
Bangalore property is on a steady recovery path given improved outlook
and hiring trends in the IT sector. Price inflation in the city has been far
more modest vs. Mumbai/NCR. Prestige – a market leader in the city –
should be a prime beneficiary of resultant increases in demand and
pricing over the next 2-3 years. The company offers best-in-class execution
(5 year avg. deliveries of 6.5 msf), has a well diversified high quality
portfolio, and has completed some of the most marquee developments in
the city. By FY14, we estimate that the annuity portfolio would increase
c.3x driven by completion of office/retail projects in partnership with high
quality partners like CISCO and Capitaland. On the development side
margins should revert to more normal 35% levels as a large low value
project (Shantiniketan) runs off the P&L and high realization projects start
contributing. Valuations at 10.4x/7.6x FY12/13E P/E and 35% NAV
discount are also reasonable. Initiate with OW with Mar-12 price target
of Rs 180.
• Pre-sales momentum is healthy. Rs 12B bookings achieved till date
or 80% of our full year estimate. Over and above this the company has
7-8 msf of launches in the high and mid income categories planned
over the next 12 months. Over the next two years we estimate pre-sales
to grow at 23% CAGR and this in turn should help drive a 35%
earnings CAGR till FY13
• Annuity income estimated to grow c3x by FY14 , aided by 1) Office
space construction for CISCO’s offshore campus 2) Retail
development with Capitaland (5 additional retail malls) 3) Standalone
developments (1.6 msf) in Bangalore / Chennai and 4) contribution
from property management business. All this should help annuities
grow from Rs 1.7B to Rs 5B by FY14.
• Execution track record is solid with the company over the last five
years having completed close to 33msf which translates into a run rate
of 6.6msf per annum. This is far higher than peer group’s deliveries.
• Valuations, price target, key risks: Our PT of Rs 180 is based on a sum
of parts approach and equates to a 30% discount to forward NAV,
13.3x/9.7x FY12/13E P/E and 2.1/1.8x P/B. A high P/B relative to the
sector is offset given a relatively high ROE (18-20%). Key risks a)
Slowdown in the IT sector, b) Heavy reliance in the near term on high end
luxury market and c) management's strategy of not reducing debt with new
fund raising in order to aid asset build out.
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