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Prestige Estates Projects Ltd (PREG.BO)
Proxy Play on Bangalore & Commercial
Initiate at Buy with a TP of Rs 170 — Our bullish view is based on a)
strong execution track record; b) attractiveness of Bangalore market –
pricing should hold given moderate increases in the recent past and volumes
should be helped by the boom in IT services; c) attractive ~35% disc to NAV
– stock has underperformed Sensex by ~21% over the past three months.
Established brand & proven execution track record — With over 24
years of real estate development experience, Prestige is a well-known brand
in South India. To date the company has delivered ~40msf in and around
Bangalore, with an annual average of ~4msf in last six years. Currently it has
a well-diversified product portfolio of ~35msf- 67% is resi, 14% office and the
balance split between retail/hotel.
Attractive Bangalore exposure enables steady growth — The city has
good demand, attractive demographics, and increasing per-capita income;
hence, significant absorption potential. We prefer it to other metros, as not
only is it an attractive/profitable market, but also because it has shown more
resilience post the last downturn, through a healthier and more gradual
recovery. Over 80% of Prestige's exposure is towards Bangalore, which we
believe is best positioned to benefit from the bounce back in IT/ITES growth.
Rentals set to double in the next three years — Our estimates show
rental income is set to grow at a CAGR of ~25% over FY10-13E as several
office/retail assets get commissioned. This enables cash flow stability, and
provides the potential opportunity for a strong unlocking of value later. Also,
its strong commercial presence (~50% of the ongoing development book)
makes it more attractive versus peers, in our view.
Catalysts offer re-rating potential — 1) Likely upsides from three new
projects recently finalized by the management, which are not reflected in our
numbers as yet; 2) pre-sales response to the 20-25msf launch pipeline
company has in store for FY12 and 3a ) stronger pick-up in pricing/rentals
due to growth in the IT/ITES sector.
Key risks — a) Execution delays/cost overruns given the scale of the rampup;
b) slowdown in IT/ITES and global macro factors could adversely impact
demand; c) geo-political risks are higher given >80% exposure to Bangalore;
and d) the interest rate tightening cycle and other sector risks.
Initiate at Buy; TP of Rs 170
Prestige is one of the largest developers in South India. In the last 24 years of
its real estate development business, it has developed and delivered 38 msf of
diversified real estate space across 153 projects (an average of >4.0msf pa in
last six years). Some of the landmarks in Bangalore City are from Prestige's
stable: UB City in Central Bangalore, Shantiniketan in Whitefield (14.6msf
project) and Forum Mall in Koramangala.
Currently it has a well diversified product portfolio of ~36 msf: 67% is
residential, 25% office and the balance is split between retail/hotels. The
company is largely Bangalore-centric (83%) and has some exposure to
Chennai, Cochin, Hyderabad, Mangalore and Mysore. We believe most of
these markets, especially Bangalore, should see an uptick with the expected
pick-up in IT/ITES.
Prestige has a growing rental annuity portfolio. In FY10, 14% of revenue came
from rentals earned (from ~2.8msf leased assets). Management is looking to
build this business segment so as to generate ~15-20% of topline YoY.
The company looks attractive to us as it offers a) revenue growth of ~30%
CAGR over FY10-13E, EBITDA growth of ~50% as margins improve with
product mix shift; b) D/E ranging between 0.5-0.65 despite increased traction in
the commercial segment; and c) ROEs in the range of 10-16% through the next
three years.
We like the company's track record so far, along with its future growth story in
the attractive market of Bangalore. Hence, we initiate coverage with a Buy
rating and target price of Rs 170, based on an avg 15% discount to a blended
NAV of Rs 200. After having corrected ~34% in the last three months (down
~25% vs IPO price of Rs 183), the stock is currently trading at <15x FY12E
earnings and ~1.8x FY12E BV (given its relatively asset-light model, with a high
proportion of JD/JVs in place)- we believe investors should accumulate the
stock at present levels.
What we like about Prestige
A. Execution track record speaks volumes
Prestige has been in the real estate business for 24 years and has established
a strong brand franchise which it can now leverage. To date, Prestige has
delivered 35msf of real estate space across 153 projects (an average of
~4.0msf pa in last six years) in multiple segments, like high-end villas and midincome
residential, office, malls, hospitality and multiplex. Apart from
development, it has ~2.8msf of leased property in its portfolio, and also
undertakes property management of 15msf. Some of the landmarks in
Bangalore City are from Prestige's stable: UB City in Central Bangalore,
Shantiniketan in Whitefield (14.6msf project) and the Forum Mall in
Koramangala.
B. Proxy to Bangalore: high-demand, high-volume market
Around 83% of the total saleable area is in and around the city of Bangalore.
Bangalore – the IT hub of India – offers high demand visibility and significant
absorption potential, making it an attractive and profitable market vs. other
metro cities, in our view. It has shown a healthier and a more gradual recovery
post the downturn. Unlike a few pockets in Mumbai and NCR, Bangalore hasn’t
seen steep/unreasonable developer-led price hikes. It has a fundamentally
good demand story, attractive demographics and increasing per-capita income.
Ongoing infrastructure projects (like Metro Rail, highways, expressways and
newly built world-class airport) should also enhance the value of its projects.
C. Attractive portfolio offering, with an impressive line-up
of new launches
Currently the company has ~35 msf saleable area under development. It is a
well diversified product portfolio of 67% is residential, 25% office and balance
split in retail/hotel (See Figure 16). Ongoing projects have a larger component
of commercial projects (~50% of developable area), which should benefit the
company as growth in IT/ITES is bouncing back, leading to a hiring pick-up in
the sector.
Overall, the company has a strong pipeline of projects under development:
~50% of its pipeline (based on developable area) is ongoing and the company
is continuously adding newer projects to its portfolio. Management has recently
guided that it has a launch pipeline of ~20-25msf by FY12 end.
D. Strong support from growing rental annuity
In FY10, 14% of revenue came from rentals earned (~Rs 1400m). Management
is targeting to build its lease portfolio, intending to generate 15-20% of revenue
each year from steady rentals. Our estimates show ~25% CAGR over FY10-
13E. We believe its rental business provides cash-flow stability to the company,
besides the potential opportunity for strong unlocking of value.
E. Model to continue supporting steady cash flows
Prestige operates both a develop-lease and a develop-sell model
simultaneously. Residential development should provide cash-flow visibility
through pre-sales, aiding the development of the lease-hold commercial
portfolio. This in turn should yield a regular rental annuity once completed and
leased, ensuring steady cash-flow visibility to the business. Also, the group
largely operates under JV/JD umbrella, giving it access to strategic land parcels
at relatively nominal cost, thereby accelerating expansion plans and reducing
the burden of hefty land costs.
F. Potential Upside Catalysts
Additional land bank waiting on sidelines: management has indicated
recently that it has concluded more JV/JD agreements for projects around
the city (including two projects behind Cessna Business Park and another
villa project in Bangalore city). These have not yet been captured in our
estimates.
Better-than-expected response to the ~20-25msf launches management has
in pipeline for FY12.
Stronger pick-up in pricing/rentals due to a surge in hiring in IT/ITES sector.
We currently assume inflation-linked price appreciation of 5%.
Complete delivery of few key projects like Shantiniketan, Vijaya Mall in
Chennai, Exora Business Park.
G. Other positives:
Strategic Tie-ups: Prestige has tied up with strategic partners like
CapitaLand (for developing five malls across South India), Cisco (developing
Cessna business park as a built-to-suit project solely for carrying out its own
operations), Red Fort Capital Real Estate Holdco I L.L.C (to develop
commercial space and townships).
Forward integration: Prestige Group has within its fold several ancillary
businesses which support and add value to its main business of
development and leasing.
– Property management services: This business is conducted through
Prestige Property Management Service Private Limited in which Prestige
holds a 97% stake. The key intention of this business is to maintain the
quality of its developments once handed over after completion. It currently
has 15msf of property under management and another 10.0msf is
expected to be added by FY12-end.
– Other services include Sub-leasing and Fit-Out services; Project and
Construction Management Services; Interior Solutions Services; Mall
Management Services; and Hospitality Operations.
Initiate with a Buy/Medium Risk
Our Target Price of Rs170 is based on a weighted average discount of 15%
(see Figure 19) to our Dec 11E blended NAV of Rs200. We believe chances of
price cuts are minimal in Bangalore, as it didn't experience the unreasonable
developer–led price hikes in the first place. But to remain conservative, we
assign a 10% probability of potential 15% price cuts to arrive at our blended
NAV. This is in line with our valuation methodology for the sector.
A break-up of our base NAV estimate of Rs204 (ex- price hikes) has been
highlighted in Figures 19 and 20 and is detailed below:
Rs 91/share for the ~35msf of commercial and residential under
development portfolio (commercial, if under development assumes for sale
till leased) – based on current pricing/costs and 5% inflation-linked
escalations
Rs 61/share attributable to the leasing portfolio which is on the ground -
~3.0msf of commercial and ~0.7ms of retail assets - based on a cap rate of
10% for Bangalore and 11% for other cities.
Hotel portfolio contributes Rs 23/share - based on Rs12-18m capital cost
per room for ~1,200 rooms
Rs 24/share from land (~470 acres of which its share is ~290acres) the
company owns but for which no development has been firmed up as yet -
valued based on current market prices
The company currently has 15msf of properties under management under
the property management business and management guides that another
~10msf will be added by end of FY12. We value this segment at 6.0x FY12E
earnings and it contributes Rs 4/share to the NAV.
This apart, we have factored in a cost of capital of ~15.2% assuming 13% cost
of debt (50bps increase to current cost of 12.5%), long-term DE of 0.7, risk-free
rate of ~8%, a market premium of 8%, Beta of 1.5x (similar to peers) and tax
rate of 30%.
Figure 20. Prestige – Dec-11 NAV Summary
Rs Millions
Residential Development 33,590
Non-Residential Development (assuming all future commercial is for sale) 24,374
Total Gross Development NAV 57,964
Less: Costs outstanding for land 273
Less: Tax payable @ 24% 13,846
Less: Net Consolidated debt outstanding 8,973
Less: Customer advances 8,597
Add: Land upon which there is no development planned (at current Market value) 8,808
Add: Value of leased portfolio (commercial + retail) 22,059
Add: Value of Project Mgmt Business (@ 10.0x FY12E earnings) 1,456
Add: Value of hotel portfolio (Existing + ongoing) 8,376
Net NAV 66,973
No. of shares 328
NAV 204
Source: Citi Investment Research and Analysis estimates
Attractive Financials
Strong Earnings Visibility: We estimate a ~30% and 50% CAGR in
revenue and EBITDA respectively over FY10-13E. Also, management has
recently guided that, as at Dec-10, unrecognized revenue in the books stood
at ~Rs20bn. Overall, the company has an impressive line-up of projects:
~50% of its pipeline is ongoing and the company is continuously adding
newer projects to its portfolio. With a proven execution track record and
seeing the development which is already on the ground, we see strong
earnings visibility in the coming few years.
Ability to service higher leverage: Consolidated net-debt stood at ~Rs
16bn as at Dec-10 with net-debt/equity at 0.45x. The average cost of debt is
~12.5%. Gross debt of Rs 5.5bn is repayable in FY12, of which, when we
remove lease rental discounting and receivable discounting, net repayment
of ~Rs1.0bn stands due. Overall, while our assumptions see Net D/E rise to
0.65 within the next three years given the business expansion, this is not too
much of a concern, when seen in conjunction with the company’s internal
cash-flow generation from pre-sales and the annuity business.
Consistent double-digit ROEs: Prestige has delivered/is expected to
record Return on Equity (ROE) of 10-20% (Figure 22). Outperformance
versus its Bangalore peers (Sobha, Puravankara, Brigade) over the years
stands out, the only exception being FY11 – due to the dilution.
Risks
Concentration risk in Bangalore
While Prestige has a strong execution track record in Bangalore, where
meaningful demand and opportunity remains, Prestige's concentration in a
single location (>80% of saleable area and ~88% of gross development NAV)
could entail risks. Likely absorption issues may crop up, particularly with
multiple premium projects in Whitefield (~20% of gross development NAV).
Dependence on IT sector performance
Real estate is largely dependent on performance of IT/ITES sector and global
macro factors. While other sectors like pharma, autos and few other
manufacturing industries are gradually setting up operations in the city, by and
large it's still IT/ITES dominant. We believe this poses as a risk to Prestige,
which has 83% of development exposure to Bangalore, especially in its
commercial portfolio.
Potential supply risks
Since the IT/ITES sector is looking up for the next few years and hiring has
picked up, most developers are looking to significantly ramp up their plans
significantly above what they have delivered so far. A potential supply glut could
adversely impact the company's performance. There are many peers who have
extensive development plans in micro-markets like Whitefield and North
Bangalore, which could lead to increased competition.
Increased execution and cost-overrun risks
With 50% of the development book already ongoing, and another ~20-25msf of
new launch guidance, we believe forthcoming development plans could prove
to be aggressive. Hence, chances of execution delays and risks of cost
overruns are high as well. While residential and commercial are its forte, the
company also has aggressive development plans on the retail and hospitality
side as well.
Professional Management
Prestige Construction, along with its promoters, has over 24 years of
experience in real estate development. While Prestige is a promoter-led
company, it is managed under an established and stable centralized lean
management structure, supported by professionals with experience in the real
estate business. Management believes in doing only core operations in-house
and outsourcing the rest – such as architecture, project management,
construction – to established players. Overall, the team has been relatively
proactive in its strategies in terms of capturing the upcoming demand pipeline.
Branding its property development has provided it with high customer visibility.
Figure 23. Brief on Promoter background
Irfan Razack CMD Aged 56 years Has overall 35 years in the retail and real estate industry and set up the company in 1986. Has been MD since 1997.
Responsible for the over-all management of our Company and oversees a gamut of activities from corporate strategic planning to
decision making.
Rezwan Razack Joint MD Aged 54 years Has overall 33 years in the retail and real estate industry and set up the company in 1986. Has been Jt MD since 1997.
Responsible for the construction and engineering activities of our Company and also guides our overall decision making
processes.
Source: Company
Prestige Estates Projects Ltd
Valuation
Our target price of Rs170 is based on a weighted average discount of 15%
(based on various operating segments) to our Dec 11E blended NAV of Rs200.
We believe chances of price cuts are minimal in Bangalore, as it didn't
experience the unreasonable developer–led price hikes in the first place. But to
remain conservative, we assign a 10% probability of potential 15% price cuts to
arrive at our TP. This is in line with our valuation methodology for the sector.
Our Dec-11E base NAV (ex-price cut) of Rs 204 is based on: 1) development
portfolio of ~35msf; 2) rental assets of ~3.8msf (their eco. stake); 3) additional
land bank of ~290 acres at current market price; 4) project management
business at 6.0x FY12E earnings; 5) cap rate of 10%-11% for commercial
space and retail malls; 6) average cost of capital of ~15.2% (assuming 13%
cost of debt); and 7) a tax rate of 25%.
Risks
We rate Prestige Medium Risk for the following reasons: a) projects could
suffer execution delays or cost overruns due to a significant scale-up in
operations; b) a slowdown in IT/ITES and global macro factors could impact its
commercial segment plans; c) Geo-political risks are higher given >80%
exposure towards a single city – Bangalore; d) interest rate tightening cycle;
and e) a slowdown in capital inflows or measures to regulate FDI in the real
estate sector. Our quantitative risk-rating system assigns Prestige a High Risk
rating, but we believe a Medium Risk rating is justified, given its sound
execution track record and a growing rental pipeline.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Prestige Estates Projects Ltd (PREG.BO)
Proxy Play on Bangalore & Commercial
Initiate at Buy with a TP of Rs 170 — Our bullish view is based on a)
strong execution track record; b) attractiveness of Bangalore market –
pricing should hold given moderate increases in the recent past and volumes
should be helped by the boom in IT services; c) attractive ~35% disc to NAV
– stock has underperformed Sensex by ~21% over the past three months.
Established brand & proven execution track record — With over 24
years of real estate development experience, Prestige is a well-known brand
in South India. To date the company has delivered ~40msf in and around
Bangalore, with an annual average of ~4msf in last six years. Currently it has
a well-diversified product portfolio of ~35msf- 67% is resi, 14% office and the
balance split between retail/hotel.
Attractive Bangalore exposure enables steady growth — The city has
good demand, attractive demographics, and increasing per-capita income;
hence, significant absorption potential. We prefer it to other metros, as not
only is it an attractive/profitable market, but also because it has shown more
resilience post the last downturn, through a healthier and more gradual
recovery. Over 80% of Prestige's exposure is towards Bangalore, which we
believe is best positioned to benefit from the bounce back in IT/ITES growth.
Rentals set to double in the next three years — Our estimates show
rental income is set to grow at a CAGR of ~25% over FY10-13E as several
office/retail assets get commissioned. This enables cash flow stability, and
provides the potential opportunity for a strong unlocking of value later. Also,
its strong commercial presence (~50% of the ongoing development book)
makes it more attractive versus peers, in our view.
Catalysts offer re-rating potential — 1) Likely upsides from three new
projects recently finalized by the management, which are not reflected in our
numbers as yet; 2) pre-sales response to the 20-25msf launch pipeline
company has in store for FY12 and 3a ) stronger pick-up in pricing/rentals
due to growth in the IT/ITES sector.
Key risks — a) Execution delays/cost overruns given the scale of the rampup;
b) slowdown in IT/ITES and global macro factors could adversely impact
demand; c) geo-political risks are higher given >80% exposure to Bangalore;
and d) the interest rate tightening cycle and other sector risks.
Initiate at Buy; TP of Rs 170
Prestige is one of the largest developers in South India. In the last 24 years of
its real estate development business, it has developed and delivered 38 msf of
diversified real estate space across 153 projects (an average of >4.0msf pa in
last six years). Some of the landmarks in Bangalore City are from Prestige's
stable: UB City in Central Bangalore, Shantiniketan in Whitefield (14.6msf
project) and Forum Mall in Koramangala.
Currently it has a well diversified product portfolio of ~36 msf: 67% is
residential, 25% office and the balance is split between retail/hotels. The
company is largely Bangalore-centric (83%) and has some exposure to
Chennai, Cochin, Hyderabad, Mangalore and Mysore. We believe most of
these markets, especially Bangalore, should see an uptick with the expected
pick-up in IT/ITES.
Prestige has a growing rental annuity portfolio. In FY10, 14% of revenue came
from rentals earned (from ~2.8msf leased assets). Management is looking to
build this business segment so as to generate ~15-20% of topline YoY.
The company looks attractive to us as it offers a) revenue growth of ~30%
CAGR over FY10-13E, EBITDA growth of ~50% as margins improve with
product mix shift; b) D/E ranging between 0.5-0.65 despite increased traction in
the commercial segment; and c) ROEs in the range of 10-16% through the next
three years.
We like the company's track record so far, along with its future growth story in
the attractive market of Bangalore. Hence, we initiate coverage with a Buy
rating and target price of Rs 170, based on an avg 15% discount to a blended
NAV of Rs 200. After having corrected ~34% in the last three months (down
~25% vs IPO price of Rs 183), the stock is currently trading at <15x FY12E
earnings and ~1.8x FY12E BV (given its relatively asset-light model, with a high
proportion of JD/JVs in place)- we believe investors should accumulate the
stock at present levels.
What we like about Prestige
A. Execution track record speaks volumes
Prestige has been in the real estate business for 24 years and has established
a strong brand franchise which it can now leverage. To date, Prestige has
delivered 35msf of real estate space across 153 projects (an average of
~4.0msf pa in last six years) in multiple segments, like high-end villas and midincome
residential, office, malls, hospitality and multiplex. Apart from
development, it has ~2.8msf of leased property in its portfolio, and also
undertakes property management of 15msf. Some of the landmarks in
Bangalore City are from Prestige's stable: UB City in Central Bangalore,
Shantiniketan in Whitefield (14.6msf project) and the Forum Mall in
Koramangala.
B. Proxy to Bangalore: high-demand, high-volume market
Around 83% of the total saleable area is in and around the city of Bangalore.
Bangalore – the IT hub of India – offers high demand visibility and significant
absorption potential, making it an attractive and profitable market vs. other
metro cities, in our view. It has shown a healthier and a more gradual recovery
post the downturn. Unlike a few pockets in Mumbai and NCR, Bangalore hasn’t
seen steep/unreasonable developer-led price hikes. It has a fundamentally
good demand story, attractive demographics and increasing per-capita income.
Ongoing infrastructure projects (like Metro Rail, highways, expressways and
newly built world-class airport) should also enhance the value of its projects.
C. Attractive portfolio offering, with an impressive line-up
of new launches
Currently the company has ~35 msf saleable area under development. It is a
well diversified product portfolio of 67% is residential, 25% office and balance
split in retail/hotel (See Figure 16). Ongoing projects have a larger component
of commercial projects (~50% of developable area), which should benefit the
company as growth in IT/ITES is bouncing back, leading to a hiring pick-up in
the sector.
Overall, the company has a strong pipeline of projects under development:
~50% of its pipeline (based on developable area) is ongoing and the company
is continuously adding newer projects to its portfolio. Management has recently
guided that it has a launch pipeline of ~20-25msf by FY12 end.
D. Strong support from growing rental annuity
In FY10, 14% of revenue came from rentals earned (~Rs 1400m). Management
is targeting to build its lease portfolio, intending to generate 15-20% of revenue
each year from steady rentals. Our estimates show ~25% CAGR over FY10-
13E. We believe its rental business provides cash-flow stability to the company,
besides the potential opportunity for strong unlocking of value.
E. Model to continue supporting steady cash flows
Prestige operates both a develop-lease and a develop-sell model
simultaneously. Residential development should provide cash-flow visibility
through pre-sales, aiding the development of the lease-hold commercial
portfolio. This in turn should yield a regular rental annuity once completed and
leased, ensuring steady cash-flow visibility to the business. Also, the group
largely operates under JV/JD umbrella, giving it access to strategic land parcels
at relatively nominal cost, thereby accelerating expansion plans and reducing
the burden of hefty land costs.
F. Potential Upside Catalysts
Additional land bank waiting on sidelines: management has indicated
recently that it has concluded more JV/JD agreements for projects around
the city (including two projects behind Cessna Business Park and another
villa project in Bangalore city). These have not yet been captured in our
estimates.
Better-than-expected response to the ~20-25msf launches management has
in pipeline for FY12.
Stronger pick-up in pricing/rentals due to a surge in hiring in IT/ITES sector.
We currently assume inflation-linked price appreciation of 5%.
Complete delivery of few key projects like Shantiniketan, Vijaya Mall in
Chennai, Exora Business Park.
G. Other positives:
Strategic Tie-ups: Prestige has tied up with strategic partners like
CapitaLand (for developing five malls across South India), Cisco (developing
Cessna business park as a built-to-suit project solely for carrying out its own
operations), Red Fort Capital Real Estate Holdco I L.L.C (to develop
commercial space and townships).
Forward integration: Prestige Group has within its fold several ancillary
businesses which support and add value to its main business of
development and leasing.
– Property management services: This business is conducted through
Prestige Property Management Service Private Limited in which Prestige
holds a 97% stake. The key intention of this business is to maintain the
quality of its developments once handed over after completion. It currently
has 15msf of property under management and another 10.0msf is
expected to be added by FY12-end.
– Other services include Sub-leasing and Fit-Out services; Project and
Construction Management Services; Interior Solutions Services; Mall
Management Services; and Hospitality Operations.
Initiate with a Buy/Medium Risk
Our Target Price of Rs170 is based on a weighted average discount of 15%
(see Figure 19) to our Dec 11E blended NAV of Rs200. We believe chances of
price cuts are minimal in Bangalore, as it didn't experience the unreasonable
developer–led price hikes in the first place. But to remain conservative, we
assign a 10% probability of potential 15% price cuts to arrive at our blended
NAV. This is in line with our valuation methodology for the sector.
A break-up of our base NAV estimate of Rs204 (ex- price hikes) has been
highlighted in Figures 19 and 20 and is detailed below:
Rs 91/share for the ~35msf of commercial and residential under
development portfolio (commercial, if under development assumes for sale
till leased) – based on current pricing/costs and 5% inflation-linked
escalations
Rs 61/share attributable to the leasing portfolio which is on the ground -
~3.0msf of commercial and ~0.7ms of retail assets - based on a cap rate of
10% for Bangalore and 11% for other cities.
Hotel portfolio contributes Rs 23/share - based on Rs12-18m capital cost
per room for ~1,200 rooms
Rs 24/share from land (~470 acres of which its share is ~290acres) the
company owns but for which no development has been firmed up as yet -
valued based on current market prices
The company currently has 15msf of properties under management under
the property management business and management guides that another
~10msf will be added by end of FY12. We value this segment at 6.0x FY12E
earnings and it contributes Rs 4/share to the NAV.
This apart, we have factored in a cost of capital of ~15.2% assuming 13% cost
of debt (50bps increase to current cost of 12.5%), long-term DE of 0.7, risk-free
rate of ~8%, a market premium of 8%, Beta of 1.5x (similar to peers) and tax
rate of 30%.
Figure 20. Prestige – Dec-11 NAV Summary
Rs Millions
Residential Development 33,590
Non-Residential Development (assuming all future commercial is for sale) 24,374
Total Gross Development NAV 57,964
Less: Costs outstanding for land 273
Less: Tax payable @ 24% 13,846
Less: Net Consolidated debt outstanding 8,973
Less: Customer advances 8,597
Add: Land upon which there is no development planned (at current Market value) 8,808
Add: Value of leased portfolio (commercial + retail) 22,059
Add: Value of Project Mgmt Business (@ 10.0x FY12E earnings) 1,456
Add: Value of hotel portfolio (Existing + ongoing) 8,376
Net NAV 66,973
No. of shares 328
NAV 204
Source: Citi Investment Research and Analysis estimates
Attractive Financials
Strong Earnings Visibility: We estimate a ~30% and 50% CAGR in
revenue and EBITDA respectively over FY10-13E. Also, management has
recently guided that, as at Dec-10, unrecognized revenue in the books stood
at ~Rs20bn. Overall, the company has an impressive line-up of projects:
~50% of its pipeline is ongoing and the company is continuously adding
newer projects to its portfolio. With a proven execution track record and
seeing the development which is already on the ground, we see strong
earnings visibility in the coming few years.
Ability to service higher leverage: Consolidated net-debt stood at ~Rs
16bn as at Dec-10 with net-debt/equity at 0.45x. The average cost of debt is
~12.5%. Gross debt of Rs 5.5bn is repayable in FY12, of which, when we
remove lease rental discounting and receivable discounting, net repayment
of ~Rs1.0bn stands due. Overall, while our assumptions see Net D/E rise to
0.65 within the next three years given the business expansion, this is not too
much of a concern, when seen in conjunction with the company’s internal
cash-flow generation from pre-sales and the annuity business.
Consistent double-digit ROEs: Prestige has delivered/is expected to
record Return on Equity (ROE) of 10-20% (Figure 22). Outperformance
versus its Bangalore peers (Sobha, Puravankara, Brigade) over the years
stands out, the only exception being FY11 – due to the dilution.
Risks
Concentration risk in Bangalore
While Prestige has a strong execution track record in Bangalore, where
meaningful demand and opportunity remains, Prestige's concentration in a
single location (>80% of saleable area and ~88% of gross development NAV)
could entail risks. Likely absorption issues may crop up, particularly with
multiple premium projects in Whitefield (~20% of gross development NAV).
Dependence on IT sector performance
Real estate is largely dependent on performance of IT/ITES sector and global
macro factors. While other sectors like pharma, autos and few other
manufacturing industries are gradually setting up operations in the city, by and
large it's still IT/ITES dominant. We believe this poses as a risk to Prestige,
which has 83% of development exposure to Bangalore, especially in its
commercial portfolio.
Potential supply risks
Since the IT/ITES sector is looking up for the next few years and hiring has
picked up, most developers are looking to significantly ramp up their plans
significantly above what they have delivered so far. A potential supply glut could
adversely impact the company's performance. There are many peers who have
extensive development plans in micro-markets like Whitefield and North
Bangalore, which could lead to increased competition.
Increased execution and cost-overrun risks
With 50% of the development book already ongoing, and another ~20-25msf of
new launch guidance, we believe forthcoming development plans could prove
to be aggressive. Hence, chances of execution delays and risks of cost
overruns are high as well. While residential and commercial are its forte, the
company also has aggressive development plans on the retail and hospitality
side as well.
Professional Management
Prestige Construction, along with its promoters, has over 24 years of
experience in real estate development. While Prestige is a promoter-led
company, it is managed under an established and stable centralized lean
management structure, supported by professionals with experience in the real
estate business. Management believes in doing only core operations in-house
and outsourcing the rest – such as architecture, project management,
construction – to established players. Overall, the team has been relatively
proactive in its strategies in terms of capturing the upcoming demand pipeline.
Branding its property development has provided it with high customer visibility.
Figure 23. Brief on Promoter background
Irfan Razack CMD Aged 56 years Has overall 35 years in the retail and real estate industry and set up the company in 1986. Has been MD since 1997.
Responsible for the over-all management of our Company and oversees a gamut of activities from corporate strategic planning to
decision making.
Rezwan Razack Joint MD Aged 54 years Has overall 33 years in the retail and real estate industry and set up the company in 1986. Has been Jt MD since 1997.
Responsible for the construction and engineering activities of our Company and also guides our overall decision making
processes.
Source: Company
Prestige Estates Projects Ltd
Valuation
Our target price of Rs170 is based on a weighted average discount of 15%
(based on various operating segments) to our Dec 11E blended NAV of Rs200.
We believe chances of price cuts are minimal in Bangalore, as it didn't
experience the unreasonable developer–led price hikes in the first place. But to
remain conservative, we assign a 10% probability of potential 15% price cuts to
arrive at our TP. This is in line with our valuation methodology for the sector.
Our Dec-11E base NAV (ex-price cut) of Rs 204 is based on: 1) development
portfolio of ~35msf; 2) rental assets of ~3.8msf (their eco. stake); 3) additional
land bank of ~290 acres at current market price; 4) project management
business at 6.0x FY12E earnings; 5) cap rate of 10%-11% for commercial
space and retail malls; 6) average cost of capital of ~15.2% (assuming 13%
cost of debt); and 7) a tax rate of 25%.
Risks
We rate Prestige Medium Risk for the following reasons: a) projects could
suffer execution delays or cost overruns due to a significant scale-up in
operations; b) a slowdown in IT/ITES and global macro factors could impact its
commercial segment plans; c) Geo-political risks are higher given >80%
exposure towards a single city – Bangalore; d) interest rate tightening cycle;
and e) a slowdown in capital inflows or measures to regulate FDI in the real
estate sector. Our quantitative risk-rating system assigns Prestige a High Risk
rating, but we believe a Medium Risk rating is justified, given its sound
execution track record and a growing rental pipeline.
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