Prestige Estates -The new kid on the block ::Macquarie Research

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Prestige Estates
The new kid on the block
Event
 Prestige is a Bangalore-based real estate company with a diversified portfolio
of real estate development projects. The company has over 24 years of
experience in real estate development and has completed more than 150 real
estate projects of around 34m sqf.

Impact
 A play on the attractive Bangalore market. We believe the Bangalore
market (for the most part) is showing signs of ‘sanity’ compared with many
other markets, such as parts of Mumbai and NCR. The micro-markets of
Bangalore (barring exceptions in the outskirts) are seeing a consistent
improvement in volumes even as prices inch up. As we had expected,
Bangalore has emerged as the No. 1 destination for commercial space
leasing. More than 7m sqft of IT office space has been leased so far in CY10.
Our channel checks indicate CY11 may see leasing of as much as 10m sqft
based on current enquiries. Meanwhile the street remains negative on the
commercial market due to concerns of oversupply. As a result, a hangover of
the 2008 crisis is visible in cap-rate and rent assumptions, which seem priced
in. This is over-pessimistic given our view that excess supply will get
absorbed in 12 months.
 Prestige is posed to exploit these trends. More than 40% of the company’s
NAV is contributed by Bangalore residential. Importantly, unlike Sobha,
Prestige is an active player in the commercial IT space (around 30% of NAV).
Prestige shares are therefore a direct play on the commercial recovery and
residential trends.
 Balance sheet concerns look overdone. One of the key concerns at the
time of Prestige’s IPO was its absolute debt level (of around Rs17bn). We,
however, believe that this concern is now unwarranted. The net debt-to-equity
ratio post listing is now around a very reasonable 0.35x. More important, a
large portion of this debt is backed by rent from leased commercial property.
In fact, Prestige’s annuity income is equivalent to almost 100% of its annual
interest cost.
Action and recommendation
 We therefore expect Prestige to trade at a 20% NAV discount. For investors
looking for an attractive way to play emerging trends in the Bangalore market,
we recommend a basket approach.


Prestige Estates Aide Memoire
Operational issues
1. What is your outlook on residential prices and volumes in the Bangalore market?
2. Which product types (residential-mass/ luxury, commercial and retail) are likely to see the most action in the next 12
months and the next three to five years?
3. Please throw some light on your upcoming projects over the next two to three years.
4. What has been the response for the already-launched projects?
5. What do you think could be bottlenecks in achieving planned expansion in terms of material supply, capacity and capital?
Financial issues
1. Please share some thoughts on the capital requirement for your planned expansion. Do you have any fundraising plans?
2. Please throw some light on your targeted cash flow from operations in the next 12 months.
Regulatory issues
1. What would you think are the biggest risks facing the company? Do you think there are any regulatory/policy risks?
2. What are the regulatory and policy risks the sector and company facing?