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UBS Investment Research
Prestige Estates Projects
Q3 FY11: operations on track, maintain Buy
Numbers on track to meet our FY11 estimates
Prestige Estates Projects (Prestige) reported Q3 FY11 revenue of Rs3.64bn and
PAT of Rs0.54bn. An EBITDA margin of 26% met our expectation. Based on 9M
revenues of Rs9.2bn and PAT of Rs1.33bn, we believe Prestige is largely on track
to meet our FY11 estimates of Rs13.4bn and Rs2.08bn, respectively, as revenue
recognition for some premium projects will begin in Q4; hence, its EBITDA
margin should improve to around 30%.
Bangalore market was resilient: well balanced sales mix
The revenue mix was fairly balanced for the quarter with mid-income residential,
premium residential and commercial leases and sales each contributing one-third to
revenue. We expect volume, especially in the mid-income range, to pick up in the
next three to six months due to more launches.
Key catalysts
We think the key triggers for the share price are: 1) an impressive residential
launch pipeline of 13m sq ft for the next few quarters, which will further drive
presales. We expect the launch pipeline in Q4 to be better than that in Q3 as some
launches have been pushed to Q4; 2) further visibility on the growing rental
annuity business—Prestige expects incremental rentals of Rs500m to be added to
its existing rental annuity of Rs1.47bn per annum in FY12; 3) improved execution
momentum reflected in faster revenue recognition; and 4) announcements of new
projects on attractive terms.
Valuation: compelling; maintain Buy rating
We base our price target on a 20% discount to our NAV estimate of Rs275.00. We
think Prestige provides the best exposure to Bangalore’s growth potential (84% of
our NAV estimate).
Valuation and basis for our price target
We believe Prestige’s core presence in Bangalore’s residential and commercial
markets, prime location land assets, domain expertise in residential, commercial
and integrated development projects, high proportion of rental-yielding assets
and a strong brand name differentiate the company. We believe a NAV-based
valuation methodology is the most appropriate for Prestige as it factors in: 1) the
value of its land assets; 2) the scale of development opportunities—the
diversified asset-geographic mix across wide timeframes; and 3) execution. We
see Prestige grouped with its regional peers, and factoring in business model
risks, we expect the stock to trade at a discount to NAV.
We base our Rs220.00 price target on a 20% discount to our September 2011
NAV/share estimate of Rs275.00. While the level of the NAV discount is a
matter of subjective assessment, we believe a 20% discount to our base case
NAV is fair. Our lower discount compared to its peers of 25-40% largely factors
in: 1) Prestige’s dominant position and diversified asset mix in the attractive
Bangalore market; 2) large contribution (23% of NAV) from rental-yielding
assets with growth potential; 3) a strong track record and brand franchise; and
4) concerns about oversupply issues. Our base case NAV/share of Rs275.00
involves the following assumptions: 1) developmental volume of 44.85msf; 2) a
9% cap rate for rental-yielding assets; 3) no price escalations; 4) an average cost
of capital of 13%; and 5) a 25% tax rate.
Bull and bear case NAV
Our bear case: 1) factors in a five-year development visibility (14msf, 55% of
NAV); 2) values the balance as undeveloped land reserves (17% of NAV); and
3) a higher cap rate of 11% for rental-yielding assets (28% of NAV). Our bull
case scenario builds in: 1) 10% higher prices; 2) a faster execution cycle for
development projects; and 3) faster leasing of commercial assets. We believe
this provides a good perspective on NAV downside risks and upside potential.
(Rs) Bull case Bear case
NAV/share 301 194
Upside/downside 14% -26%
Source: UBS estimates
Prestige Estates Projects
Prestige Estates Projects (Prestige) is a South India-focused real estate developer
with a diversified real estate portfolio in residential, commercial, retail, and
hospitality. Most of its developable area is in Bangalore (84%) and it is now
expanding to other South Indian cities. Prestige also provides allied services,
such as interior design, property management services, and sub-letting services.
Established 24 years ago, Prestige has developed a number of landmark
properties in Bangalore, including UB City, Prestige Shantiniketan, and the
Forum Mall.
Statement of Risk
Risks to Prestige are a high exposure to high-end/luxury projects, high exposure
to Bangalore and a decline in commercial leasing and activity and regulatory
policy risks
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Prestige Estates Projects
Q3 FY11: operations on track, maintain Buy
Numbers on track to meet our FY11 estimates
Prestige Estates Projects (Prestige) reported Q3 FY11 revenue of Rs3.64bn and
PAT of Rs0.54bn. An EBITDA margin of 26% met our expectation. Based on 9M
revenues of Rs9.2bn and PAT of Rs1.33bn, we believe Prestige is largely on track
to meet our FY11 estimates of Rs13.4bn and Rs2.08bn, respectively, as revenue
recognition for some premium projects will begin in Q4; hence, its EBITDA
margin should improve to around 30%.
Bangalore market was resilient: well balanced sales mix
The revenue mix was fairly balanced for the quarter with mid-income residential,
premium residential and commercial leases and sales each contributing one-third to
revenue. We expect volume, especially in the mid-income range, to pick up in the
next three to six months due to more launches.
Key catalysts
We think the key triggers for the share price are: 1) an impressive residential
launch pipeline of 13m sq ft for the next few quarters, which will further drive
presales. We expect the launch pipeline in Q4 to be better than that in Q3 as some
launches have been pushed to Q4; 2) further visibility on the growing rental
annuity business—Prestige expects incremental rentals of Rs500m to be added to
its existing rental annuity of Rs1.47bn per annum in FY12; 3) improved execution
momentum reflected in faster revenue recognition; and 4) announcements of new
projects on attractive terms.
Valuation: compelling; maintain Buy rating
We base our price target on a 20% discount to our NAV estimate of Rs275.00. We
think Prestige provides the best exposure to Bangalore’s growth potential (84% of
our NAV estimate).
Valuation and basis for our price target
We believe Prestige’s core presence in Bangalore’s residential and commercial
markets, prime location land assets, domain expertise in residential, commercial
and integrated development projects, high proportion of rental-yielding assets
and a strong brand name differentiate the company. We believe a NAV-based
valuation methodology is the most appropriate for Prestige as it factors in: 1) the
value of its land assets; 2) the scale of development opportunities—the
diversified asset-geographic mix across wide timeframes; and 3) execution. We
see Prestige grouped with its regional peers, and factoring in business model
risks, we expect the stock to trade at a discount to NAV.
We base our Rs220.00 price target on a 20% discount to our September 2011
NAV/share estimate of Rs275.00. While the level of the NAV discount is a
matter of subjective assessment, we believe a 20% discount to our base case
NAV is fair. Our lower discount compared to its peers of 25-40% largely factors
in: 1) Prestige’s dominant position and diversified asset mix in the attractive
Bangalore market; 2) large contribution (23% of NAV) from rental-yielding
assets with growth potential; 3) a strong track record and brand franchise; and
4) concerns about oversupply issues. Our base case NAV/share of Rs275.00
involves the following assumptions: 1) developmental volume of 44.85msf; 2) a
9% cap rate for rental-yielding assets; 3) no price escalations; 4) an average cost
of capital of 13%; and 5) a 25% tax rate.
Bull and bear case NAV
Our bear case: 1) factors in a five-year development visibility (14msf, 55% of
NAV); 2) values the balance as undeveloped land reserves (17% of NAV); and
3) a higher cap rate of 11% for rental-yielding assets (28% of NAV). Our bull
case scenario builds in: 1) 10% higher prices; 2) a faster execution cycle for
development projects; and 3) faster leasing of commercial assets. We believe
this provides a good perspective on NAV downside risks and upside potential.
(Rs) Bull case Bear case
NAV/share 301 194
Upside/downside 14% -26%
Source: UBS estimates
Prestige Estates Projects
Prestige Estates Projects (Prestige) is a South India-focused real estate developer
with a diversified real estate portfolio in residential, commercial, retail, and
hospitality. Most of its developable area is in Bangalore (84%) and it is now
expanding to other South Indian cities. Prestige also provides allied services,
such as interior design, property management services, and sub-letting services.
Established 24 years ago, Prestige has developed a number of landmark
properties in Bangalore, including UB City, Prestige Shantiniketan, and the
Forum Mall.
Statement of Risk
Risks to Prestige are a high exposure to high-end/luxury projects, high exposure
to Bangalore and a decline in commercial leasing and activity and regulatory
policy risks
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