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Not ready for possession
Residential projects mispriced at 1.5x premium to market
Delay of 3-24 months across projects, potential cash crunch of INR15b
JDAs fraught with execution risk, office segment a bright spot
Positives outweigh negatives – REDUCE with TP of INR104
Residential premium mispriced
Prestige Estates (PEPL) is a south-based
developer with a total land bank of about
68m sq ft. Almost 77% of its land bank is
located in Bengaluru, with about 56%
represented by the residential segment.
The residential business contributes about
64% and 63% to FY12E and FY13E
revenue, respectively. Our checks with
brokers, banks and leading International
Property Consultants (IPCs) suggest that
affordability is close to 2008 (previous
market peak) levels and volumes have
significantly declined in the past 6-12
months. Our checks with leading mortgage lenders suggest that they
have turned cautious on the Bengaluru market. The residential portfolio
currently contributes about 35% to PEPL’s total GAV. PEPL’s major
projects are priced at about 50% premium to other projects in the vicinity,
implying that sales may come under pressure in the near term.
Channel checks suggest delays, funding shortfall likely
Our channel checks with local brokers, sales representatives and PEPL’s
management indicate that PEPL’s projects are currently facing delays of
3-24 months. A one-year delay could impact NAV by about 10.5%.
Furthermore, since PEPL recognises revenue based on percentage of
completion, we see downside risk of 10-18% to consensus earnings
estimates for FY12-13. Our analysis of cash flow indicates that PEPL will
likely face a funding shortfall of INR15b over the next two years.
JDAs – more downside risk than upside
About 69% of PEPL’s projects are through Joint Development
Agreements (JDAs). In a JDA, the land owner surrenders his land parcel
to the developer in lieu of a stake in the project’s sales/profit. However,
we believe issues such as dispute with the land owner, higher sensitivity
to construction costs, high interest cost and potential penalty on failure to
complete the development on time can severely impact the project’s
prospects.
Counter-consensus REDUCE, Sobha remains top pick
We initiate coverage on PEPL with a REDUCE rating and a TP of
INR104.00, implying 13% downside potential from current levels. Key
concerns on PEPL are delays in existing projects, cash flow concerns
and risks related to JDAs. Our TP of INR104 for PEPL is based on a
SoTP valuation of its real estate and services businesses. Key risks are
faster-than-anticipated execution, good response to its mid-income
projects and easing of the current liquidity situation in the real-estate
sector. Sobha Developer is our top pick in the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Not ready for possession
Residential projects mispriced at 1.5x premium to market
Delay of 3-24 months across projects, potential cash crunch of INR15b
JDAs fraught with execution risk, office segment a bright spot
Positives outweigh negatives – REDUCE with TP of INR104
Residential premium mispriced
Prestige Estates (PEPL) is a south-based
developer with a total land bank of about
68m sq ft. Almost 77% of its land bank is
located in Bengaluru, with about 56%
represented by the residential segment.
The residential business contributes about
64% and 63% to FY12E and FY13E
revenue, respectively. Our checks with
brokers, banks and leading International
Property Consultants (IPCs) suggest that
affordability is close to 2008 (previous
market peak) levels and volumes have
significantly declined in the past 6-12
months. Our checks with leading mortgage lenders suggest that they
have turned cautious on the Bengaluru market. The residential portfolio
currently contributes about 35% to PEPL’s total GAV. PEPL’s major
projects are priced at about 50% premium to other projects in the vicinity,
implying that sales may come under pressure in the near term.
Channel checks suggest delays, funding shortfall likely
Our channel checks with local brokers, sales representatives and PEPL’s
management indicate that PEPL’s projects are currently facing delays of
3-24 months. A one-year delay could impact NAV by about 10.5%.
Furthermore, since PEPL recognises revenue based on percentage of
completion, we see downside risk of 10-18% to consensus earnings
estimates for FY12-13. Our analysis of cash flow indicates that PEPL will
likely face a funding shortfall of INR15b over the next two years.
JDAs – more downside risk than upside
About 69% of PEPL’s projects are through Joint Development
Agreements (JDAs). In a JDA, the land owner surrenders his land parcel
to the developer in lieu of a stake in the project’s sales/profit. However,
we believe issues such as dispute with the land owner, higher sensitivity
to construction costs, high interest cost and potential penalty on failure to
complete the development on time can severely impact the project’s
prospects.
Counter-consensus REDUCE, Sobha remains top pick
We initiate coverage on PEPL with a REDUCE rating and a TP of
INR104.00, implying 13% downside potential from current levels. Key
concerns on PEPL are delays in existing projects, cash flow concerns
and risks related to JDAs. Our TP of INR104 for PEPL is based on a
SoTP valuation of its real estate and services businesses. Key risks are
faster-than-anticipated execution, good response to its mid-income
projects and easing of the current liquidity situation in the real-estate
sector. Sobha Developer is our top pick in the sector.
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