Prestige Estates:: Southern Pride ::Motilal Oswal

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Southern Pride
A proxy on South India's real estate growth story
 Prestige Estates Projects Ltd, a premium developer in the South India real
estate market, has strong brand equity in the region, notably in Bangalore.
 Its presence across asset classes, superior execution and the steady growth
potential of southern cities make it an attractive play.
 Recovery of the commercial vertical on the backdrop of strong IT/ITES
demand along with uptick in economic activity augurs well for Prestige.
 We initiate coverage with a Buy and target price of INR175 (40% upside).
Strong brand, diversified product mix: Prestige Estates Projects Ltd (Prestige)
has a diversified land bank of ~62msf (company’s share is ~33msf of saleable and
~10msf of annuity projects) in established locations or growth corridors of key South
India cities, especially Bangalore. Prestige enjoys strong trust and customer preference
due to (1) its diversified and well-balanced product positioning across verticals and
customer segments, (2) a superior execution track record (almost 44msf over the past
25 years) with identifiable landmarks in Bangalore such as UB City, Shantiniketan and
Forum Mall and (3) its strong relationships with a growing corporate client base.
Promising markets, quality assets render meaningful cash flow visibility: We
believe Prestige will enjoy steady monetization of its projects due to the stable outlook
of the real estate (RE) sector in most southern cities. This is largely due to (a) strong
growth prospects of the IT/ITES sector, driving housing demand and commercial leasing
and (b) affordability for buyers, led by the rational movement of property prices. We
expect Prestige to have meaningful cash flow visibility from (1) its pre-sold projects
(~13msf) with ~INR22b receivable over the next 2-4 years, (2) its near-term launch
pipeline of ~15msf and (3) growing annuity assets (~3msf operational and ~7msf
upcoming). However, its heavy inclination towards annuity projects and strong nearterm
capex plans are likely to dent free cash flow over the next couple of years.
Steady revival of the commercial vertical to boost annuity income: Bangalore
has been in the forefront of commercial recovery, driven by the renewed momentum in
corporate expansion in the IT/ITES sector. Prestige is well placed to benefit from the
commercial uptrend with (1) 2.5msf of rent-yielding and ~3.4msf of upcoming projects
and (2) a strong and growing MNC/domestic client base. Prestige’s JV with CRIDF, an
associate of Capital Malls Asia, will help it to expand in the retail vertical, which
accounts for 19% of Prestige's GAV. We estimate annuity income from commercial
and retail segments will show uptrend from INR1.5b in FY11 to INR2.7b in FY13.
Valuation and view: We estimate Prestige's one year forward NAV of INR195. Prestige
has commanded a better average RoE of 15% over the past four years (v/s ~11% for
the coverage universe). It trades at 1.5x FY13E BV of INR81/share, 11x FY13E EPS
of INR11.3 and 36% discount to NAV. We believe (a) momentum in IT/ITES demand
growth and rental uptick, (b) on-time monetization and execution of flagship projects,
and (c) acquisition of new turnkey projects will be key triggers for the stock. We
initiate coverage with a Buy and a target price of INR175 (a 10% discount to NAV).