Prestige Estates - Still long way to run :: Macquarie Research,

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Prestige Estates
Still long way to run
Event
 Prestige reported weak sales in 1QFY12. However strong unbilled revenues
provide comfort that this is a mere deferment of revenues and not a structural
weakness. Our positive outlook on Prestige remains unchanged. The stock is
up 12% from its bottom in June 2011. We expect this move to continue.
Impact
 Unbilled revenues strong (at a robust Rs17bn) even as Prestige reported
weaker than expected revenues for 1QFY12 (Rs2.5bn vs our expectation of
Rs4.2bn). While margins surprised (with growth of 910 bps QoQ), sales
performance led to PAT of Rs364mn vs our expectation of Rs627m. We
however believe that margins and the cash flow position/ outlook remain strong.
The strong unbilled revenue number leads us to believe that lower than
expected revenues were a timing issue rather than structural decline in earnings
potential. As older projects hit the hurdle for revenue recognition over the next
2-3 quarters, we expect a pick-up in revenue and margins in 2HFY12.
 Debt continues to remain comfortable at 0.5x net debt to equity on a
consolidated basis. Importantly, annuity flow covers more than 100% of
interest expense. This cover is likely to increase by the end of FY12 (and
onwards in FY13-FY15). As a result, we now do not expect debt to fall. In fact
this may increase as management takes a view to hold on to a larger
proportion of yielding assets, as compared to the pre-IPO days.
 Pre-sales triggers to continue: Prestige sold over 800 of 2,321 apartments
available for sale in the newly launched mid-income residential project-
‘Tranquility’ and 120 of the 244 apartments for sale at premium project ‘Park
View’. This highlights the strong environment prevalent in Bangalore. We
expect pre-sales led triggers and cash flows to remain strong over the next
two quarters as four new projects are likely to be launched in that period.
Earnings and target price revision
 No change
Price catalyst
 12-month price target: Rs210.00 based on a Sum of Parts methodology.
 Catalyst: Residential and commercial property volume and price trends
Action and recommendation
 Reiterate Outperform rating: Prestige ticks all boxes we consider when we
pick stocks by elimination of key risks (refer to Selection via elimination dated
13 May 2011). It has a strong balance sheet, trades at attractive free cash
yields, has limited news flow risk, provides excellent disclosures and is
exposed to the right micro-markets - Bangalore residential and IT commercial.
For investors who find it difficult to invest in Prestige due to stock liquidity
constraints, we recommend a ‘basket’ approach. In our view, a market cap
weighted basket of Prestige and Sobha (SOBHA IN, Rs260, OP, TP: Rs430)
would be the ideal way to play strong trends in the Bangalore market.