Prestige Estates Projects PEPL IN -BUY : Nomura Research

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RESULTS FIRST LOOK
Prestige’s 2QFY12 results missed our as well as consensus revenue/profit estimates, but this was largely on account of slower-than-expected construction progress at one of its ongoing projects. Despite an uncertain macro environment, the company noted strong response at its newly launched residential projects and achieved cumulative sales of INR7.1bn in the quarter vs INR10.8bn for full-year FY11 (residential segment). We expect revenues to pick up from 4QFY12F as newer high-value projects reach the revenue threshold. Liquidation of debtors should be a key catalyst for the stock. Maintain BUY.

Prestige Estates' standalone 2QFY12 sales of INR1,281mn (-48%q-q) came in below our and consensus estimates of INR2,183mn and INR2,477mn, respectively. The lower revenues on a q-q basis were due to 1) slower construction progress at its Neptune Courtyard project in Cochin which was expected to be completed during the quarter; and 2) lower-than-expected sales at its completed projects. In 2QFY12, the company recognized revenue of only INR0.8bn from its saleable residential & commercial projects, as compared to INR2.07bn in the previous quarter.

The company now expects to complete Neptune Courtyard in 3QFY12 and recognize at least INR700mn from the same in 3Q. It also expects Prestige White Meadows to reach revenue recognition threshold in 4QFY12 and Kingfisher Towers in 2QFY13.

EBITDA margin for 2QFY12 was higher at 38% vs. our expectation of 29% and consensus of 30%. We attribute this difference in the margin to lower contribution from saleable projects, which have a lower margin when compared to high-margin steady lease income from investment properties. With the completion of low-margin Prestige Shantiniketan, we think margins are likely to revert to a higher base, and management expects that EBITDA margins should remain around 35% on saleable projects in the future. On account of lower revenue, standalone EBITDA at INR493mn (-29%q-q) was 23% and 33% lower than our and consensus estimates, respectively.

PAT at INR263mn (-28%q-q) was below both our and consensus estimates of INR334mn and INR326mn, respectively, driven by the lower top line.

Balance sheet

On the balance sheet side, standalone net debt rose q-q from INR6.97bn to INR8.03bn, as company continues to invest towards construction of commercial / residential development and extended advances to landlords pertaining to joint development agreements.

The realisation of sundry debtors remained slow at INR0.8bn during the quarter, with INR9.5bn still remaining to be collected from the customers as of end-Sep11. As mentioned by management, realisation of debtors against Prestige Shantiniketan (approx. INR4.3bn or c. 45% of total outstanding debtors) is expected to pick up pace from 4QFY12 as leasing of Prestige

Shantiniketan’s office space is achieved. The payment towards sale of Prestige Shantiniketan office space is subject to leasing of the property, in our view.

We believe realisation of debtors will be a positive catalyst for the stock as this should ease pressure on the overall debt position and help the company ramp up construction on its ongoing commercial and residential developments.

The company was able to lower its cost of borrowings q-q from 14.3% to 13.6% despite an increase in the gearing level from 34% to 38%. We view this as positive especially when other real estate developers are squeezed for liquidity and interest rates have been rising.

Sales performance

Operationally, the company achieved a strong response towards its new launches in Bangalore and managed to sell nearly 1.9mn sq ft in residential segment during the quarter, totalling INR7.1bn vs. sales of INR10.8bn in the residential segment for the full-year FY11. Nearly 80% of sales of INR7.8bn (including commercial segment) achieved during the quarter came from the new mid-income residential launches in Bangalore, namely Prestige Tranquillity (c. INR4.7bn), Prestige Park View (c. INR1.3bn) and Prestige Sunnyside (c.INR0.4bn).

With a large amount of sales coming from mid-income housing projects, the company’s average realisation for the residential projects moved lower to INR3,584 per sq ft vs. INR4,773 per sq ft (Jun-11) vs. INR6,962 per sq ft (Mar-11) vs. INR9,139 per sq ft (Dec-10). Despite the drop in average realisation in the residential segment, the company has achieved cumulative sales of INR9.9bn in 1HFY12, and we believe it is on target to achieve its FY12 sales guidance of c. INR14.0bn.

Maintain BUY; available at 33% discount to NAV

We maintain our BUY rating on the stock as we expect 1) revenue recognition to improve with newer high-value projects reaching the revenue threshold in 1QFY13F; 2) realisation of debtors to pick up pace; and 3) on track to achieve FY12 sales guidance of c. INR14.0bn (equivalent to FY11 sales of INR13.8bn) despite lower realisation in FY12F.

We also like the fact that 50% of the company’s developable land reserves are under construction leading to ~60% of the overall cash flows coming through by FY15F. This, combined with 3.7mn sq ft of completed and leased commercial space, should ensure that ~70% of GAV is visible by FY15F, in our view. We reiterate our BUY call on the stock as it is trading at a nearly 33% discount to our NAV of INR143 per share and 21% discount to our price target of INR122 per share.