Prestige Estate- Operating performance continues to beat guidance :JPMorgan

Prestige Estate Projects Limited (PEPL IN) Operating performance continues to beat guidance		Overweight Price: Rs169.75 21 Apr 2014 Price Target: Rs205.00 PT End Date: 30 Mar 2015

Prestige continues to deliver steady operating performance and has managed to meet/surpass its guidance levels across all operating metrics, despite a challenging macro. The company’s FY14 pre-sales and collections at Rs36B/Rs25B were up 16% Y/Y and 26% Y/Y, respectively. The pick-up in collections in Q4 is impressive at Rs6.6B (vs Rs5.9B last Q) and we believe this should continue to accelerate ahead (catch-up to pre-sales). Overall, the operating results reaffirm our hypothesis that over the next two years the company is poised to more than double its operating cash flows and earnings based on simple catch-up to pre-sales and locked-in rental growth (80%).

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· F14 pre-sales of Rs36.3B, up 16% Y/Y – Pre-sales for the Mar-Q stood at Rs6B (+11% Y/Y), taking overall F14 pre-sales to Rs36.3B. This is 16% higher than last year (Rs31B in F13) and largely in line with the company’s full-year guidance levels. On a sequential basis, there was a moderation in pre-sales in Q4 (Rs6B vs Rs9B last Q) due to no new project launches done in the last Q. Pre-sales during the quarter were largely driven by additional phase launch of the company’s largest residential project in Bangalore (Lakeside Habitat in Whitefield). Average realizations increased by 12% in F14, aided by both price increases and mix change.

· Pick-up in collections is impressive; revenue should also continue to catch up – Collections for the company have continued to increase over the last year and have been catching up to pre-sales. Q4 pre-sales at Rs6.6B (+23% Y/Y, +11% Q/Q) were the highest ever reported by the company (annualized Rs26B+). This takes full-year collections to Rs24.7B, 26% higher than last year’s levels. Revenue recognition for the company has also been picking up over the last year and the current run rate is close to Rs4.5-5B/Q, which is lower than pre-sales and collections due to POCM accounting. We expect revenues/earnings to see a meaningful scale-up over F15/16, narrowing the gap to pre-sales/collections.

· Guidance met across all metrics despite a challenging macro – PEPL has managed to meet or surpass expectations across all operating metrics (pre-sales, collections, launches) despite a tough macro environment. Specifically, the company achieved: a) pre-sales of Rs44B (Rs36.3B PEPL share) vs guidance levels of Rs44B (PEPL share – Rs37B); b) collections of Rs24.7B in F14 came in better than guidance of Rs23B, and c) Launches – PEPL launched 15.7msf of projects in F14 as against its guidance of 14msf.

· Bangalore market outlook – The Bangalore residential market has witnessed some moderation compared to last year’s levels, however, overall absorption trends still remain healthy. Mid-income projects (below Rs10M) continue to see a good response, as evident in recent launches from Prestige/Sobha. Prestige’s Lakeside Habitat in Whitefield and Sobha’s Oasis project in Electronic City have seen good offtake last Q. Overall pricing in the market has increased sharply over the last year and we do not see scope for significant appreciation from here-on in the near term.

 

 

Investment Thesis

Prestige, in our view, should deliver strong growth in earnings and free cash flows over the next two to three years. Our view is based on the strong pre-sales performance given exposure to the better performing/stable Bangalore market and locked-in rental growth from its ongoing office projects and retail completions. While debt levels for the company have increased due to the build-out of capex projects, yield on cost for annuity assets at 15%+ is fairly high (with locked-in escalations) and are value-accretive. As the rental portfolio matures, we believe the company is also likely to payout higher dividends from FY15 onwards.

Valuation

Maintain OW with Mar-15 price target of Rs205. Our PT is based on 8x Dev Co cash EBITDA, in line with the multiple used for peer group (Sobha). For rent co, we use a EV/EBITDA multiple of 11x, which implies a 15% discount to long-term multiples of rental landlords.

Risks to Rating and Price Target

a) Slowdown in the IT sector and meaningful slowdown in pre-sales momentum;

b) Sluggishness in execution which can adversely impact cash flows and revenue recognition; and

c) Sharp increase in debt levels.