Prestige Estate - 1QFY12 results below expectations on low revenue recognition. Margin improvement is a positive::JPMorgan

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Prestige Estate Projects Limited Overweight
PREG.BO, PEPL IN
1QFY12 results below expectations on low revenue
recognition. Margin improvement is a positive


Prestige's 1Q earnings were below estimates on low revenue recognition
but gross margin improvement of +15% Q/Q (to 37%) is a positive. On
operating basis, progress on rental business and execution remains
satisfactory. New bookings in 1Q were tracking below co’s guidance
(FY12 -Rs15-18B) due to delay in new launches. However, launch activity
has picked up at the margin and response to recent large mid income
launch (4msf in Bangalore) in July has been encouraging (~30% sold).
 Financial highlights- 1] Net income (standalone) of Rs364M (+46%
Y/Y, -48% Q/Q) below expectations primarily due to low revenue
recognition from existing order book (~Rs17B); 2] EBITDA margins
improved meaningfully to 28% (vs. 19% in 4Q) with Shantiniketan
project largely out of the books now. Importantly, 1Q Gross margins
stood at 37%, increase of 15pp Q/Q; 3] Consol Net Debt at Rs12B (Net
D/E-0.5x) increased by ~Rs750MM during the Q likely on account of
rental asset build out. Interest cost increased by 50bps to 14.26% in 1Q.
 1Q Operational highlights –1] New bookings at Rs2.1B, down 16%
Q/Q given no big launches during the Q; 2] 1Q rental income of
Rs385M, stable Q/Q. Recent handovers in Chessna/Exora are in fit out
stage/rent free period and are expected to start contributing to rental
income over 2Q-3Q (FY12 guidance-Rs2.1B); 3] Incremental leasing
was healthy at 1msf (PEPL- 0.5msf) thereby taking total area under
lease to 6.82msf (PEPL - 4.3msf); 4] Co. has outstanding order book of
Rs 17B yet to be recognized as revenues; 5] Execution remains on track
with 1.6msf delivered in 1Q. FY12 delivery guidance stands at 6msf.
 Debt and cash flows - Close to 45% of the PEPL’s gross debt (Rs14.8B)
includes rental securitization loans (Rs6.7B). Adjusting for this and cash
on books, remaining debt on development business is Rs4.5B. Against
this, PEPL has Rs9B of o/s receivables from projects already completed
and sold (~Rs6B from Shantiniketan/Oasis project). Collections from
these projects should accelerate progressively in FY12 as handovers
happen. Overall, PEPL has stock value of Rs 45B (net of const. costs)
from on going projects to be liquidated over 3-4 years