Prestige Estates Projects: Homing in on the right model - Buy

The 10-million sq ft of launches planned in FY19 will push up revenues

Investors willing to bet on realty stocks can consider companies with a fair degree of brand recognition and those well-placed to benefit from a revival in the segment.

By these yardsticks, Bengaluru-based developer Prestige Estates Projects appears to be in a sweet spot. The stock has corrected over 30 per cent since April, in line with the fall in key indices, presenting an attractive buying opportunity. The company is on a stable growth track in both its commercial and residential businesses, and boasts a strong launch pipeline in all its segments. It has 91 ongoing projects across segments — residential (mid-income and luxury/premium categories) and commercial.

 

 

Prestige recorded healthy new sales (value) and rental income growth of 35 per cent and 14 per cent y-o-y, respectively, for FY18. The average realisation, too, has been improving consistently in the past three years. At the current market price of ₹193, the stock trades at 18 times its trailing 12-month earnings, slightly lower than its three-year average, and at a discount to peers such as Godrej Properties and Oberoi Realty.

Investors with a two-three year perspective can buy this stock, given its reasonable valuation, strong project pipeline and growing rental income.

New project launches

About 60-70 per cent of Prestige’s revenue comes from the Bengaluru region. The location of its projects in popular areas such as Whitefield, RV Road and Electronic City bodes well for better realisations.

According to a Knight Frank report, there has been a revival in demand for residential properties in the Bengaluru market; the segment notched up a 22 per cent y-o-y growth in units sold in the first half of this year.

With market conditions improving, Prestige recorded a 65 per cent y-o-y jump in new sales (value) growth during the June quarter of FY-18. In the same period, it launched two new projects with a built-up area of 1 million square feet (msf). It has 19 residential projects in the pipeline, with nearly 67 per cent of them in Bengaluru.

The average realisation for the Bengaluru area is around ₹4,727 per square feet, according to Knight Frank. Prestige is able to maintain realisations at around ₹6,854 per square feet, indicating robust pricing capabilities.

Nearly 38 per cent of the firm’s upcoming projects are in commercial property development (including retail). The company also has various projects in Chennai and Hyderabad — among the other key cities in its portfolio. It has expanded to new territories — Pune, Ahmedabad and Udaipur. Prestige has plans for 10 msf of new launches in FY19.

Revenue to grow

The (net) cash flow from ongoing residential projects is projected to be ₹6,763 crore.

Prestige also earns rental income from its malls, hospitality and commercial properties, and this accounts for nearly 30 per cent of its overall revenue.

Rental income has increased at an average annual rate of 24 per cent over the last three years to ₹619 crore in FY18. Given the various commercial projects set to be launched, rental income is expected to increase to ₹861 crore per annum by FY19.

Overall, for FY19, the company has a revenue target of ₹3,500-4,000 crore, 28 per cent of which was achieved in the June quarter.

The company plans to start its mid-income housing project on a joint venture platform with HDFC Capital by FY19.

Financials

Prestige’s (net) debt has increased to about ₹7,279 crore, mainly on account of consolidation of associate entities. In this regard, the debt-equity ratio stands at 1.7 times. The planned launches will be largely on self-owned land, which will result in higher revenue inflows from the second half of FY19.

The company expects to maintain a debt-equity ratio of 1.3 times for FY19.

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