Sunday, October 18, 2015

Prestige Estates Projects: On firm ground

Optimism about a revival, followed by sobering sales numbers — this has been the story of property developers for nearly eight quarters now. As a result, shares of listed real estate companies have witnessed lacklustre performance; the BSE Realty index has fallen 8 per cent over the past one year.

But with interest rates turning benign, investors who wish to bet on a turnaround in the fortunes of listed property developers can consider well-branded names that may benefit from a revival. A good option to consider is the Bengaluru-based developer Prestige Estates Projects (Prestige).

The company has consistently delivered revenue and profit growth — averaging 31 per cent and 13 per cent respectively — even during the slowdown over the last two years. It is on a strong growth track in both its commercial rental and residential sale business and has a strong launch pipeline in the relatively stable property markets of South India.

The stock is also reasonably priced. At the current market price of Rs.215, the stock trades at about 25 times its 2014-15 earnings. This is within its historical valuation band of 20-25 times in the last three years and comparable to that of peer Oberoi Realty (which trades at 27 times); it is at a discount to other developers with commercial property focus, such as Phoenix Mills and DLF, which trade at multiples of 31 and 45 times, respectively.

Investors can therefore consider buying the shares of Prestige given its reasonable valuation, strong project pipeline of commercial and residential properties and growing rental income.

Revenue to grow

Prestige’s mainstay for revenue is residential property sale, primarily in Bengaluru. The company launched 14.6 million sq ft (msf) of housing and commercial property in 2014-15 and has 65 msf under construction currently.

Sales increased 13 per cent year-on-year to Rs.5,013 crore in 2014-15. However, in the recent June quarter, sale area dipped 60 per cent due to lack of new launches. Projects totalling 12 msf are planned to be launched in 2015-16, mainly in Bengaluru and Hyderabad; residential projects in Bengaluru and Kochi, totalling six msf were launched in the September quarter of 2015. New launches should help sales momentum.

Besides property sale, Prestige also earns rental income from its malls, hospitality and commercial assets, accounting for 10 per cent share of overall revenue. Lease income increased at over 30 per cent annually in the last three years to Rs.384 crore in 2014-15. Rental income is expected to increase by over 20 per cent to Rs.470 crore in 2015-16, with planned additions to its leased assets portfolio.

The company also earns revenue through property management services. Area managed and revenue grew annually by 38 per cent and 30 per cent respectively, over the last three years. Revenue growth (from Rs.328 crore in 2014-15) in this segment is likely to be sustained as more projects are completed and handed over.

As of June 2015, Prestige had Rs.7,800 crore of sales booked for which revenue is yet to be recognized. This should provide revenue visibility. The management has set a revenue target of Rs.5,750-6,000 crore for 2015-16, on the back of higher rental income, sale area and prices.

Margin to stabilize

Prestige’s operating margins were stable at 31 per cent in 2014-15 — a difficult year — helped by better sale price in its commercial, mid-income and premium housing segments. Average realization increased 8 per cent Y-o-Y in 2014-15; price growth continued in the June quarter with a 7 per cent Y-o-Y increase to Rs.6,643 per sq ft.

But net margin dropped to 10 per cent in 2014-15, from 12 per cent a year ago. This was due to higher depreciation and financing costs. Interest payments increased 40 per cent Y-o-Y to Rs.321 crore in 2014-15. Total debt increased to Rs.3,984 crore as of June 2015, up from Rs.3,805 crore in March 2015. Debt-to-equity ratio stands at about 0.9 times, which is comfortable.

Net margin was at 10 per cent in the June quarter, but could improve as interest rates are easing. Also, Prestige recently raised Rs.500 crore through a non-convertible debenture issue (interest rate of 11.27 per cent) to pay down high-cost debt. Cash collection increased 31 per cent Y-o-Y to Rs.3,232 crore in 2014-15, easing working capital funding.

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