Prestige Estates Projects is on a sound footing. Here’s why

The year 2019 was rocky for the real- estate industry. The recovery in demand in the residential market that was visible in the beginning of the year, took a beating due to the NBFC crisis, leading to a tight liquidity situation for developers. Residential demand remained muted and levels of unsold inventories continued to be high.

Even though the Centre announced a slew of measures to boost demand and infuse liquidity into the sector, there has been no significant improvement in residential demand.

However, real-estate players with good brand recognition, favourable project locations and a strong track record for deliveries were able to perform well in such turbulent times.

Prestige Estate Projects is among the top realty companies that have managed to deliver healthy performance during the first half of FY20. The stock of this Bengaluru-based company gained 42 per cent in the past year, thanks to healthy residential project launches, market expansion and a ramp-up in its commercial portfolio.

Though the pricing of the launches could be under pressure due to weak demand, the Centre’s measures are likely to bear fruit in the coming quarters, thereby improving residential demand. The company is on a stable growth track in both its residential and commercial businesses, and boasts a strong launch pipeline across segments. The firm has 45 ongoing projects across segments — residential (mid-income and luxury/premium categories) and commercial — in key cities.

At the current market price of ₹328, the stock trades at 29 times its trailing 12-month earnings, slightly higher than its three-year average, but at a discount to peers such as Godrej Properties.

While the near-term upside may be limited, investors with a two- to three-year perspective can consider buying the stock in declines.

Well placed to benefit from a revival in the sector, Prestige remains a good long-term bet.

Project launches

Prestige primarily operates in the Bengaluru region (67-70 per cent of its projects), where it has multiple ongoing and upcoming projects.

The location of its projects (residential as well as commercial) in popular areas, including Whitefield and Electronic City, bodes well for the company for better realisations.

Prestige registered new sales growth of 2 per cent y-o-y in H1FY20 and also launched 7.88 million sqft of projects across its portfolio during H1FY20, against 1.6 million sqft the same period last year. Its collections grew 10 per cent y-o-y during the same period.

It has 22 residential projects and 13 commercial (office and retail) in the pipeline. The company has expanded its footprint to other regions including Hyderabad, Noida and Kochi, and has about 18.9 million sq ft of launches planned over the next few quarters.

Though the average property prices (₹4,500 per sqft) in the Bengaluru market have declined during the first half of 2019, prices in this realty market are expected to rise moderately in the coming year, aiding Prestige’s realisations.

Based on information shared by the company management, the firm’s average realisation works out to around ₹6,400 per sqft (for under-construction projects).

Growing rental income

For Prestige, besides residential revenue, rental income from malls, hospitality and commercial assets offer good revenue visibility. Given the robust commercial market, particularly office space, the company has increased its commercial projects (office property) to 12 in H1FY20 from nine projects last year.

Similarly, the company has expanded its retail (malls) and hospitality (hotels) portfolio as well. For instance, it recently inked a joint venture with DB Group for building a hotel and a convention centre in Delhi. In the recent September quarter, the rental income grew 23 per cent y-o-y to ₹ 223 crore.

Nearly 33 per cent of the firm’s upcoming projects are commercial properties. It has plans to launch 26.13 million sq ft of projects across cities including Bengaluru, Chennai, and Hyderabad.

Given the various commercial projects set to be launched, rental income is expected to increase to ₹977 crore per annum in FY20, a 13 per cent growth y-o-y.

Stable financials

The firm registered revenue and profit growth of 52 per cent and 32 per cent y-o-y to ₹ 3,348 crore and ₹307 crore, respectively, for the first half of this fiscal year. The (net) debt-to-equity ratio for the company stands at 1.91 times.

The company has taken additional debt during H1FY20, mainly to fund a land parcel in Hyderabad and acquire a retail property (a mall).

The management expects to reduce the debt- equity ratio to 1.4 times by the end of FY20.

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