IGI Logo

CY23: To be a defining year

Scale-up in residential segment to reduce concerns around leverage

PEPL stock has not seen any major re-rating despite continued strong performance in its residential business. In our opinion, this is likely due to concerns over leverage given a heavy capex cycle ahead of us. We expect CY23 to be a defining year for PEPL as it looks to grow its pre-sales on a strong base, provide growth visibility, and allay concerns of rise in leverage beyond a comfortable level. PEPL’s 25msf launch pipeline (over 12 months) and strong business development plans will provide clarity on further scale-up in residential business and robust cash flow generation. While PEPL continues its aggressive stance on commercial strategy, a large part of its capex is likely to be funded from internal accruals, capping the net debt at not more than 0.5- 0.6x of equity. We reiterate our BUY rating with a TP of INR675 and rate it as our top pick in real estate sector for CY23.

Key risk downside risks to our target price include (a) slowdown in residential absorption and (b) inability to sign BD deals

25msf launch pipeline (next 12m) to help sustain growth trajectory

* PEPL reported sales bookings of INR104b in FY22 and became the first company to breach INR100b pre-sales mark. In FY23, the company has guided for INR120b of pre-sales, of which, it has already clocked INR65b in 1HFY23.

* Its residential segment did well, largely driven by ~INR70b of pre-sales by Prestige City (TPC), Bengaluru, in the last 18 months. With inventory in TPC, Bengaluru, largely exhausted, the company would have to rely on its upcoming 23msf of pipeline to sustain its pre-sales in Bengaluru.

* PEPL plans to launch 25msf of residential projects over the next 12 months (including 12msf in non-Bengaluru markets), which will not only help PEPL sustain its pre-sales in Bengaluru but also boost contribution from Mumbai, NCR, and Hyderabad, thereby, maintaining its pre-sales growth trajectory.

* We expect PEPL to meet its FY23 pre-sales guidance of INR120b, and the same is expected to grow to INR126b in FY24. Launches from new project additions over the next 6-12m will lead to upward revisions in our estimates.

Aims to spend INR20-25b on business development annually

* PEPL currently has INR65b of inventory in ongoing projects and 57msf of upcoming project pipeline with a revenue potential of INR337b, providing just three years of visibility. Thus, business development is likely to be the focus.

* The company expects to spend INR20-25b annually on new project additions with a target to reach INR150-170b of pre-sales in the next twothree years and targeted contribution from each of its core micro-markets.

* PEPL aspires to generate INR70-80b of pre-sales from Bengaluru, INR30-35b from Mumbai, INR10-15b each from Hyderabad, NCR, and Pune, and INR10b from Chennai and other southern markets.

* Based on targeted pre-sales of INR150-170b, its annualized operating cash flow run-rate is expected to increase to ~INR55b over the next two-three years, which will be sufficient to fund its business development spends.

* Additionally, the company has INR20b of capital pending to be deployed from the HDFC platform which will be utilized over the next 12 months and in case required, the company will also roll out its INR25b AIF. Thus, business development spends are likely to be taken care of internally.

Surplus cash flows sufficient to fund aggressive capex plans

* Excluding the spending on business development, PEPL is expected to generate INR20-30b of free cash available for capex. The company currently has INR145b of pending capex to be spent on ongoing (INR70b) and upcoming (INR75b) office, retail, and hotel projects.

* PEPL remains committed to deliver the ongoing and upcoming commercial portfolio within the next five years, and hence, an annual capex run-rate is expected to increase to INR35b in FY25-27 from INR18b in FY23.

* Strong cash flow generation will ensure a large part of existing construction debt will be paid off once completion and will be replaced by debt on upcoming assets. That said, we do not expect net debt to increase by more than INR20- 25b, leading to net debt-to-equity of 0.5-0.6x.

* The portfolio once delivered is expected to generate INR32b of rental income at the existing rental rate (without incorporating any growth/escalations). Off the 32msf leasable area slated to be delivered over the next five years, Bengaluru accounts for ~13msf and with an average annual absorption of ~12msf, we remain confident of healthy leasing traction.

* For the company’s upcoming projects in Mumbai, we expect off-take to be healthy in PEPL’s BKC project (Prestige 101), while leasing traction in Prestige Liberty towers, Mahalaxmi remains to be seen

Valuation and view

* We raise our FY24E pre-sales by 16% to INR126b, on the back of higher-thanexpected launches over the next 12 months. Our recent channel check indicates that demand momentum continues to remain strong in Bengaluru, and thus, we remain confident of PEPL’s pre-sales growth trajectory.

* As PEPL’s residential segment further scales up, the cash flow generation will be sufficient to take care of business development spending and commercial capex requirement without much increase in net-debt which is key investor concern

* Once fully stabilized over the next five-six years, the commercial portfolio will generate a rental income of INR32b, and the current valuation does not fully reflect this yet.

* We reiterate our BUY rating with an unchanged SOTP-based TP of INR675, implying a 44% upside potential. We believe CY23 is likely to be a defining year for PEPL with respect to sustaining its pre-sales growth momentum and providing cash flow visibility, and hence, we rate it as our top pick for the sector.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer