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Demand momentum intact; net debt flat QoQ

Strong launch pipeline to aid in sustaining sales run-rate

* Prestige Estates Projects (PEPL) reported the second-best quarterly pre-sales performance with total booking value of INR35b (10% beat), up 17% QoQ /66% YoY in 2QFY23.

* PEPL generated 75% of sales from Bengaluru led by continued momentum at Prestige City, Bengaluru while Mumbai and Hyderabad contributed 12% and 9%, respectively, during the quarter.

* Sales volume rose 20% YoY to 4.2msf while blended realizations improved 40% YoY to INR8,900/sq. ft. fueled by higher sales in Mumbai.

* PEPL launched 7.3msf of projects in 2QFY23, which included phase launches in Prestige City, Mumbai and Bengaluru along with new project launches at Hyderabad and Bengaluru. On the commercial front, the company launched Prestige Liberty Towers in Mumbai

* Given the low unsold inventory level, PEPL plans to launch 15msf of projects in 2HFY23 to sustain the momentum

* Absence of large project additions coupled with significant improvement in collections resulted in stable net debt on a QoQ basis at INR40b in 2QFY23.

* Collections stood at INR26b (up 67% YoY) and PEPL spent INR10b towards residential development and INR6b on annuity capex. It has also spent INR10b towards business development during the quarter.

* Revenue increased 6% YoY to INR14b but declined 26% sequentially led by subdued project completions. EBITDA decreased 6% YoY to INR3.7b owing to 300bp contraction in margin to 26% because of higher other expenses. PAT surged 85% YoY to INR1.4b as the company reported exceptional gains of INR1.5b on account of residual proceeds from divestment of a few commercial assets. Adjusted for that PEPL’s PAT stood at INR373m.

Annuity income to witness significant growth led by rental revenue

* Rental revenue (Office + Retail) for 2QFY23 increased 6% YoY to INR0.64b. PEPL currently has 28msf of commercial projects under construction, of which, it will deliver 5msf across Hyderabad, Pune and Bengaluru over the next few months.

* Pending capex on ongoing projects was at INR75b and additionally, PEPL will spend INR75b on upcoming 15msf pipeline. Once fully executed, these assets are expected to generate rentals of INR31b (at Prestige’s share) by FY28, which is significantly higher than the current exit run rate of INR2.5b.

Highlights from the management commentary

* Business development (BD): PEPL has enough deals in pipeline, having a GDV of INR200b+ including in new markets like Gurgaon. Management expects to spend INR25-30b annually towards BD.

* BD funding: The company has an unutilized fund of INR20b in its affordable/ mid-income platform signed with HDFC a few years ago. This fund can be utilized to acquire projects in Hyderabad, Chennai and Bangalore. Further, on the AIF front, PEPL has received INR25b worth of commitments.

* Mortgage rates: 60-70% of the company’s customers avail mortgage loan while buying properties. Demand remains strong despite rising rates but beyond 50- 75bp hikes, demand can be negatively impacted.

* MMR launch and project pipeline: Since the launch of Prestige City at Mulund, PEPL has generated sales of INR11b (60% of launched inventory).

* In FY23E, the company plans to launch two more projects in Mumbai (Shiv Shahi and Daffodils) and expects to generate INR30b sales from this market.

* A few new transactions are under discussion that will be added to the upcoming project pipeline over the next few months.

Valuation and view

* The management reiterated its FY23 sales guidance of INR120b and given the visibility, we have raised our estimate to match the guidance. With 57msf of upcoming residential project pipeline, we expect the run-rate to sustain over the next two-to-three years.

* As collections match the enhanced sales run-rate, the operating cash from residential business along with rental income can largely fund the capex required for its upcoming annuity portfolio. This will enable PEPL to retain its leverage of 0.6x to equity, which is a key investor concern.

* We reiterate our BUY rating on the stock with an unchanged TP of INR675, implying an upside potential of 48%.

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