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Strong operational momentum sustains Net debt up by INR9b on higher land investments

Strong response to launch drives pre-sales growth

* Prestige Estates Projects (PEPL) maintained strong momentum in pre-sales, with bookings up 30% YoY at INR39b (5% above estimate), in line with the quarterly run rate of the company’s FY24 guidance of INR160b.

* Growth was largely driven by strong response to its Bengaluru project launch (Prestige Lavender fields), which contributed over 50% of pre-sales during the quarter as 85% of the project sold out. In 1QFY24, PEPL launched just one project with developable area of 3.1msf.

* Sales volumes were up 6% YoY, while blended realizations were up 28% YoY at over INR10,000/sqft largely due to higher pricing and premium mix.

* P&L performance: PEPL delivered 5.8msf of projects during the quarter. Revenue was down 13% YoY at INR17b (24% below estimate) due to a 28% decline in residential revenue. However, EBITDA grew 14% YoY to INR5.3b, due to a 750bp improvement in margin to 31% on account of a 700bp rise in Residential EBITDA margin. The company recognized a fair value gain of INR2.4b in ‘other income’ due to MTM gain for its stake in Nexus REIT. Thus, reported PAT grew 30% YoY to INR2.7b

Higher spending on land led to INR9b increase in net debt

* Total collections stood at INR31b, with residential collections up 14% YoY/ 23% QoQ at INR25b. PEPL spent INR20b on construction, overheads and taxes to generate OCF of INR10.5b.

* The company spent INR19b on capex (INR6b) and land (INR13b) leading to a deficit of INR7b. Net debt increased by INR9b to INR65b or 0.6x equity.

* With a pending capex outlay of INR160b on the ongoing and upcoming office/retail/hospitality projects over the next five years and simultaneous investments of INR40-50b in land to sustain residential growth, we believe net debt should continue to rise for at least next two years. We expect PEPL’s net debt at ~INR80b at FY24 end.

Rental scale-up on track; Hospitality delivers strong performance

* Revenue from office and retail assets more than doubled to INR1.2b. EBITDA stood at INR0.8b, generating a margin of 66%. The company expects exit rentals of INR7b at FY24 end.

* With 26msf of ongoing office and retail projects and additional 21msf of upcoming projects, rental income is expected to inch up to INR38b once these projects are delivered by FY28 end.

* Hospitality segment: Revenue grew by 22% YoY to INR1.8b. EBITDA margin grew 100bp YoY to 36%, leading to 25% growth in EBITDA to INR0.6b. PEPL currently has an ongoing and upcoming portfolio of ~1670 keys, which should generate steady state revenue of INR23b.

Key highlights from Management Commentary

* Launch pipeline: PEPL has a robust project pipeline, which includes few large developments in Hyderabad (Prestige City), Chennai (Pallava Gardens), Mumbai (Nautilus and Ocean Tower) and NCR (Bougainvillea Gardens). It has spent INR30b+ on these projects, which have GDV of ~INR275b and are expected to be launched over the next 15 months.

* Debt: Cash flows remain robust from the residential business and if the company requires external funding for capex, then debt can be taken given the strong balance sheet.

* ~INR40-50b worth of revenue recognition is pending and will boost the company’s equity, resulting in D/E coming in line with guidance of 0.5x.

* The management expects net debt to reach ~INR70b by FY24 but focus is to maintain it at 0.5x rather than aiming for absolute level.

* Asset monetization: Monetizing opportunities always exists but the management intends to create significant value by monetizing assets (if at all necessary) once they are ready and stabilized, which will enable it to command premium valuations.

* The overall annuity assets can be valued at USD4-5b+ and the company is open to monetizing them at appropriate time depending on its cash flow needs.

Valuation and view

* The company delivered a healthy operational performance in 1QFY24 and remains on track to meet its FY24 pre-sales guidance. Thus, we retain our FY24 pre-sales estimate of INR155b.

* We remain positive about the company’s pre-sales growth trajectory and resultant cash flows from the residential business. While an increase in net-debt remains a concern in the near term, we believe a ramp-up in cash flows beyond FY25 will allay leverage concerns.

* We incorporate a higher stake in Mumbai commercial projects and an increase in the hospitality portfolio, while higher capex assumptions lead to an increase in FY24E net debt to INR80b. Thus, our SOTP-based TP is revised to INR750, indicating 28% upside potential. We reiterate BUY rating on the stock.

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