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Has emerged as the largest realty company

Prestige Estates Projects Ltd (PEPL) is India’s largest developer in terms of booking value for FY22. Much of PEPL’s growth is fueled by the projects in Bengaluru and Hyderabad. The company has embarked in to Mumbai and NCR region, and targeting aggressive growth in these geographies.

* Pre-sales increased from 1.1 msf in Q1FY22 to 3.6 msf in Q1FY23 (+230% YoY) and we expect these healthy sales to continue.

* Management expects total annuity income to reach Rs. 1,000 crores in the next 2-3 years, up from Rs. 250 crores now, and to triple in the long term.

* Hospitality segment witnessed a turn around(-49% EBITDA margin in Q1FY22 vs +35% in Q1FY23), aided by new additions and higher operating margins. We expect this trend to continue given opening up of economy and strong uptick in tourism & travel.

* Real estate is on a healthy base, led by strong demand and higher realisation. Declining inventory levels and softening commodity prices are expected to outweigh rising mortgage rates.

* We have a positive view on PEPL on the back of strong projects under pipeline(46 msf), strong pre-sales momentum and a healthy balance sheet (debt-to-equity of 0.40).

* Hence, we assign BUY rating on the stock with a target price of Rs. 611 based on 2.3x FY24E adj. book value.

Robust residential pipeline

PEPL clocked a pre-sale of Rs.3,012 crs in Q1FY23, Up by 310% YoY. Area sold increased to 3.63 msf from 1.1msf in Q1FY22 and collection doubled to Rs. 2,146 crs during the same period. The company has 29 ongoing (40.3msf) and 31 upcoming projects (60msf), that are expected to drive the sales momentum and have the potential to generate free cash flow of ~Rs.20,000 crs.

Steady cashflow backed by increased annuity

Annuity income is expected to reach Rs.1,000 crs (Rs.250crs in FY22) in next 2-3 years by adding 7.18 msf to the lease portfolio (~3msf in FY22). Bengaluru and Mumbai hold the major development share, being IT/ Finance hub. In the near future, Rs. 860crs of rental income is likely to be added from its 15 ongoing projects, and the share in the sales mix will increase from 4% to 9%. Higher leased assets will improve the EBITDA margin and provide steady cashflows to PEPL. Mumbai projects will start construction by Q2FY23 and are expected to be completed in 4 years. The annuity potential of these projects is Rs. 1,300 PA.

Healthy Balance sheet

PEPL strengthened its balance sheet by reducing the Net debt ratio to 0.35 (FY22) from the average level of 1.13 during FY19-21.The improvement is primarily attributed to the debt deduction for the assets sold to Blackstone in FY20 and used this cash inflow to settle a few other debts. PEPL has stated that it intends to keep its debt-to-equity ratio around 0.5 in the future

Valuation

Given its strong balance sheet, robust launch pipeline, industry consolidation, best affordability in the last two and half decades, weak residential cycle in the recent years has provide solid foundation for a rebound. Hence, we value the company at 2.3x FY24E adjusted book value and recommend to BUY with a target price of Rs. 611.

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