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Growth visibility intact across segments

Monetization of hospitality portfolio and platform deal to reduce burden on leverage

Expansion in new markets to sustain pre-sales growth momentum

* PEPL reported bookings of INR163b in 9MFY24, up 81% YoY and surpassed its initial full-year guidance of INR160b. With INR160b of ongoing project inventory as of Dec’23, the company is on track to achieve its revised presales guidance of INR200b in FY24.

* While laying out the roadmap to achieve INR250b of pre-sales by FY26, the company highlighted six key markets (Bengaluru, MMR, Hyderabad, NCR, Pune, and Chennai) that would play a vital role in reaching the target.

* Since then, it has scaled up to its target in Bengaluru and made successful foray into Mumbai and Hyderabad, but contribution from other three markets remain negligible. We expect this to change soon as the company has built a healthy pipeline in Chennai and NCR and is targeting to launch a few projects in FY25.

* In NCR, the recent large acquisition along with two upcoming projects (1 each in Noida and Delhi) has a combined revenue potential of INR140b and can act as a strong growth lever for the company. Similarly, PEPL has 6msf of pipeline across two projects in Chennai and as indicated in 3QFY24 call, it is at an advanced stage of acquiring a large project in Pune.

* Prestige’s overall project pipeline stands at INR700b (including inventory at its existing projects) and can enable it to sustain its strong growth momentum in the near term. We expect PEPL’s pre-sales to rise to INR260b by FY26 at a CAGR of 15% over FY24-26E

Rental portfolio: Mumbai assets shaping up well

* PEPL currently has 11msf of operational office and retail portfolio with a total rental potential of INR4.3b. In FY24, the company is slated to deliver 8msf of office assets (3.6msf delivered in 3Q), which will scale up the exit rentals to INR7b at PEPL’s share.

* With 21msf of ongoing office and retail projects and additional 23msf of upcoming projects, rental income is expected to rise to INR38b once these projects are delivered by the end of FY28. ? PEPL has a balance capex outlay of INR137b to be spent on above projects over the next four years, indicating an annual cash outlay of INR30-35b.

* The success of the company’s expansion strategy hinges on leasing its two large office assets in Mumbai, which have the potential to generate a rent of INR20b. While we remain confident of healthy leasing traction for its BKC asset (3.8msf), we were concerned about the same for its Mahalaxmi asset due to traffic congestion leading to access issues.

* However, the recent opening of the first phase of Coastal Road project has led to the diversion of traffic and reduced congestion on the key access road leading to the project. Additionally, both projects will benefit from direct access to nearby metro stations via an underground tunnel

PEPL to start generating positive FCF from FY26

* In 9MFY24, PEPL generated OCF of INR37b and spent INR53b in new land investments, capex and interest costs leading to net debt increasing by 15b to INR70b as of Dec’23.

* Annualized OCF run-rate has risen to INR60b and with further scale-up in the residential and commercial segment, we expect it to increase to over INR95b by FY26, which will be sufficient to meet its INR80-85b worth of investment in land and capex.

* Thus, we expect net debt to increase by INR20-25b through FY25 and peak out at INR90-95b, resulting in net debt-to-equity of 0.7x, which should not be a concern for the company operating at such scale.

Platform deal with ADIA and Kotak AIF can further release cash flow burden

* PEPL has announced that it has entered into a residential platform deal where Abu Dhabi Investment authority (ADIA) and Kotak AIF will invest INR20b in the company’s upcoming residential projects.

* Investment will be utilized for development of four greenfield projects already identified from PEPL’s upcoming residential pipeline and are located at Bengaluru, MMR, NCR and Goa. These projects have development potential of 14msf with estimated top-line of INR180b

* The investments will be made through project level optionally convertible debentures (OCDs) and will take care of early stage approvals related investments for the company thereby reducing the cash flow burden and limiting the rise in leverage.

Monetizing hospitality portfolio can lead to value unlocking

? PEPL currently operates ~1,500 keys of hospitality portfolio, which is set to double over the next three to four years. Once stabilized, the segment can generate revenue of INR18b (PEPL share) vs. INR9b currently.

? As highlighted in 3QFY24 results call, the management is currently evaluating to monetize its hospitality portfolio, which will lead to some value unlocking. Moreover, the move can also knock off INR9b of gross debt from its books and alleviate some of the cash flow stress associated with the INR17b balance capex in the hospitality segment. Valuation and view

? The recent land acquisition in NCR has further strengthened the project portfolio. We believe that as the company provides further growth visibility on its residential segment through the expansion of its project pipeline and advances on its key commercial projects, further value accretion is imminent.

? While leverage has always remained a key investor concern, the recent scale-up in its residential and commercial segment and the company’s plans to monetize its hospitality portfolio has put those concerns to rest.

? We reiterate our BUY rating on the stock with an increased TP of INR1,535, indicating a 17% upside potential.

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