Prestige Estates: On a growth sprint; execution holds the key

5 Apr 2023 , 10:51 AM

Recommendation: Buy

Target Price: Rs 505

Over the last two years, PEPL has witnessed a paradigm shift in its Residential sales to be among the largest developers in India, and aims to double its presales by FY26. In the Annuity segment, it is targeting a 10x scaleup in rentals by FY28, with an expected yield to cost of ~19%. Analysts at IIFL Capital Services’ NAV conservatively builds in a much slower ramp-up across Residential and Annuity businesses, and expect a higher peak net debt-to-equity at 0.9x by FY26 (versus PEPL guidance at 0.64x). Still, PEPL trades at ~25% discount to our NAV, making valuations attractive. Sustained progress on execution and leasing of Office portfolio will be key to stock performance.

Annuity– treading on a counter-cyclical strategy

PEPL’s guidance of building Rs30 billion rental portfolio by FY28, is aggressive especially at a time when office occupancy levels are still recovering. Execution of Mumbai projects (>40% of FY28 rentals), and leasing of >40msf over next five years remains a concern, although: 1) High yield to cost of ~19% 2) PEPL’s strong execution track record in past (over FY12-20), offers comfort. Progress on Strata sale/pre-leasing of office projects will be a positive.

Residential – monumental shift

PEPL’s Residential sales moved up from Rs45-55 billion in FY19-21 to Rs104 billion in FY22 and is expected to be >Rs120 billion for FY23. PEPL’s ambition of doubling FY23 pre-sales to Rs250 billion (~30% CAGR) by FY26 entails: 1) Building a meaningful presence across Mumbai, NCR and Pune markets, in addition to maintaining growth momentum in Bangalore. 2) Strong business development (BD) focus to support higher launch momentum, despite a healthy project pipeline. Residential margins of 18-20% in P&L and >30% OCF expected to remain steady.

Execution under spotlight; valuations cheap

Given the scale of the annuity program, despite strong residential cash flows, PEPL will need to fund a meaningful share of capex through debt over FY23-26. However, PEPL trades at a steep discount to the NAV of IIFL Capital Services, which builds a conservative growth outlook on the Residential business, and a slower leasing momentum. P&L earnings improvement will be back-ended. Analysts at IIFL Capital Services are building in ~35% PAT CAGR over FY22-25; RoE’s are likely to remain muted despite a 350bps improvement over this period.