PRESTIGE surfing the sectoral waves
We are LONG on PRESTIGE and continue to remain bullish despite fully expecting COVID-19 related volatility over the medium-term.
PRESTIGE is a real estate developer engaged in the construction, development, and leasing of properties. The company has a strong presence in southern belts of Bengaluru, Chennai, Hyderabad and Kochi, but has growth levers in regions outside this core set. The broader Indian real estate sector is in the middle of long-term growth cycle helped by schemes such as Pradhan Mantri Aawas Yojana (PMAY) along with broad structural changes like RERA, notwithstanding choppy fundamentals over the last year or so due to COVID-19. The sector was valued at US$120bn in FY 2017 and is expected to register 18% CAGR growth to reach US$1tn by FY 2030. In that context, the sector’s contribution to GDP should also tick up nicely to 13% by FY 2025 from 6.5% at present.
Strong product portfolio with a mix of residential and commercial
PRESTIGE’s portfolio comprises Residential (75% of Revenue, 44% of EBITDA), Commercial (12% of Revenue, 43% of EBITDA), Retail (4% of Revenue, 6% of EBITDA), Hospitality (1% of Revenue, 1% of EBITDA) & Property management services (8% of Revenue, 6% of EBITDA). Focus is on increasing residential portfolio and enhancing commercial annuity income from INR1,000cr at present to INR3,000cr by FY 2026 in markets like Bengaluru, Chennai, Hyderabad, Mumbai, Pune and NCR. PRESTIGE has also set up a platform with HDFC Capital for affordable housing projects with a capital of INR2,500cr for sharpening residential focus.
Steady growth and sound balance sheet
Revenue/EBITDA has seen a CAGR of 10%/16% during FY 2016-20 helping the company deliver a lofty 13% ROCE and 9% ROE over the last five years. Leverage is high with debt-to-total assets of 0.3x and debt-to-equity of 1.6x. This is expected to improve as PRESTIGE has recently signed a term sheet with Blackstone group for sale of assets valuing INR9,600cr in order to pare debt and redeploy surplus in new projects. Cash flow generation appears strong with FCFF of INR769cr in FY20. Impact of COVID-19 was clearly visible as PRESTIGE announced its Q3 2021 results with 9M revenue of INR4,996cr, 18% decline on Y-o-Y which in light of sectoral tailwinds should reverse in our view. Interest coverage for Q3 2021 was 1.5x. Despite COVID-19, office portfolio remained resilient with 99% collections which as such endorse the quality of tenants.
PRESTIGE – Blackstone deal de-risks investment profile while opening up growth levers
PRESTIGE recently entered into term sheet with Blackstone group for sale of key assets for INR9,600cr. Assets included in the transaction are i) 100% stake in six completed office projects, ii) 85-87% stake in nine shopping malls, iii) 50% stake in four under construction office assets and iv) 85% in its hotel Oakwood Residences and 100% in Hotel Aloft. Post Blackstone deal, Pro forma leverage will be 0.99X leaving an additional INR4,000cr to fund future growth capex. PRESTIGE is also likely to explore REIT listing for its office/commercial portfolio in near future and in that context the Blackstone relationship is quite meaningful, having already sponsored two REIT’s – Embassy Office Parks and Mindspace Business Parks.
Valuation on absolute and relative terms looks fairly attractive
PRESTIGE currently trades at 19.6x P/E and 8.3x EV/EBITDA on FY23F. Close comps Phoenix Mills (NSE: PHOENIXLTD) trades at P/E of 23.2x and EV/EBITDA of 12.1x while Oberoi Realty (NSE: OBEROIRLTY) trades at 17.1x and 13.7x and DLF (NSE: DLF) trades at 30.9x and 35.3x, respectively on FY23F. PRESTIGE’s well diversified portfolio and favorable tailwinds for residential segment along with ‘CRISIL DA1’ graded projects bode well for the stock. Promoters own 65% of outstanding shares which is no cause for concern. Potential risk factors include delay in construction activities and fluctuation in material prices which are not unique to PRESTIGE.
We are LONG and continue to remain bullish despite fully expecting COVID-19 related volatility over the near medium-term.