Prajay Engineers Syndicate Ltd.
CMP: Rs274
BUY
IT offshoring and the resultant boom in hospitality business and premium residential segment has given a fillip to the Hyderabad real estate market. The expected new international airport at Shamshabad should give further increase to the commercial potential of the city. PESL being one of the leaders in the Hyderabad market is well placed to capture this high growth phase. We expect the company to report revenue and profit CAGR of 139% and 128% respectively over FY06-09. We value the stock at Rs307per share implying an upside potential of 49% from the current levels.
The ongoing IT outsourcing boom in the Hyderabad market, has led to a sharp rise in real estate demand for hotels and premium residential. This is corroborated in the sharp growth of more than 50% in property prices over the past 12 months. PESL with planned 15.8mn sq ft development offers a strong play on the growing Hyderabad real estate market.
PESL has a good mix of residential and hotel development over the next few years capturing both the booming segments. The company has altered its mass housing strategy to include luxury residential, citing increased demand from the IT/ITES sector. PESL also plans to develop two 5-star (one in Goa), two 3-star and expand its existing three star hotel.
PESL currently has 8 on hand projects and expects to take the tally to 31 over the next 4 years with a planned space addition of 15.8mn sq ft. we expect these
projects to turn a revenue CAGR of 139% and a profit CAGR of 128% over the next 3 years. Hospitality business would start contributing meaningfully from FY10.
PESL’s ambitious plans can run into rough weather, if there is a sharp drop in property prices in the Hyderabad market. Also with many projects expected to start in a short span, delay in execution or launch could push back cash flows impacting valuations.