Prestige Estates Projects IPO Analysis

Prestige Estates Projects (PEPL), promoted by Irfan Razack, Rezwan Razack and Moaman Razack, is one of the leading real estate development companies operating in the southern part of the country and more specifically in Bangalore. The company has developed 150 real estate projects of approximately 34.23 million square feet (sft) since inception. In the last five years (since FY 2005), it has completed and delivered about 20.4 million sq ft.



The company's offerings in residential real estate segment are wide ranging from plotted development, apartments, villas and integrated townships. Similarly, in the commercial and retail segment, its portfolio comprises corporate office blocks, built-to-suit facilities, technology parks and campuses, SEZs and shopping malls. In addition, the company is also having hospitality properties comprising hotels, resorts and serviced accommodation.

Land reserve of the company as end of August 31, 2010, aggregated approximately 988.44 acres including the land on which there is no present development. The land bank on which there is no development aggregated approximately to 483.16 acres as end of August 31, 2010. Of the total land reserve (in-terms of acres), about 38.8% is owned either directly or through subsidiaries of the company. It has sole development rights for about 7.41% of the land. In addition it has joint development agreement for 23.07% of the land bank.

The company currently owns or holds development rights for 57.36 million sq ft of developable area, which includes 28.43 million sq ft of saleable area and 11.04 million sq ft of area that can be leased. This 57.36 million sq ft of developable space was spread over 54 projects comprising 32 ongoing projects, 13 under-development projects and nine forthcoming projects, each aggregating to a total developable area of 33.9 million sq ft, 10.2 million sq ft and 13.3 million sq ft, respectively.

Of the ongoing projects, the commercial and residential segments account for 54.1% (or 18.32 million sq ft) and 32.2% (or 10.92 million sq ft) of the total developable space. However, the share of the commercial segment was a mere 16.9% (or 1.72 million sq ft) in the project under development with that of residential at 52.5% (or 5.34 million sq ft).

In the retail business, the company has entered into a joint venture with CRIDF, an associate of CapitaMalls Asia. CapitaMalls Asia is one of the largest listed "pure-play" shopping mall owners, developers and managers in Asia by total property value of assets and by geographic reach, in terms of number of malls and cities. The joint venture is aimed at developing six retail projects (principally mall developments) with a total developable area of 5.61 million sq ft (of which the leasable area is 1.83 million sq ft) in south India pursuant to a framework agreement between the company and CRIDF for the joint development of these projects. It has also entered into a joint venture with CapitaMalls Asia for the purpose of managing the retail malls developed by the joint venture with CRIDF.

While the real estate development business continues to be the primary focus, it also offers a variety of services through the real estate services business. This includes the provision of property management services for its commercial and residential developments, sub-leasing and fit-out services, project and construction management services, interior solutions services, mall management services, which include the retail real estate projects that it completed pursuant to its joint ventures with CRIDF, and the operation of its hospitality projects.

The company's property management services have about 14 million sq ft spread over 45 commercial properties and 55 residential properties. With the completion of major developments, the company expects to add another 32 million sft to the property management portfolio by 2014.

The company plans to use the issue proceeds to finance it ongoing projects and projects under development (Rs 428.81 crore); invest Rs 193.20 crore in existing subsidiaries that will in turn utilize it for the construction of commercial and retail projects; finance acquisition of land of Rs 21.34 crore; repayment of certain loans to the tune of Rs 280 crore, and the balance for general corporate purposes.

Strengths

The company has strong proven track record in executing projects on the back of able and experienced management team. It enjoys the reputation for quality/iconic projects such as UB City and Forum Value Mall. The integrated operation comprising construction, interior design and facility management will allow the company to capture greater value/pie in realty development value chain.

Strong portfolio of rental yielding assets in the commercial as well as retail segments that would provide steady cash flow to the company. About 19.4% of the revenue for the first quarter ended June 2010 and 13.6% of the FY 2010 revenue has come from rental income. Currently the company has a commercial leasable area of 1.21 million sq ft including UB City and Prestige Technology Park and 0.26 million sq ft of retail leasable space in two retail projects of The Collections (at UB City, Bangalore), a luxury mall and Forum Value Mall (at Whitefield, Bangalore) and 0.34 million sq ft of area leased to two hospitality projects. In the two retail malls, The Collections and Forum Value Mall, the company has 45% and 35% share of the lease income under JD agreement. Moreover, the company has also strong leasable space in the pipeline in its ongoing, underdevelopment and forthcoming projects including the benefits expected from the partnership with CapitaLand Retail India Investments for mall developments.

A diversified project portfolio with focus on all segments: mid income residential units to luxury homes & villas; luxury malls to mixed use properties in suburban location.

Weaknesses

The share of commercial projects out of the ongoing projects is about 54.1%. This increased exposure to commercial projects in the medium term would result in high funding requirements despite the JDA model. Moreover, the subdued commercial/retail realty market will affect the realization (in case of sale model) and rental yield (in case of lease model) in the medium term. Operating margin of 21.8% in FY 2010 and 21.1% in Q1 of FY 2010 suggests high cost of land bank as well as increased share of commercial project in ongoing project portfolio.

The company's operations are largely concentrated on Bangalore. As of June 30, 2010, about 82.06%, 83.13% and 51.21%, respectively, of its ongoing projects, projects under development and forthcoming projects are located in Bangalore. PEPL, though, is diversifying into newer geographies like Chennai, Mangalore, Cochin and Hyderabad. However its ability to compete and execute projects in these areas as well as ensure market acceptance for the same are yet to be demonstrated. Especially the work on company's two important commercial projects in Chennai, Prestige Palladium and Prestige Polygon, has been very tardy due to subdued market conditions and financing.

In the residential segment, about 61% of the saleable area of the ongoing project is accounted by three projects, i.e., Prestige White Meadows, Prestige Golfshire Villas, Prestige Shantiniketan and Prestige Neptune's Courtyard. Moreover, the former three projects account for 49% of the saleable area. Any delay on these projects will severely affect the cash flow positions of the company.

The company's outstanding debt end June 30, 2010 was Rs 2019.95 crore, out of which about Rs 243.42 crore was unsecured and Rs 1776.54 crore was secured. Moreover, out of the total proceeds the company is to use just Rs 280 crore to retire its existing debts, thus leaving the company highly leveraged, affecting further raising of funds to finance pipeline projects.

Outstanding payments towards land acquired or for which it has signed MoU (and already made advance) stood at Rs 256.18 crore end of August 31, 2010, with advance payment toward consideration for land aggregating about 1366.513 crore. The outstanding payment includes the balance payment of Rs 157.48 crore towards 217.19 acres (or 21.93% of its land bank) for the land the company proposes to acquire for its ongoing projects, projects under development, forthcoming projects as well as deposit of Rs 94.55 crore towards land reserve for which it has signed a joint development agreement. The company has already made a payment of Rs 236.53 crore towards the land (217.19 acre), for which it has signed MoU and Rs 91.70 crore of refundable deposit towards JD land. It has to be seen how the company is going to fund the land acquisition given the already high leveraged balance sheet and debt servicing and construction funding obligations. Moreover, if there is any delay in development of JD properties, the company has to indemnify such parties with whom it has entered JD agreement or pay penalty as specified in the agreement.

Some of the properties on which the company is developing projects, such as Hilton, Forum Thomsun Mall, Prestige Silver Oak, Prestige Dynasty, Forum Vijaya Mall and Prestige Polygon are the subject matter of litigation to which it is not a party.

PHD Developers, in which Irfan Razack (one of the promoter of PEPL) is a partner has been alleged to have siphoned off funds of Rs 8.37 crore in constructing a building for Amanath Cooperative Bank by the enquiry commission appointed under Karnataka Cooperative Societies Act.

Conflicts of interest may arise out of common business objects shared by the Company and certain of the promoter group entities

Valuation

Consolidated revenue of the company for FY 2010 was higher by 14% to Rs 1024.44 crore while its net-profit was higher by 91% to Rs 147.35 crore on deflated base on account of higher derivative loss. The EPS works out to Rs 4.5 on both the lower and upper price band and, thus, the PE at the offer price band is 38.2-40.7 times. In comparison, the PE of Shobha Developers, Puravankara and Brigade Enterprises, its peers similarly focused on the Bangalore realty market, is 26.7 times, 18.7 times and 36 times. While PE of Sobha Developers and Brigade Enterprise is on FY 2010 standalone earnings that of Puravankara is on FY 2010 consolidated earnings.

The book value (BV) of the company on pre-issue equity stands at Rs 29.64 and the price to book value (PBV), considering the upper price band, was ruling at 6.2 times. But on post-issue equity, the BV is Rs 60.29 and the PBV at 3 times at the upper price band. The post issue P/BV, considering lower price band, is close to 2.9 times.

On price to book value basis, the stock of this company looks more expensive when compared to its three home city peers. Sobha Developers with a BV of Rs 177.72 is ruling at a P/BV of 2.1 times, while Puravankara with book value of Rs 71.29 is ruling at a P/BV of 1.8 times. Similarly, the third major Bangalore based listed player, Brigade Enterprise, has a BV of 92.48 and rules at a P/BV of 1.6 times.