Apply only if you have long term view

Prestige Estates Projects Limited is tapping the capital markets with an IPO to raise Rs 1200 crs in a price band of Rs 172-183. The issue has opened on the 12th of October and closes on the 14th of October.

Business
Prestige had 24 years of experience in real estate development and is one of the leading real estate development companies in South India. It has completed 150 real estate projects of approximately 34.23 million square feet (msf). Prestige has developed a diversified portfolio of real estate development projects focusing on projects in the residential (including apartments, villas, plotted developments and integrated townships), commercial (including corporate office blocks, built-to-suit facilities, technology parks and campuses and SEZ’s), hospitality (including hotels, resorts and serviced accommodation )and retail (including shopping malls) segments of the real estate industry. Prestige currently owns or holds development rights for 57.36 msf of developable area which includes 28.43 msf of saleable area and 11.04 msf of leasable area.

The company currently has 32 ongoing projects which comprise of 11 residential projects with a developable area of 10.92 msf (of which saleable area is 9.27 msf), 14 commercial projects with a developable area of 18.32 msf (of which the saleable are is 5.91 msf and the leasable area is 6.14 msf), four hospitality projects with a developable area of 1.26 msf (equivalent to 655 keys and of which the leasable area is 0.91 msf) and three retail projects with a developable are of 3.39 msf (of which the leasable area is 1.2 msf).

Prestige has 13 projects under development which comprise 5 residential projects with a developable area of 5.34 msf (of which the saleable area is 4.28 msf), four commercial projects with a developable area of 1.72 msf (of which the saleable area is 0.74 msf and the leasable area is 0.05 msf),two hospitality projects with a developable area of 1.13 msf (which is equivalent to approximately 507 keys and of which the leasable area is 0.72 msf ) and two retail projects with a developable area of 1.97 msf (of which the leasable area is 0.90 msf).

Prestige also has 9 forthcoming projects which comprise 5 residential projects with a developable area of 9.77 msf (of which the saleable area is 7.80 msf), 2 commercial projects with a developable area of 2.35 msf (of which the saleable area is 0.42 msf and the leasable area is 0.51 msf) and two retail projects with a developable area of 1.20 msf (of which the leasable area is 0.61 msf).

Prestige has a land bank of approximately 483.16 acres as of 31^st august 2010. Prestige has entered into a JV with CRIDF, an associate of Capitamalls Asia, which 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 malls and cities.

Objects of the issue

1. Finance our ongoing projects and projects under development                 Rs 428.81 crs
2. Invest in the existing subsidiaries for the const & devel of projects           Rs 193.20 crs
3. Finance the acquisition of land                                                                                   Rs   21.33 crs
4. Repay certain loans of the company                                                                        Rs 280.00 crs
5. General corporate Purposes                                                                                       Rs    XX
6. TOTAL

Financials
The company has recorded consolidated revenues of Rs 916.15 crs for the year ended March 2009; Rs 1086 crs for the year ended March 2010 and Rs 309.45 crs for the first quarter ended June 2010. The profit after tax and minority interest is Rs 73.14 crs for March 2009, Rs 143.78 crs for March 2010 and Rs 17.27 crs for the first quarter ended June 2010.

If one were to look at the stand alone numbers then revenue for the year ended March 2009 is Rs 889.69 crs, Rs 993.16 crs for March 2010 and Rs 267.43 crs for June 2010. The profit after tax was Rs 76.11 crs for the year ended March 2009; Rs 141.73 crs for the year ended March 2010 and Rs 24.91 crs for the first quarter ended June 2010.

Comparisons
The company has compared itself with Sobha and Purvankara, both are listed entities and are in the competitive Bangalore market. In terms of revenue Purvankara reported revenues of Rs 478 crs for financial year March 2010 and a net profit after tax of Rs 145.32 crs. The EPS for the company was Rs 6.81 and the PE multiple based on yesterday’s close of Rs 127.60 is 18.74 times. Sobha developers reported revenues of Rs 1114 crs for March 2010 and a net profit of Rs 136.7 crs. The EPS is Rs 14.92 and the PE multiple based on yesterday, closing price of Rs 366.85 is 24.58 times.

Competition
Prestige is in the Bangalore market in particular and the Southern market in general. The Bangalore market has a lot of competition and has many players like Prestige, Sobha, Purvankra, Nitesh, Brigade Enterprises and other unlisted players as well. It is a matured market and has a general level of quality about it. One gets a feeling that the city has ample land and property is available either in ready or under construction stage. Besides the Bangalore or Southern builders you have players on the Northern part of India who are also available and offer opportunities to invest. Somehow or the other whether it was timing, pricing or what have you, investors have not made money from investing in real estate companies whether it be a DLF, HDIL, Unitech, Ansal  or even a Parashvanth. With such a dubious track record one gets scared and cautious when it comes to the real estate sector.

As far as Prestige is concerned they are probably one of the big builders in Bengaluru in terms of msf under construction and are associated with landmark projects like the UB City, Shantiniketan and so on. They are known to be a quality builder and have adequate land bank to sustain growth for the next five years at the bare minimum.

Valuations
The company reported a Profit after tax of Rs 143.78 crs for the year ended March 2010 and Rs 24,91 crs for the first quarter of the current financial year ending March 2011. The pre IPO equity is 26.25 cr shares which would translate into an EPS of Rs 5.47 for the year ended March 2010 and Rs 0.66 for the quarter ended June 2010. The March 2010 EPS would translate into a PE multiple of 31.44 times at the lower end of the price band of Rs 172 and 33.45 times at the upper end of the price band of Rs 183.

Conclusion
Prestige is a large real estate builder, developer and has in his portfolio assets on the leased model as well as outright sale model. He is into retail malls, hospitality and commercial where leased rent is the business and intends to have a portfolio of a mix of these assets which would give lease rent in excess of Rs 500 crs in about three years time. Currently this revenue is in the range of Rs 140-150 crs.

Prestige is highly leveraged currently and has a debt on a consolidated basis of close to Rs 1776.54 crs. Prestige has also discounted its future leased rentals and from the current IPO proceeds Rs 280 crs are earmarked for loan repayment. Further almost Rs 400 crs would be deployed in the financial year 2012 and 2013 and would be currently used to repay borrowings which cost the company on an average 12%.

Looking at the size, projects, business model and prospects, Prestige appears a good investment prospect. It has two negatives in that the share based on current valuations looks expensive and would not offer appreciation in the short term and secondly the sector has not rewarded shareholders. Looking at these two factors one believes that investment should be made with a medium to long term outlook and one should be prepared to see value erosion on listing.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.