Prestige Estates: Medium term growth prospects hinge on capex cycle

Deal to sell commercial assets and residential recovery are near term positives

Prestige Estates Projects (PEPL), the Bengaluru-based real estate developer, has seen steady gains on the bourses since the start of the month. 

This has come on the back of a strong September quarter, the deal with Blackstone Group to sell commercial assets, and a robust sales outlook supported by a strong launch pipeline for the second half. 

As part of the term sheet signed with Blackstone, it will sell stakes in some special purpose vehicles for office, retail, hotel, and facilities management properties, for an enterprise value of Rs 9,160 crore. 

If the deal goes through, PEPL will be able to repay the existing debt of Rs 5,600 crore on these assets, and be left with a surplus of over Rs 3,500 crore for capex or equity infusion in other commercial assets. 

Consolidated net debt at the end of Q2 stood at Rs 8,667 crore. The company will also have Rs 270 crore in annuity income following the transaction; it is looking to scale up its lease income pool to pre-Covid levels of Rs 1,000 crore as it invests in new assets.  

While the deal assures the company of growth capital, analysts at HDFC Securities believe bulk of the proceeds will be used as equity contribution for two Mumbai assets. 

PEPL plans to start work on the Bandra Kurla Complex and Mahalakshmi commercial office projects from the March 2021 quarter. Capex on these assets is expected to be Rs 2,800 crore, with 2 million square foot of gross lease area each. These are expected to be completed in the next four years. 

The company will utilise cash flow from the ready unsold inventory of Rs 2,600 crore to repay residential segment debt. 

PEPL reported year-on-year (YoY) growth of 1 per cent in the residential segment, with sales at Rs 838 crore; cash collections rose 5 per cent YoY to Rs 910 crore. 

ICICI Securities’ Adhidev Chattopadhyay says gross residential bookings have bounced back to pre-Covid levels of over Rs 1,000 crore. Given the strong pipeline of launches for H2FY21, momentum in residential sales is expected to sustain, he adds. 

Even as the Street awaits closure of the Blackstone deal, HDFC Securities believes the entry of PEPL into a new capex cycle indicates its rerating will take a longer time frame.