Uptick in annuity cash flows key for Prestige Estates projects

Weak residential sales, low hotel occupancy add to worries

The Prestige Estates Projects stock has shed about 15 per cent since its results last week on disappointing March quarter (Q4) and a muted near-term outlook. Prior to the recent correction, the stock was the best performer among realty stocks since mid-May, gaining 65 per cent. 

Given its steady annuity income, the Bengaluru-based realty player was expected to be less impacted than listed players who are primarily in the residential space. While the company ended FY20 with rental income of over Rs 1,000 crore and has seen a gradual uptick in residential collections, it could see an impact on its cash flows because of a weak office leasing market, mall closures, lower residential launches, and a sharp drop in hotel occupancy.

Some of the weakness due to the pandemic was reflected in the Q4 revenues and operating profit, which were down 26-30 per cent over the December quarter and were  flat as compared to the year-ago quarter. Flat revenues, higher employee costs, and a 30 per cent increase in interest costs led to a 89 per cent fall in net profit for the quarter. 

Going ahead, the Street will look at the lease trends and movement of debt on the books.

While net debt decreased by Rs 500 crore on a sequential basis, with Rs 8,170 crore adjusted for the recent equity issuance, monetisation of the commercial segment over the next few quarters will be critical for incremental debt reduction. Adhidev Chattopadhyay of ICICI Securities, said: “The Covid-19 impact puts a question mark on our long-held view of the annuity asset business providing a cushion against rising debt levels.”

 

 

While its net debt-to-equity ratio stands at 1.4x after recent the fund raise, analysts believe that more funds need to be raised for the company to fund capex plans and maintain debt at current levels. The company could look at private equity investment and listing its real estate investment trust for the same.

While the firm is present across retail (malls), hotels, services and residential segments, given the headwinds faced by each of the segments and recovery expected to be pushed to FY22, cash flows from the rental portfolio would be key. The other trigger would be the pace of expansion and capital allocation over the next year. Analysts at Elara Capital are cautious on the firm’s strategy to explore geographies beyond south India and largely toward projects like hotel and slum rehabilitation, which requires higher upfront capital investment. 

Given the headwinds,  brokerages have revised earlier earnings estimates for FY21 downwards by 70-80 per cent.