Guidance, Q2 show boost for Prestige Estates

The management remains confident of meeting target on back of a strong March quarter

The Prestige Estates stock is up 10 per cent since its results last week on better-than-expected September 2016 quarter (Q2) performance and the company maintaining its FY17 new sales guidance of Rs 3,500 to Rs 4,000 crore despite demonetisation-related slowdown concerns. The S&P BSE Realty index, in comparison, is up just 1.4 per cent in this period. The key question now is: will the stock rally sustain?

While the management expects traction in new sales in the March quarter, most analysts believe that given the sales so far of Rs 1,400 crore (40 per cent of target) and limited new launches, it is unlikely to reach its FY17 target. Analysts at HDFC Securities have cut their new sales estimates by 32 per cent and expect the company to clock Rs 2,200 crore of sales in the residential segment in FY17.

 

While the jury is out on this, the company’s revenues, operating profit and net profit were 30 per cent to 60 per cent lower than year-ago numbers, but better than analyst estimates by 10-15 per cent. The Rs 1,151 crore of revenues came in on the back of revenue recognition of Bengaluru-based projects, Falcon City and Lakeside Habitat, which accounted for 37 per cent of the top line. Consolidated operating profit margins came in at 20.8 per cent, impacted by cost escalations in projects nearing completion.

The company sold one million square feet for Rs 600 crore in the September quarter, up 17 per cent over the June quarter largely on back of sales of existing projects. There were no new launches in the September quarter as the company is focused on completing existing projects and going slow on new launches. So far this financial year, the company has launched two new projects while the FY16 new projects stood at seven.

Although net debt increased by Rs 34 crore to Rs 5,090 crore in the quarter, its net debt-to-equity stands at 1.1 times within the guidance of 1 to 1.25 levels for FY17. Analysts believe the company will have avenues to de-leverage its balance sheet, either via real estate investment trust or stake sale in its rent company.

At the current price, the stock is trading at 19.6 times its FY18 estimates. Axis Capital analysts believe that the 20 per cent decline after demonetisation is overdone. They have a 'buy' call given the company’s strong annuity income stream, projects in Bengaluru, which will recover faster driven by strong commercial absorption of 12-13 million sq ft per annum and steady residential demand. One of the key reasons for investors' interest in the stock is the expectation that rental income, which is currently pegged at Rs 600 crore will improve to Rs 1,400 crore over the next three to four years. Given this backdrop, the stock should outperform the sector.