IPO Review: Prestige Estates

Bangalore-based real estate developer, Prestige Estates, is raising `1,200 crore to fund its existing projects and repay part of its debt. The company, a well-known brand in Bangalore that operates in the residential, commercial, retail, hospitality and property management segments, has so far developed 34 million sq ft land. Of the IPO proceeds, it intends to use `622 crore for construction and development, `280 crore for debt repayment, `30 crore for land acquisition and the rest for general corporate purposes. While the company is diversifying its presence across the southern states, over 70 per cent of its development area is located in Bangalore.

Sound prospects

The company has a good project execution track record and revenues have grown 25 per cent annually in the last five years. The company has development rights for about 57.4 million sq ft land spread across six southern cities and Goa. Roughly 45 per cent of these projects would be for residential purposes and 39 per cent for commercial projects. A pick-up in the IT/ITES services market and higher wages have seen prices rise about 15 per cent in Bangalore's residential segment over the last one year. Analysts believe the demand for office space continues to be robust and rentals may see some appreciation. Given the company's portfolio of rental assets, which accounted for a fifth of the June quarter revenues, better prospects in the office space as well as higher pricing power in the residential space are positives.

Margin concerns

Margins in the last two years, however, have been on a declining trend. Inadequate pricing, despite the premium positioning and cost escalation, resulted in margins coming down from 29 per cent in FY09 to about 21 per cent in the first quarter of FY11.

To overcome cost increases during the completion, the company plans to hold back apart of the completed property to gain from any subsequent rise in prices. The company's margins are 300-400 basis points lower than its Bangalore-based peers as it prefers the joint development model. Upcoming premium residential projects should also see margins look up. The company's high net debt of 2.4 times the equity is a matter of concern, but post the issue and due to part payment of debt, it is likely to come down to 0.8 times.

Valuations

The growth prospects, execution record, experienced management, visibility in cash flows and the company's presence across the property value chain are positives. The IPO has been priced at a premium. Analysts believe the scrip will trade at 2-2.5 times its estimated FY11 book value, which is at a slight premium to its peers. Its pricing is at a nearly 4 per cent premium to its NAV (net asset value) of `164 per share, whereas Sobha and Purvankara (which have two times larger land banks than Prestige) trade at a 30-35 per cent discount to their NAV. While it is a quality offering, promoters should have left more on the table for investors.