Prestige Estates set for tightrope walk

Prestige Estates and Projects Ltd’s management is very optimistic about the future. The realty firm is eyeing a 25-30% year-on-year growth in pre-sales or bookings in FY25. 

This target comes on a strong base of 63% jump seen in FY24 that had translated into record pre-sales of 21,040 crore. The management’s confidence stems from a robust launch pipeline of 59.2 million square feet for FY25 with a potential gross development value of 59,100 crore. Notably, FY24 saw a high number of new launches and deliveries, which contributed 75% to pre-sales.

Collections in FY24 were the highest ever with realizations continuing to rise. The company could exceed its FY25 pre-sales guidance if project approvals come on time, the management said. 

However, the first quarter of FY25 is expected to be soft in terms of pre-sales due to delays in approval amid the general election.

Prestige continues to diversify from its core markets of Bengaluru and Hyderabad to newer localities such as the Mumbai Metropolitan Region and National Capital Region (NCR) which offer better margins. 

It will launch its first project in NCR, Prestige Bougainvillea Gardens, in first half of FY25. It has also acquired land parcels in Ghaziabad and Pune. 

While the company has proven its execution ability, there could be challenges, mainly elevated competition from incumbents/established realty brands in newer markets. The capital expenditure (capex) related to land acquisition in FY24 was around 4,800 crore. It is expected to be around 3,500–4,000 crore in FY25. To meet its growth aspirations, investments in land banks are crucial.

Not only residential, Prestige is also going full-throttle in expanding its annuity assets (offices and retail) and hospitality portfolio. 

It aims to achieve an exit rental from office assets of 3,930 crore by FY28, a substantial increase from FY24 exit rental of 740 crore. Traction in office leasing, which took a hit during the pandemic, is yet to see a substantial recovery.

So, improvement in rentals may be gradual. Further, the company is planning to come out with an initial public offering (IPO) for its hospitality business and aims to list it by FY25-end. This is expected to unlock the value of hospitality assets and fund expansion plans. Prestige has a pending capex of 13,900 crore for these assets.

Huge capex, mainly land payments, have led to an increase in net debt to 7,790 crore as of March-end. The average cost of borrowing also rose to 10.7%. Amid elevated interest rates and piling debt, higher cost of borrowing is a dampener. 

The company’s net debt-equity ratio is at a multi-quarter high of 0.66 times, above the management’s comfort zone of below 0.5 times. 

The management expects the ratio to fall below its target level aided by improved revenue recognition. That said, balancing debt while chasing growth may be easier said than done. ICICI Securities expects Prestige’s net debt levels to rise further to 8,440 crore by March 2025. Recall that Prestige was struggling with elevated debt in the past, which became a niggling worry for its investors. So, it had to sell some of its assets in 2021 to the Blackstone Group to pare debt.

Meanwhile, in the last one year, Prestige Estates’ stock has rallied a whopping 222%, beating the Nifty Realty Index’s more than 100% returns. 

Solid pre-sales trajectory, timely launches and ongoing consolidation in the sector worked in the stock’s favour. Hereon, meaningful gains would mainly depend on whether the company is able to meet its mammoth FY25 pre-sales target. According to Jefferies India, at the current valuations and with large capex underway, the stock seems fully valued.

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