Southern Pride - breport.myiris.combreport.myiris.com/MOTOSW/PREESTAP_20110718.pdf · Prestige Estate Projects BSE SENSEX S&P CNX CMP: INR125 TP: INR175 Buy 18,507 5,567 Southern

Sandipan Pal ([email protected]); Tel: +9122 3982 5436

Southern Pride

Prestige Estate Projects

18 July 2011

Initiating Coverage | Sector: Real Estate

Kochi

Chennai

Goa

Hyderabad

Strongbrand instable

markets

Reputedstrategicpartners

Topcorporate

clients

Diversified asset classes and landmark developmentsDiversified asset classes and landmark developments

Strong IT/ITES demand


218 July 2011

Prestige Estate Projects: Southern Pride

Page No.

Summary ..............................................................................................................3

Strong brand and diversified product mix ....................................................... 4-8

Promising markets, quality assets render strong cash flow visibility ......... 9-14

Revival of commercial vertical to boost annuity income ........................... 15-19

18% revenue CAGR, 49% net profit CAGR over FY11-13 ..................... 20-25

Valuation and view ....................................................................................... 26-27

Company background .................................................................................. 28-31

Financials and valuation .............................................................................. 32-33

Prestige Estate ProjectsCMP: INR125 TP: INR175 BuyBSE SENSEX S&P CNX

18,507 5,567

Southern PrideA proxy on South India's real estate growth story

Prestige Estates Projects Ltd, a premium developer in the South India real

estate market, has strong brand equity in the region, notably in Bangalore.

Its presence across asset classes, superior execution and the steady growth

potential of southern cities make it an attractive play.

Recovery of the commercial vertical on the backdrop of strong IT/ITES

demand along with uptick in economic activity augurs well for Prestige.

We initiate coverage with a Buy and target price of INR175 (40% upside).

Strong brand, diversified product mix: Prestige Estates Projects Ltd (Prestige)

has a diversified land bank of ~62msf (company’s share is ~33msf of saleable and

~10msf of annuity projects) in established locations or growth corridors of key South

India cities, especially Bangalore. Prestige enjoys strong trust and customer preference

due to (1) its diversified and well-balanced product positioning across verticals and

customer segments, (2) a superior execution track record (almost 44msf over the past

25 years) with identifiable landmarks in Bangalore such as UB City, Shantiniketan and

Forum Mall and (3) its strong relationships with a growing corporate client base.

Promising markets, quality assets render meaningful cash flow visibility: We

believe Prestige will enjoy steady monetization of its projects due to the stable outlook

of the real estate (RE) sector in most southern cities. This is largely due to (a) strong

growth prospects of the IT/ITES sector, driving housing demand and commercial leasing

and (b) affordability for buyers, led by the rational movement of property prices. We

expect Prestige to have meaningful cash flow visibility from (1) its pre-sold projects

(~13msf) with ~INR22b receivable over the next 2-4 years, (2) its near-term launch

pipeline of ~15msf and (3) growing annuity assets (~3msf operational and ~7msf

upcoming). However, its heavy inclination towards annuity projects and strong near-

term capex plans are likely to dent free cash flow over the next couple of years.

Steady revival of the commercial vertical to boost annuity income: Bangalore

has been in the forefront of commercial recovery, driven by the renewed momentum in

corporate expansion in the IT/ITES sector. Prestige is well placed to benefit from the

commercial uptrend with (1) 2.5msf of rent-yielding and ~3.4msf of upcoming projects

and (2) a strong and growing MNC/domestic client base. Prestige’s JV with CRIDF, an

associate of Capital Malls Asia, will help it to expand in the retail vertical, which

accounts for 19% of Prestige's GAV. We estimate annuity income from commercial

and retail segments will show uptrend from INR1.5b in FY11 to INR2.7b in FY13.

Valuation and view: We estimate Prestige's one year forward NAV of INR195. Prestige

has commanded a better average RoE of 15% over the past four years (v/s ~11% for

the coverage universe). It trades at 1.5x FY13E BV of INR81/share, 11x FY13E EPS

of INR11.3 and 36% discount to NAV. We believe (a) momentum in IT/ITES demand

growth and rental uptick, (b) on-time monetization and execution of flagship projects,

and (c) acquisition of new turnkey projects will be key triggers for the stock. We

initiate coverage with a Buy and a target price of INR175 (a 10% discount to NAV).

Stock performance (since 26October 2010)

Shareholding pattern % (Mar-11)

Bloomberg PEPL IN

Equity Shares (m) 328.1

52-Week Range 232/104

1,6,12 Rel. Perf. (%) -8/-9/-

M.Cap. (INR b) 41.0

M.Cap. (USD b) 0.9

Y/E March 2011 2012E 2013E

Net (INR b) 15.4 18.2 21.6

EBITDA (INR b) 3.7 5.1 7.1

NP (INR b) 1.7 2.6 3.7

EPS (INR) 5.1 8.0 11.3

EPS Gr. (%) 13.0 58.3 40.9

BV/Sh(INR) 64.4 71.1 81.1

P/E (x) 24.6 15.5 11.0

P/BV (x) 1.9 1.8 1.5

EV/EBITDA (x) 14.0 10.2 7.4

EV/ Sales (x) 3.4 2.9 2.4

RoE (%) 11.6 11.9 14.9

RoCE (%) 11.7 13.1 16.2

Others

1.0

Promoters 80.0

Initiating Coverage

Sector: Real Estate

318 July 2011

Foreign

18.0

Domestic

Inst, 1

100

130

160

190

220

Oct

-10

Dec

-10

Feb

-11

Apr

-11

Jun

-11

Prestige EstatesSensex - Rebased


418 July 2011

Strong brand and diversified product mix

Prestige has a land bank of ~62msf in city-centric locations or growth corridors

of key South India cities, especially Bangalore.

Prestige enjoys trust and customer preference due to its (1) diversified,

balanced product positioning, (2) execution track record with identifiable

landmarks in Bangalore and (3) strong relationships with a growing

corporate client base.

Prestige's development portfolio is skewed towards the JDA and JV models,

which have helped it to acquire prime land with minimal upfront investment.

Diversified asset classes…

Much of Prestige's brand recognition emerges from its long presence and successfultrack record in RE verticals, such as(1) Residential: Strong end-to-end product mix, including sky apartments, villas, plotted

developments and integrated townships.(2) Commercial and Retail: Customized offerings such as corporate office blocks, built-

to-suit facilities, technology parks, campuses, SEZs and shopping malls, under variousbusiness models (annuity, strata-sale).

(3) Hospitality: Prestige's offerings include hotels, resorts and serviced accommodation.

Since inception, Prestige delivered ~44msf (157 projects) of development across verticalsand its future product proposition of ~62msf extends across asset classes. About 60% ofPrestige's development plan is residential and the rest is distributed among commercial(25%), retail (11%) and hotel (4%) projects.

Residential Commercial Retail Hospitality Services

Apartments

Villas

Townships

Plotted

developments

Office space

SEZs

Built-to-suit

campuses

Techparks

Malls Resorts

Serviced

apartments

Hotels

Food courts

Sub-leasing and

fit-out services

Project and

construction

management

services

Mall management

Facilities

management

Prestige's Business

Prestige's operations cover almost all asset classes

Source: Company/MOSL

Its presence across asset

classes has enhanced

Prestige's brand recall


518 July 2011

Vertical-wise break-up of completed projects of ~44msf Prestige's development potential (%)


Res idential57%

Commerc ial39%

Retail3% Hotel

1%

… in growing and promising RE markets

Prestige has emerged as a Bangalore-focused RE player, having delivered 157 projectsover 44msf of developable area, with ~75% of the projects located in city-centric locations.However, it has been expanding to other key cities in South India such as Chennai, Cochin,Mysore, Hyderabad and Mangalore. Bangalore constitutes ~75% of Prestige's futuredevelopment plans and Chennai accounts for ~13% of its land bank. Steady diversificationreduces its dependence on a single RE market and offers an opportunity to leverage theRE growth story of other emerging tier-II and tier-III southern cities as well.

Steady expansion outside Bangalore: Land bank break-up (%)

Mangalore2%

Mysore3%

Hyderabad3%Cochin

4%

Chennai13%

Bangalore

75%


Products at several price points address wide demand

Prestige is established in almost every RE sub-vertical, catering to a wide customer baseover varying income groups. In the residential vertical Prestige has a varied range ofproducts in mid-income housing, high-end city-centric segments and high-end villas, and itoffers ample variety in commercial and retail verticals as well to maximize its customerbase. We believe Prestige's offerings will give it the opportunity to leverage on growthpotential at every price point and give it higher resilience during a slowdown.

114

6025

64

5832

Res idential Commerc ialRetail Hospitality

Inner circle: Developable area/outer circle: Saleable area

Prestige is diversifying from

Bangalore to major southern

cities


618 July 2011

Product mix across customer segmentsCategories Key Projects Locations Specifications (INR/sf)

Mid-income housing Shantiniketan Whitefield *BSP: 3,000-5,000

Mid-income housing Southridge Banshankari BSP: 3,000-5,000

Premium housing/villas White Meadows Whitefield BSP: 5,000-7,000

Premium housing Oasis Dodballapur BSP: 5,000-7,000

Upper mid end villas Silver Oak Whitefield BSP: 5,000-7,000

Luxury housing Kingfisher Tower Vittal Mallya Road BSP: ~20,000

Luxury housing Hilton Residences Ulsoor Road BSP: ~20,000

Luxury villas Golfshire Nandi Hills BSP: ~9,000

Commercial spaces Shantiniketan commercial Whitefield Strata sales

ITechnology parks Exora Business Park Outer Ring Road Lease model

Campus development Cessna Business Park Outer Ring Road Cisco Campus

Mid-market retail Forum Value Mall Whitefield City-centric destination

Luxury retail UB City Retail Vittal Mallya Road High end brand

* Base sale price Source: Company/MOSL

Product positioning of future developments: Volume break-up; Value break-up

Mid income71%

Luxury end10%Premium end

19%


JDA model enables value-accretive acquisitions

Prestige has land reserves of more than 1,000 acres, aggregating ~62msf of developmentpotential and ~43msf of saleable (or leasable) area in Bangalore, Mysore, Cochin,Hyderabad, Mangalore, Chennai and Goa. The development portfolio is skewed towardsjoint development agreement (JDA) and joint venture (JV) models, comprising over 65%of its land bank. The JDA model with local land owners enables Prestige to acquire city-centric prime land parcels (projects in UB City, Khoday and Ulsoor Road) at minimumupfront investment.

Prestige's (1) brand advantage, (2) superior delivery and (3) ability to command pricingpremium has made it a preferred joint development partner for land owners. The JDAroute of land acquisition offers superior capital recycling and helps to mitigate marketuncertainty.

Luxury end37%

Premium end30%

Mid income33%

Addressing various price

points offers high resilience

and balanced growth

potential

Prestige's brand image

makes it a preferred

JDA partner


718 July 2011

Execution excellence, client base, strategic association, integratedbusiness approach key ingredients of premium branding

Prestige products have higher customer preference and command premium pricing, acrossRE segments due to its strong brand, which emerges from: (a) execution excellence, (b) awide client base, (c) strategic associations and (d) integrated business approach.

(a) Execution excellence: Over the past 25 years, Prestige has exhibited executionsuperiority in volume (over 157 projects, ~44msf of developable area) and quality. Thecompany developed some of the largest integrated developments and identifiable landmarksin Bangalore, such as UB City, Shantiniketan, Forum Mall and Prestige Tech Park.

Landmark developments


UB City Cessna Business Park

Shantiniketan Forum Mall

(b) Wide client base: Prestige has set up and nurtured strong relationships with reputedclients such as Cisco, Reliance, JP Morgan, Oracle and Nokia. The company tied up withCisco for its expansion in India and to develop the largest campus, outside the US, of~4.5msf (it has built six out of 14 buildings amounting to ~1.8msf). A large, growing clientbase with strong order book potential minimizes its dependence on a single client or groupof clients.


818 July 2011

(c) Strategic associations: Prestige also enriched its brand by establishing strategicpartnerships (JVs) with international players such as(a) Capita Retail India Development Fund (CRIDF), an associate of Capital Malls Asia,

for retail business (it plans to develop six malls in South India); and(b) Reputed hotel management brands such as Oakwood, Hilton, Marriott and Starwood

for hospitality projects.

We believe association with global players will augment Prestige's expertise and brandequity and bolster its growth potential.

(d) Integrated business approach: Prestige's integrated business approach has beenits key building block of its growth. Its marketing strategy involves indigenous expertiseand external perspective of reputed domestic/international consultants to ensure high visibilityand sales translation. Prestige's focus on developing in-house construction capabilities willgive it better quality control and execution management. The company foresees immensepotential in allied services such as (a) property management, (b) project and constructionmanagement, (c) mall management solutions and interior designing. We believe the segmentshave strong potential to supplement its core business and render additional revenue streams.

Building blocks of Prestige's brands


Strategic partnerships

enrich Prestige's

brand value

Long and wide

execution experienceLong relationship with

a strong client base

Cisco (1.8msf)

Reliance (0.2msf)

JP Morgan (0.4msf)

Oracle (0.9msf)

Nokia (0.5msf)

Since inception

157 projects (~44msf)

Residential


Commercial


Retail

3 projects (1.4msf)

Hotel

3 projects (0.6msf)

Reputed strategic

and financial

partners

Capital Mall

UB Group

Hilton/Marriott/

Oakwood

Red Fort Capital

Integrated business

approach

Marketing strategy:

Combination of

indigenous and external

expertise

Allied services:

Property/ Mall

management, Interior

designing

Backward

integration: In-house

construction arm (Team

United)

Landmark

developments

UB City

Shantiniketan

Prestige Tech Park


918 July 2011

Promising markets, quality assets render strong cash flowvisibility

We believe Prestige will enjoy steady monetization of its projects due to stable

outlook of the RE sector in most southern cities.

This is largely due to (a) strong growth prospects of the IT/ITES sector, driving

the housing demand and commercial leasing and (b) buyers’ affordability, led

by rational movement of property prices.

We expect Prestige to have meaningful cash flow visibility from (1) its pre-

sold projects (~13msf) with ~INR22b receivable over the next 2-4 years, (2)

strong near-term launch pipeline of ~15msf and (3) a growing portfolio of

annuity assets (~3msf operational, ~7msf upcoming commercial/retail/hotel

projects).

However, its heavy inclination towards annuity projects and strong near-term

capex plans, are likely to dent free cash flow over the next couple of years.

Bangalore market steadiest among super metros

In most southern cities, led by Bangalore, sales momentum has been steady over the past12 months. This is largely due to a higher proportion of end-user demand (~80%), whichhas stronger resilience to macro-cyclicality and is mainly driven by need-based ratherthan profit-based purchase. This has kept property prices in Bangalore largely affordable,with a moderate price appreciation across locations. A Cushman and Wakefield analysissuggests that compared with values in Bangalore at the end of 2009, capital valuesappreciated by a moderate 3-17% in the high-end segment and 5-19% in the mid segment.We believe the stability in capital values has reinstated the return of positive sentimentamong buyers over the past 6-9 months. Therefore, (a) steady demand growth fromgenuine buyers, and (b) increase in new launches by major developers has resulted inpositive momentum in sales volume.

We expect demand for RE to remain buoyant due to strong growth prospects of the IT/ITES sector, which is the biggest driver of residential demand (~50%) in southern cities.While a strong employee addition guidance by IT majors augurs well for growth in housingdemand, steady traction in commercial leasing is anticipated in the backdrop of new officespace addition plans, which grew 50-70% in CY10.

The steady Bangalore

market renders

immense comfort

Robust demand outlook for

the IT/ITES sector will

bolster real estate demand

Launches in southern markets were muted after recession Low price increases lead to better absorption in Bangalore

50

75

100

125

150

1QC

Y09

2QC

Y09

3QC

Y09

4QC

Y09

1QC

Y10

2QC

Y10

3QC

Y10

4QC

Y10

1QC

Y11

0%

10%

20%

30%

40%

Bangalore price appreciationMumbai price appreciationBangalore absorption rate (%)Mumbai absorption rate (%)

* Assuming base scale of 100 in 1QCY09 Source: JLLM (REIS)/MOSL

0%

25%

50%

75%

100%

1QC

Y09

2QC

Y09

3QC

Y09

4QC

Y09

1QC

Y10

2QC

Y10

3QC

Y10

4QC

Y10

1QC

Y11

NCR Mumbai Bangalore ChennaiPune Hyderbad Kolkata

**


1018 July 2011

Prestige projects to enjoy superior churn

Led by steady market sentiment, we expect Prestige to witness strong sales momentum.Moreover, strong marketability of its projects will ensure higher customer preference dueto (a) attractive project locations, (b) superior construction quality and (c) strong goodwill.Prestige's ongoing commercial projects will enjoy the benifit of improving business outlook(especially in the IT/ ITES vertical) and strong relationship with growing MNCs and IT/ITES players. We expect Prestige to have meaningful cash flow visibility from:(a) strong pre-sales from completed/ongoing projects;(b) robust launch pipeline inclined towards the mid-income segment;(c) growing annuity assets.

(a) Pre-sold projects of ~INR54b to usher in strong near-term cash flow...

Over the past few years, Prestige has enjoyed steady sales momentum. It has ~19msf(developable area ~30msf) of ongoing residential and commercial projects, of which itsold ~13msf (accrual of ~INR54b) including (a) ~1.5msf (INR8b) in FY09, (b) ~2.2msf(INR12b) in FY10 and (c) ~1.9msf (INR13.8b) in FY11. Strong pre-sales from its completedand ongoing projects render healthy near-term cash flow visibility with receivables of~INR22b over 2-4 years. Prestige's debtors grew from INR3.6b in FY10 to INR9.3b inFY11, due to this. We believe near-term cash flow from pre-sales will comfortably addressmost of the remaining construction costs of projects (company estimate of ~INR26b),leaving a robust upside from monetization of strategically unsold inventory of ~6.7msf.

Prestige sold projects worth ~INR54b (13msf): Status of key projects Product Type Saleable Area Sales Received Receivable

area (msf) sold (msf) value (INR b) (INR b) (INR b)

Silverdale Mid income 0.2 0.2 0.6 0.4 0.1

South Ridge Mid income 0.7 0.7 2.8 2.2 0.6

Shanthiniketan (Resi) Mid income 4.6 4.5 10.1 9.0 1.1

Total Mid-income 5.4 5.3 14.3 12.6 1.8

Neptune Courtyard Premium 0.9 0.6 2.7 2.4 0.3

Oasis Premium 0.7 0.5 3.1 1.5 1.6

White Meadows-1&2 Premium 1.6 0.6 5.0 1.1 3.9

Wellington Park Premium 0.8 0.8 2.2 2.0 0.2

Silver Oak Premium 0.6 0.2 1.1 0.1 1.0

Royal Wood Premium 0.3 0.0 0.2 0.0 0.2

Kensington Gardens Premium 0.8 0.7 2.0 1.9 0.1

Total Premium 6.0 3.8 18.0 10.7 7.2

Kingfisher Tower Luxury 0.3 0.3 6.5 0.4 6.2

Golfshire Luxury 2.0 0.5 3.6 1.2 2.4

Ashcroft Luxury 0.0 0.0 0.1 0.1 0.1

Total Luxury 2.3 0.7 10.2 1.6 8.6

Dynasty 2 Commercial 0.1 0.1 0.7 0.1 0.6

Shanthiniketan (Com) Commercial 3.0 2.5 7.6 5.1 2.5

Cyber Tower Commercial 0.3 0.3 1.0 0.6 0.3

Palladium Commercial 0.1 0.1 0.4 0.4 0.1

Polygon Commercial 0.3 0.2 1.1 0.6 0.5

Khoday Tower Commercial 0.1 0.1 0.5 0.1 0.4

Total Commercial 4.0 3.3 11.5 7.0 4.6

Overall 17.7 13.1 54.0 31.8 22.2


Prestige expects near-term

receivables of ~INR22b from

robust pre-sales

Strong market, superior

expertise will enhance

monetization


1118 July 2011

(b) Strong launch pipeline offers additional monetization visibility

After the economic downturn of 2008, there has been a dearth of new launches in Bangaloredue to high outstanding inventory. However, with improving sentiment, new projects havebeen coming into the market. Prestige plans to launch ~15msf (Prestige's share of 10-12msf) of projects over 12-15 months. While delay in approval could lead to a back-endloaded launch in FY12, successful monetization would be a significant cash flow driver forPrestige. We believe a sharper focus on the mid-income segment (~80% of launch plan)and steady market diversification will mitigate potential supply pressure emerging fromrobust launch plans of Bangalore-based developers.

Key residential launch plan for FY12Key launches Locations Area Prestige Prestige share Exp. sale Exp. Launch

(msf) stake (%) of area (msf) rate (INR/sf)

Sunnyside Bengaluru 0.9 100.0 0.9 4,000 2/3QFY12

Tranquility Bengaluru 4.8 100.0 4.8 3,500 2QFY12 (soft launch)

Jacobs Land Bengaluru 1.1 74.0 0.8 6,000 FY12

Prestige Park View Bengaluru 0.8 65.0 0.5 4,000 2QFY12 (soft launch)

Bellavista Chennai 5.0 60.0 3.0 4,000 FY12

Hillcrest Ooty 0.1 50.0 0.0 6,000 FY12

Prestige Summerfield Bengaluru 1.3 43.0 0.6 6,000 4QFY12/FY13

Total 14.0 10.6



0.0

1.0

2.0

3.0

4.0

FY09 FY10 FY11 FY12E FY13E FY14E FY15E

0

5

10

15

20

Residential (msf)Commercial (msf)Residential sale value (INR b)Commercial sale value (INR b)

Prestige to witness steady monetization (msf) Expected sales volume and accruals

We believe Prestige's premium/luxury-end projects, in city-centric locations, will be thepreference among marquee buyers, while the mid-income projects in growth corridorssuch as Old Madras Road and Kanakpura Road are expected to draw strong responsefrom the mass market. We expect the company to post sales of (a) INR15.8b in FY12(80% residential) and (b) ~INR19.7b (83% residential) in FY13 against INR13.8b in FY11.

0.7 0.7 0.51.3 1.5

2.0 2.30.3 0.3 0.4

0.70.9

0.60.6

0.3

0.2

0.4 0.3

0.51.2 0.6

0.5

0.7 0.6

0.3

0.6

FY09 FY10 FY11 FY12E FY13E FY14E FY15E

Mid-income Premium end Luxury end Commercial

Successful monetization of

the back-end loaded FY12

launch pipeline could be a

key trigger

RHSRHS


1218 July 2011

We estimate commercial and retail assets will contribute INR2.7b rental income by FY13

(c) Growing commercial portfolio ensures steady boost in annuity income

Prestige's annuity assets of ~3msf (2.5msf of commercial and ~0.4msf of retail) generatedrental income of ~INR1.5b as on FY11. The company also has two operating hotel projectsyielding ~INR315m in annual rentals (Prestige's share).

We expect Prestige’s annuity assets to grow strongly over 2-4 years with several annuityassets starting operations. We estimate rental income from its commercial and retail projects(excluding hotel properties and sub-leasing income) will jump from INR1.5b in FY11 toINR2.1b in FY12 and INR2.7b in FY13. However with strong construction expenditureplanned in annuity projects (~INR3.5b-4b in FY12), which require upfront heavy investmentand have back-ended cash flow, the annuity vertical is unlikely to generate significant freecash flow in the near term. The company gets 16-20% rental yield from its annuity projects,which is expected to improve steadily with traction in new completion, anticipated overthe next 3-4 years.

2.5 2.5

3.23.6

3.9

4.8

0.4 0.4 0.5 0.7 1.01.6

5.4

3.6

2.7

2.01.51.4

FY10 FY11 FY12 FY13 FY14 FY15

Commercial Lease (msf) Retail Lease (msf) Rental (INR b)


Key projects likely to commence rentals in FY12Projects Type Lease PEPL's share Status Expected annual

area (msf) (%) rental (INR m)

Cessna Business Park - B6 Commercial 0.35 60.0 Delivered in FY11, 113

ORR, Bangalore Cisco campus, leased out

Cessna Business Park - B5 Commercial 0.35 60.0 Expected delivery in FY12, 113

ORR, Bangalore Cisco campus, leased out

Exora Business Park Phase 1 Commercial 0.7 32.3 Delivered in FY11, leased out, 103

ORR, Bangalore fit-out work on

Vijaya Retail & Office space Retail & Commercial 1.03 50.0 Delivery in FY12, 394

Chennai partly leased (~.3msf)

Forum Value Mall Hotel 168 keys 35% economic Delivery in FY12 60

Whitefield, Bangalore interest


Rental income from annuity

projects will grow to

INR2.7b by FY13


1318 July 2011

3.0 3.98.3 10.8 13.5

16.6

2.72.5

4.4

0.92.30.7

FY05 FY06 FY07 FY08 FY09 FY10 FY11

Project level cash flow to address capex need for annuity projects

Prestige will generate meaningful medium term project level cash flow from sales ofresidential and commercial projects and growth in rental income. A favorable RE outlookin South India cities is likely to boost absorption of its projects, while its execution capabilityand ramping-up plan in delivery will ensure timely monetization. However, due to its heavyinclination towards annuity projects and strong near-term capex plans, we don't expectPrestige to generate free cash flow over the next couple of years.

Cash flow from project monetization (INR b)

FY12E FY13E FY14E

Residential 9.4 11.6 14.6

Mid-income 3.0 2.9 4.7

Premium end 4.1 5.4 5.0

Luxury end 2.4 3.3 4.9

Commercial (Sale) 3.6 3.6 3.6

Commercial (Lease) 1.5 1.8 2.1

Retail 0.5 0.9 1.4

Hotel 0.3 0.5 1.6

Others 0.9 1.3 1.7

Total cash inflow 16.3 19.6 25.0

Construction cost 10.7 13.7 15.4

Operating cost 1.1 1.4 2.5

Net project-level cash flow 4.6 4.5 7.1


Track record offers execution comfort, ensures on-time monetization

Over the past 25 years Prestige has built some of Bangalore's largest integrateddevelopments and identifiable landmark developments such as Prestige Shantiniketan,UB City and Forum Mall. Prestige's execution capability can be attributed to its(1) Strong management, rich industry experience and reputation of timely delivery,(2) Qualified project execution team,(3) Constant integration of operations by developing in-house capabilities in construction

management, property management and interior design, which helps to maintain betterquality control and on-time delivery,

(4) Flexibility in leveraging external expertise due to its relationship with reputed architects,(RSP India, CPG Consultant), contractors (B L Kashyap, Simplex, JMC, L&T, NCCL)and interior designers.

Prestige's significantly improved delivery over the past five years (msf)


Project level cash flow is

strong but capex needs for

annuity projects will dent

free cash flow in the

near term

Prestige, which has a strong

execution ramp-up, expects

momentum to continue


1418 July 2011

Since inception Prestige delivered 157 projects, aggregating 44msf of developable area.However, Prestige had robust traction in execution over the past 6-7 years during which itdelivered ~30msf of the 44msf; and in FY11, it delivered 16.6msf. The management indicatedPrestige would maintain its execution momentum with average construction of 10-12msfa year and guided for delivery of ~6msf in FY12. We believe Prestige's execution excellenceoffers comfort to its customers and ascertains steady, timely cash inflow.

Integration strategy to improve execution control

Prestige's sharp focus on developing in-house capabilities will introduce better qualitycontrol and execution management. It acquired 75% in Team United, a South India-based construction company, with a

view to developing project construction capability. This construction arm is handling afew ongoing projects such as Southridge, Palladium and a part of White Meadows.

Prestige has an in-house Property Management and Services (PMS) arm (1,619employees), which deals with all aspects of property management for its deliveredprojects, including safety and security, cleaning, maintenance, landscaping and generalfacilities management. It also has an in-house interior designing service arm to assistwith highly customized offerings.

The company has ~14mf of assets under management. We expect that with strongexecution/delivery, it will bring ~30msf of assets under management over the next 2-3 years.

Prestige is likely to post ~25% CAGR in PMS income over the next three years


We believe Prestige's development of in-house capability is its key differentiator, fromwhich it will benefit in several ways: It will (1) lower dependence on third parties,(2) ensure better quality control, (3) make for efficient project planning and cost managementand (4) generate a parallel source of revenue.

1420

2632

38

2.1

1.7

1.3

1.00.8

FY11 FY12E FY13E FY14E FY15E

Asset under management (msf) Estimated revenue (INR b)

In-house capability building

aids control over execution

Prestige's execution

excellence offers comfort to

its customers and ascertains

steady, timely cash inflow


1518 July 2011

Revival of commercial vertical to boost annuity income

Over the past 12 months Bangalore has been in the forefront of commercial

recovery, driven by momentum in corporate expansion in the IT/ITES sector.

Prestige is well placed to be a key beneficiary of the commercial uptrend

with (1) 2.5msf of rent-yielding and ~3.4msf of upcoming projects and (2) a

strong relationship with growing MNC/domestic client base.

We believe Prestige’s JV with CRIDF, an associate of Capital Malls Asia, will

allow it to expand in the retail vertical, as well.

We estimate annuity projects in the commercial and retail segment will witness

a strong upward trend from INR1.5b in FY11 to INR2.7b in FY13.

Bangalore to be in the forefront of commercial recovery

We expect Bangalore city to lead recovery of the commercial vertical. While fresh supplyof office space has been limited to CBD areas, Bangalore's secondary business districtssuch as Outer Ring Road (ORR), Inner Ring Road and Bannerghatta Road have emergedas the most attractive commercial micro-markets in India due to their (a) infrastructure,(b) connectivity, (c) clientele like Infosys, Oracle Corporation and IBM and educationalinstitutions such as the Indian Institute of Management and (d) relatively low rentals.These places absorbed an average of ~5msf a year over 2007-10 and command thehighest occupancy rates.

In 2010, there was steady traction in Bangalore's commercial leasing mainly due to controlledsupply and robust interest from occupiers in the suburban and peripheral ORR micromarkets, which accounted for ~40% of absorption over the past six months. Despite thehighest operational commercial space (~60msf) in India, Bengaluru's overall vacancy levelwas 15-16% (among the lowest in India). While peripheral micro markets and areas likeWhitefield had vacancy rates of about 35% due to recent space addition, vacancy rates inCBD and off-CBD locations such as ORR fell sharply to 5-8%. Rentals in the CBD andoff-CBD and suburban micro-markets already appreciated moderately due to sustaineddemand for Grade A office space and minimal vacancy in first-generation buildings. Weexpect leasing momentum to gain steadily due to strong demand from the IT/ITES sectorand with several corporates seeking consolidation.

DTZ's outlook on Bengalore office market

Since 1QCY09, absorption of commercial space increased over seven successivequarters, indicating growing demand in Bangalore's office market.

In 2010 absorption was 8.1msf (v/s 4.5msf in 2009, mainly due to stronger demandfrom the IT/ITES sector. Micro-markets such Whitefield garnered ~40% of supply.

Overall vacancy in the city was ~16% (v/s 19% lowest among key cities) . The consolidation of ORR as the city's most preferred office destination resulted in

this PBD sub-market reporting low vacancy levels of 4%. New supply in 2010 was low at 4.4msf with markets continuing to realign to changing

demand. The scheduled new supply for 2011 is 7.2msf but demand for space islikely to be higher.

Almost all micro-markets in Bangalore appear to be on course for strong recovery.Locations such as Whitefield, whose rental recovery is lagging, are likely to seemarginal price increases during the latter half of 2011.

Moderate supply addition,

low vacancy rates and

steady demand in key micro

markets makes Bangalore an

attractive play on a

commercial recovery

Rentals will strengthen by

late 2011


1618 July 2011

Steady demand for office space in Bangalore Low vacancy augurs well for rental uptick (CY11 forecast)

Strong demand and moderate supply to boost rentals over DTZ Outlook: Bangalore to outperform in rental growthCY11-13 in Bangalore among key Asian cities (%) over 2011-15

Traction in the IT/ITES sector a key driver of positive sentiment

Revival in the IT sector and hiring plans by IT majors are likely to boost demand forcommercial space and housing units in South Indian cities, where the IT/ITES sectorscontribute over 60% of demand for office space. With the IT industry's anticipated16-18% growth over the next three years, we estimate IT majors will implement expansionand recruitment plans. This will propel demand for commercial space and boost theresidential segment.

Southern cities have higher IT/ITES-driven RE demand (%) Hiring projection for IT majors ('000)

Source: Industry/MOSL

10.5 10.08.0

6.5 6.3

1.8 1.8 1.8 1.5

-0.8

Ban

galo

re

Sin

gapo

re

Bei

jing

Hon

gK

ong

Pun

e

Che

ngdu

She

nzhe

n

Ban

gkok

Tok

yo

Kua

laLa

mpu

r

5878

92107114

136

161

187

160

191

228

257

108

133

159

190

FY10 FY11 FY12 FY13

HCLT Infosys TCS Wipro

62 62 65 63

4027

15

25

2015

27

5512

Ban

galo

re

Che

nnai

Hyd

erab

ad

Pun

e

Mum

bai

NC

R

Kol

kata

IT Sector Services

1.6 1.75 2.25 2.4 2

2021

232525

1QCY10 2QCY10 3QCY10 4QCY10 1QCY11

Absorption (msf) Vacancy (%)

13 1411

46

12

5

15

10395

8075

62

85

110

62

2006 2007 2008 2009 2010 2011E 2012E 2013E

Supply(msf) Prime off ice rent (INR/sf/month)

Kolkata

Mumbai

Hyderabad

NCR

Chennai

Pune

Bangalore

0

25

50

75

100

0% 10% 20% 30% 40%Vacancy rate (%)

Sto

ck (

msf

)

Source: DTZ/JLLM/MOSL


1718 July 2011

Prestige to be a key beneficiary of the commercial uptrend

Prestige will benefit from the potential upswing in the commercial/retail verticals due to its(1) portfolio of rent-yielding assets (~3msf yielding INR1.5b), (2) projects that are likely togo operational over 2-4 years and (3) a wide client base continuously augmenting theorder book. We estimate the delivery timeline of its annuity assets under construction issmartly aligned to a possible upswing of the commercial RE market between FY12 andFY15. Therefore Prestige is likely to benefit from a pricing uptick or faster-than-expectedresponse to commercial projects. We estimate the annuity projects in the commercial andretail segments will witness an uptrend from INR1.5b in FY11 to INR2.1b in FY12 andINR2.7b in FY13.

Growth in rent-yielding assets… …will boost annuity income (INR b)


1.08 1.0 1.5 1.8 2.13.00.4 0.4

0.61.0

1.5

2.5

0.3 0.30.3

0.5

1.6

2.6

0.5

0.3 0.50.5

0.5

0.6

FY10 FY11 FY12E FY13E FY14E FY15E

Commercial Retail Hotel Sublease

Operational annuity assets account for 19% of GAVProjects Type Lease area PEPL's share Annual rental GAV/share

(msf) (msf) (INR m) (INR)

Prestige Tech Park Commercial 1.6 1.6 660

Cessna Garden Developers Pvt Ltd Commercial 1.1 0.7 330

West Palm Developers Pvt Ltd Commercial 0.3 0.2 60

Prestige Valley View Estates Pvt Ltd Commercial 0.0 0.0 6

ICBI India Pvt Ltd Commercial 0.0 0.0 25

Total commercial 3.1 2.5 1,081 38.9

Forum Mall Retail 0.3 0.2 250 8.3

Forum Value Mall Retail 0.3 0.1 60 1.9

UB City Retail Retail 0.0 0.0 85 3.0

Total Retail 0.7 0.4 395 13.2

Angsana Resort Hotel 0.2 0.1 80 1.5

Oakwood Service Apartments Hotel 0.2 0.1 235 8.3

Total Hotel 0.4 0.2 315 9.8

Grand Total 4.2 3.1 1,791 61.3


2.5 2.5

3.23.6

3.9

4.8

1.0 1.60.4 0.4 0.5 0.7

1,033

147 147184

325

854


Commercial (msf) Retail (msf) Hotel (Room)


1818 July 2011

Strong, established client relationships

Prestige's client base is a key differentiating aspect in the success of its projects. Itestablished and nurtured relationships with marquee and growing MNC/domestic clients,for whom it undertook development. Its clients represent an opportunity for it to undertakemore of their projects in future. Prestige's clients include:(1) Cisco Systems: Prestige tied up with Cisco for its India expansion plan and to develop

the largest campus outside the US of ~4.5msf at Cessna Business Park. It has deliveredsix out of 14 buildings of ~1.8msf and is undertaking the construction of the remaining~2.5msf on which it will build blocks B7-B11. The operational blocks will contribute ~INR283m of rental income.

(2) Reliance Industries: Prestige developed two projects for the company between2003 and 2007 with leasable area of 0.2msf.

(3) Oracle: Prestige also completed five projects for Oracle between 2002 and 2007with development area of 0.9msf.

(4) The company developed office space for reputed MNCs such as JP Morgan (0.4msf)and Nokia (0.5msf).

Prestige's execution capability and product quality have been crucial factors in its credentialswith clients. A growing client base provides it with opportunities for a strong order book intheir upcoming commercial projects and to create a robust prospective buyer segment forresidential projects. A large number of clients also minimizes Prestige's dependence on asingle group of clients.

JV with CRIDF offers capability building opportunity in the retail vertical

Prestige's joint venture with CRIDF, an associate of Capital Malls Asia aims to developsix retail projects with developable area of 5.6msf and leasable area of 3.4msf (Prestige'sshare 1.2msf) in key South India cities. Capital Malls is one of the largest listed "pure-play" shopping mall owners, developers and managers in Asia by property value of assets,geographic reach and in terms of number of malls and cities. CRIDF invested INR3.6b inthe JV for 50% stake.

The company also holds (a) ~0.38msf of space for retail projects (~INR0.4b in annualrent) and (b) ~2.2msf (Prestige's share 0.7msf) of space in upcoming malls in Bangaloreand Chennai. Prestige's strategy to retain ownership and maintenance control of most ofits retail projects ensures a well balanced tenant mix. For some of its existing malls (suchas Forum Mall, Koramangala), it entered into a revenue sharing agreement, which rendersstrong upside potential from booming consumer growth.

Prestige's retail portfolio with CRIDFProject Location PEPL Lease PEPL's effective

Share (%) Area (msf) Area (msf) Status

Forum Value Mall Bangalore 35 0.3 0.10 Completed

Forum Sujana Mall Hyderabad 25 0.9 0.21 Ongoing, delivery by 1HFY13

Forum Mangalore Mall Mangalore 35 0.5 0.17 Ongoing, delivery by 1HFY13

Forum Thompson Mall Kochi 24 0.8 0.20 Under development, last leg of approval

Forum Mysore Mall Mysore 51 0.5 0.23 Forthcoming, approvals received

Forum Graphite Whitefield, Bangalore 51 0.5 0.25 Forthcoming, approvals to come

Total 3.4 1.2


Prestige's strong

relationships with a growing

client base bodes well for

leasing momentum

Prestige to benefit in the

long term from expertise in

the retail vertical


1918 July 2011

We believe the growth of organized retail in most Indian cities will be driven by (a) anincrease in disposable income, (b) rising employment opportunities, (c) a change in theperception of branded products, (d) the entry of international players and (e) the availabilityof relatively cheaper finance. Prestige's association with CapitaMalls, an internationallyreputed brand, will help Prestige strengthen and expand in the retail vertical, which accountsfor 19% of Prestige's GAV.

Association with reputed operating partners in hospitality projects

Prestige has a strong partnership with internationally acclaimed brands such as Marriott,Starwood and Hilton for its hospitality business. While it completed two projects in Bangalore(Prestige Oakwood in UB City and Oasis, Angsana in Whitefield), five projects (four inBangalore and one in Kochi) are being developed and likely to add more than 1100 keysover 3-5 years. The company mainly operates under a 60% gross operating profit (GOP)model and we expect this vertical to contribute annual revenue of INR0.3b-0.5b overFY11-13.

Prestige's hospitality portfolioProjects Number Prestige's Operating Steady state Delivery

Location of rooms share (%) partner revenue (INR m) Status

Oakwood Premiere UB City 177 57 Oakwood 235 Operational

Oasis/Angsana spa Whitefield 79 60 Prestige Leisure Resort 79 Operational

Aloft Cessna BP ORR 202 60 Starwood Asia Pac 180 FY13-14

Hilton Hotel Ulsoor 285 100 Hilton 700 FY13-14

Forum Value Mall Whitefield 168 35 60 FY12

Marriott Hotel Nandi hill 307 100 Mariott 380 FY14

Forum Thompson Kochi 200 25 60 FY15

1,418 1,694


Scale-up in

hospitality vertical to

commence after FY13


2018 July 2011

18% revenue CAGR, 49% net profit CAGR over FY11-13

A strong project pipeline and an improving RE outlook for southern cities augur well forPrestige's financial performance. We expect Prestige to post revenue of 18% CAGR,from INR15.4b in FY11 to INR21.6b in FY13. The increase will be led mainly by contributionfrom residential projects, leased and sub-leased commercial projects and retail and hospitalityprojects.(1) Development projects: While Prestige's Shantiniketan project has been the key

revenue driver over last couple of years, we expect meaningful contribution from its(a) other mid income and premium-end residential projects such as Neptune Courtyard,Oasis and White Meadows, (b) luxury-end projects such as Golfshire, Kingfisher Towerand Hermitage and strata-sales of commercial properties such as Prestige Polygon.We expect the division to post revenue CAGR of 25% over FY11-13.

(2) Commercial leasing projects: Contribution is expected from its (a) commercialprojects like Cessna Business Park and Prestige Technology Park, (b) upcoming projectssuch as Exora Business Park and (c) sub-leased rentals and from property maintenanceincome. This division is expected to post revenue of 32% CAGR over FY11-13.

(3) Retail and hospitality projects: Revenue is expected from leased rental projectssuch as (a) retail projects like Forum and its mall in Chennai and (b) hospitality projectslike Oakwood and Oasis.

Revenue of 18% CAGR over FY11-13


Multiple revenue streams render down-cycle resilience

Prestige's diverse revenue streams follow a well balanced business model across REverticals. While steady annuity income offers a cushion in a sluggish sales environment, itspresence in diverse segments minimizes its dependence on a single asset class. Thus,multiple sources of revenue insulate Prestige from the inherent cyclicality of the RE sector.

(1) Diverse product segments: Prestige has diversified across almost all RE verticalsincluding residential (apartments, villas, plotted developments and integrated townships),commercial (corporate office blocks, built-to-suit facilities, technology parks, campusesand SEZs), hospitality (hotels, resorts and serviced accommodation) and retail(multiplexes and shopping complexes).

4.2 9.7 10.2 15.4 18.3 21.6

9.01818

51

10

131

(8)

14

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Revenue (INR b) Grow th rate (%)

Project Shantiniketan was the key revenue

contributor over the past couple of years

Neptune Courtyard, White

Meadows, Golfshire and

Kingfisher Tower will be

key revenue drivers in

FY12 and FY13

Revenue contribution from

the Kingfisher project to

start in FY13


2118 July 2011

Revenue contribution from different verticals (%)FY10 FY11 FY12E FY13E FY14E FY15E

Residential 57 53 53 55 63 62

Mid-income & premium 52 43 44 28 36 43

Luxury end 5 10 9 27 27 19

Commercial (Sale) 24 26 26 22 12 8

Commercial (Lease) 8 8 8 8 7 8

Retail 4 3 3 4 5 7

Hotel 2 2 2 2 6 7

Other services 5 8 8 8 7 8

Total 100 100 100 100 100 100


(2) Balanced business models: Prestige maintained a balanced mix of revenuecontribution from the sale of projects (mainly for residential and commercialdevelopments) and the lease of assets (mainly for commercial and retail developments).Its leased projects render steady annuity income, which counter balances lumpy revenuefrom projects under the sale model. We expect Prestige's annuity income, whichcomprises income from (1) the lease of commercial/retail properties (2) hotel propertiesand (3) other allied services such as property management to grow from INR2.1bcurrently to INR3.7b in FY13.

Growing annuity income provides resilience to a down-cycle (%)


Over FY10-11, 80-84% of Prestige's income came from the sale of residential andcommercial properties while annuity income from commercial and retail leasing, propertymanagement and hospitality projects contributed 16-20%. We expect the company tocontinue to maintain a growth in annuity income contribution in FY12 and FY13.

Diverse products lead to

diverse revenue streams and

greater balance in revenue

We expect revenue

contribution from annuity

projects to remain steady

0%

25%

50%

75%

100%


Annuity income Non-recurring income


2218 July 2011

(3) Expanding post-sales service offerings: Prestige offers property managementservices, sub-leasing and fit-out services, project and construction management services,interior design and mall management and facilities management services. The propertymanagement vertical got Prestige recurring income of ~INR0.8b (FY10) and ~INR1b(FY11) from is 14msf assets (80 projects) under management. We expect Prestige tobring ~30msf of assets under management over the next 2-3 years, generating recurringannual income of ~INR1.3b by FY13, with 18-20% operating margin.

Traction in delivery to drive property management revenueFY09 FY10 FY11 FY12E FY13E FY14E FY15E

Asset (msf) 14.0 14.0 14.0 20.0 26.0 32.0 38.0

Addition - - 6.0 6.0 6.0 6.0 5.0

Residential 9.1 13.0 16.9 20.8 24.7

Commercial 4.9 7.0 9.1 11.2 13.3

Income

Residential (INR/sf/month) 2.5 2.7 2.8 3.0 3.1

Commercial (INR/sf/month) 6 6.3 6.6 6.9 7.3

Revenue 506 788 843.2 950 1,297 1,677 2,090

From new residential 421 575 743 926

From new comemrcial 529 722 934 1,164

EBITDA 101 158 169 190 259 335 418


Margin expansion to drive earnings growth over FY11-13

Historically, Prestige posted subdued EBITDA margins (an average margin of 22% overthe past five years) mainly due to (1) a large contribution from its low-margin initial phasesof mid-income project Prestige Shantiniketan and (2) a JDA business model in whichPrestige gets a share of revenue in lieu of the whole construction. However, going forward,we expect a sharp uptick in operating margin due to (a) increasing contribution from itspremium and luxury commercial and residential projects and (b) improving realizations inthe mid-income segment. We expect Prestige's EBITDA margins to jump from 24.2% inFY11 (21.8% in FY10) to 28% in FY12 and 32.9% in FY13.

EBITDA margin to increase with contribution from high-end projects


We expect Prestige to post net profit of 49% CAGR from INR1.7b in FY11 to INR3.7b inFY13 and net margin to improve from 11% in FY11 to 17.4% in FY13, which is attributablemainly to a strong boost in operating margins.

2.6 2.23.7

5.1

7.121.8

28.8

32.9

28.0

24.2

FY09 FY10 FY11 FY12E FY13E

EBITDA (INR b) EBITDA Margin (%) Contribution from

Kingfisher Tower

Prestige benefits from

property management

services, sub-leasing and

fit-out services

Lower revenue contribution

from Shantiniketan and

premium segment sales will

improve margins


2318 July 2011

We expect Prestige to post net profit CAGR of 49% over FY11-13


Not concerned about net gearing of INR11.5b and net DER(x) of 0.5x

Prestige's net debt was INR11.5b in March 2011, implying net DER(x) of 0.5x. Theaverage borrowing cost was 13.8%. However, we believe Prestige is comfortably placedin liquidity because: (a) consolidated debt comprises ~INR2b due to consolidation fromsubsidiaries, and excluding partners' share, Prestige's effective net debt would be INR9.9b,and (b) almost ~47% of PEPL's debt is securitized through lease rental discounting fromits existing rent yielding assets and ~26% is addressed by receivable discounting loansfrom its projects under sale-model. Therefore, we expect the company to service its debtobligations comfortably.

Prestige's Debt Profile (INR b)

Gross Opening Balance (Pre-IPO) 17.7

Net loan repaid 3.0

Secured loan 14.7

Capex loan (Hotel) 0.7

Project debt (residential and commerical) 3.2

Rental securitization 7.0

Receivable discounting loan 3.8

Unsecured loan 0.5

Gross debt 15.2

Cash balance 3.7

Net debt 11.5

Standalone net debt 7.0

PEPL’s share of loans to subsidiaries 2.8

Effective net debt 9.9

Net worth 20.5

Net DER (x) 0.5


0.81.5 1.7

2.6

3.78.6

17.2

14.5

10.8

14.4

FY09 FY10 FY11 FY12E FY13E

Net Profit (INR b) Net Margin (%)

Debt is comfortable with a

strong cushion from annuity

income-supported lease

rental discounting loans


2418 July 2011

Prestige to continue with moderate leverage

Prestige's business model has high exposure to annuity projects in which the companytypically retains the assets on its books and hence the monetization is back-ended. Suchprojects require considerable debt funding during construction. Therefore, Prestige is unlikelyto reduce its debt significantly in the near term. While the company plans to repay ~INR5.5bin FY12 and INR4b in FY13, we expect it to raise fresh loans to refinance the constructionof its annuity projects. Based on management interaction, we expect the company tomaintain net DER(x) of 0.4-0.5x over FY12-13, and its debt servicing capability is likely toimprove with interest coverage ratio increasing from 2.2x in FY10 to 4x in FY13.

We expect Prestige to maintain net DER(x) of 0.4-0.5x over FY12-13


Key headwinds

High dependence on the Bangalore market: Almost 75% of Prestige's land bank is inBangalore city, contributing 80% of its GAV. While Bangalore plays a key role for Prestige,the demand for real estate in this city is derived mainly from the IT/ITES sectors, whichcontribute ~62% of commercial and an even higher proportion of residential demand.Thus, any sluggishness in the IT sector could put significant pressure on its sale volume,realization/lease rental and the inherent valuation of the projects.

City and vertical wise contribution (INR/share)Product Bangalore Chennai Kochi Hyderabad Mysore Mangalore Total

Residential 35 1 2 1 - - 38

Commercial-sale 8 3 - - 0 - 11

Commercial-lease 24 1 0 - - - 25

Retail 8 6 1 2 1 1 19

Hotel 7 - 0 - - - 7

Total 80 11 3 3 2 1 100

*Excluding PMS and land bank value Source: Company/MOSL

JV/JDA agreements with third parties entail potential risks: Prestige entered intojoint ventures/joint development arrangements (JDA) for 65% of its developable land.This model has several positives like (a) access to city-centric land parcels and (b) mitigatingthe risk of upfront investments. However, it also caps gains during an economic upswing,since the company gets only a part of the upside. On the other hand, since the companybears the entire construction cost, risk-related to a rise in construction costs would impactthe company more than its peers that adopt the land bank model. Therefore, the company

16.09.1

11.1

16.015.2 15.2

0.40.50.5

1.9

1.61.6

2.4 3.2 2.2 2.5 3.2 4.0

FY08 FY09 FY10 FY11 FY12E FY13E

Gross Debt (INR b) Net DER (x) Interest coverage ratio (x)

We expect Prestige to

maintain net DER(x) of

0.4-0.5x over FY12-13

High dependence on the IT/

ITES sector and on the

Bangalore market could be

a risk for Prestige


2518 July 2011

may not be an out-performer during a boom in the RE market. Additionally, under the JDAmodel, developers need to consider their partners' consent for every major decision, whichinvolves operational challenges. However, we believe (a) Prestige's superior executionreputation and (b) multiple JDAs with the same partners such as Khoday and the UBgroup would mitigate risk of conflict. Also once the area sharing is agreed along withbusiness plan, the company typically takes the power of attorney from the land owner todeal with the project for approval, construction, sales, handing over and registration of theproperty to the prospective buyers

High exposure to annuity assets keeps Prestige asset heavy: While Prestige has acomfortable leverage position, we believe a high proportion of annuity assets (commercial,retail and hotel) will limit its ability to reduce debt. Unlike the residential vertical, whichcould follow a self-financing model, its annuity projects require higher debt financing duringthe construction phase.

Approval delay and macro concerns could delay monetization: Although the steadinessof the Bangalore market is a huge comfort factor, we believe a slower approval processcould impact its launch plan negatively. With lack of launches in 1QFY12, we expectmuch of its 15msf of launch to be back-ended with a risk of delay in cash flow. Similarly,repeated rate hikes could impact sales volumes, especially in the premium segments, whichhas lower resilience to macro-concerns. Given the expectation that projects like Golfshire,Kingfisher Tower, White Meadows and Oasis will contribute significantly to Prestige'scash flow, sluggishness in these projects would be a downside risk.

High capex needs from

annuity assets limit

Prestige's ability to

reduce debt


2618 July 2011

Vertical-wise NAV analysis (INR/share) City-wise GAV analysis


Mangalore1%

Mysore2%

Hyderabad3%Kochi

3%

Chennai11%

Bangalore80%

Valuation and view

We estimate Prestige's one year forward NAV at INR195, based on the NPV method ofvaluing its land bank. Prestige has commanded a better average RoE of 15% over thepast four years (v/s ~11% for the coverage universe). It trades at 1.5x FY13E BV ofINR81/share, 11x FY13E EPS of INR11.3 and 36% discount to NAV. We believe (a)momentum in IT/ITES demand growth and rental uptick, (b) on-time monetization andexecution of flagship projects, and (c) acquisition of new turnkey projects would be keytrigger for the stock. We initiate coverage with a Buy and a target price of INR175.

We estimate Prestige's one-year forward NAV at INR195Particulars INR m INR/share % GAV % NAV

Residential 38,675 118 37 61

Commercial-sale 11,137 34 11 17

Commercial-lease 25,407 77 24 40

Retail 20,187 62 19 32

Hotel 4,303 13 4 7

Project management 3,674 11 3 6

Land bank (483 acres) 2,300 7 2 4

Gross Asset Value 105,683 322 100 166

Less: Debt 11,496 35 11 18

Less: Other Op Exp 7,398 23 7 12

Less:Tax 22,933 70 22 36

Less: Land cost pending 500 2 0 1

Net Asset Value 63,856 195 60 100


NAV calculation: Key assumptions

1. NAV estimates factor in development plans that will be executed over 6-7 years;2. 5% CAGR in RE prices across cities and verticals (residential, commercial and retail);3. 4% CAGR in construction costs for all verticals;4. Steady occupancy rates of 90% in commercial and 65% in the hospitality segment;5. WACC of 14% and cap rate of 10.5%;6. Land bank of 483acres valued at cost.

While Prestige's residential and commercial projects under the sale model contribute ~37%and 11% of its Gross Asset Value (GAV) respectively, its annuity assets render strongsupport with ~47% contribution to GAV. Bangalore RE market, which forms 75% ofPrestige's developable area, constitutes ~80% of its GAV. Chennai accounts for ~11% ofGAV with 13% of its development potential.

1952

7023357111362

77

34118

Res

iden

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2718 July 2011

Existing portfolio protects Prestige from downside risk

Our NAV estimate suggests Prestige has a meaningful valuation cushion from its ongoingresidential/commercial projects and rent-yielding annuity assets. We estimate its

(a) ongoing projects (in which Prestige has sold >25% or ready stock), and(b) existing annuity portfolio of ~3msf and two hotel projects; account for ~INR108/

share (~55% of its NAV of INR195/share), mitigating any large downside risk. Webelieve at the current market price of INR125/share, Prestige is well placed tocapture an upside potential emerging from (a) monetization of its pipeline launchesand forthcoming projects and (b) the start of rentals from its under-constructionannuity assets.

Existing projects valued at INR108/share


We expect the following key triggers for the stock:

(1) Momentum in IT growth and volume/pricing uptick: We expect improvement inthe IT/ITES sector hiring and salary growth to have strong direct and indirect positiveimpact on demand outlook of the Bangalore market with traction in commercial leasingvelocity and residential demand. While transaction volume has been steady in thismarket, the scope of better realization (pricing and rental appreciation) could be positivefor Prestige's new launches.

(2) Faster monetization, timely execution of flagship projects: While strong responseto new launches in the mid-income segment will be a critical factor, faster executionof flagship projects such as Golfshire (~INR18b), Kingfisher Tower (~INR7.5b) andWhite Meadows (~INR12b) would be a huge trigger for Prestige, since the projectstogether account for ~16% of its GAV. The company has sold a major portion of theseprojects and therefore, faster completion could propel huge cash flow visibility andimprove the saleability of later phases or newer projects.

(3) Acquisition of new turnkey projects: Prestige is acquiring new land across keycities. Its strong brand establishment with existing JDA/JV partners could help thecompany to be part of a development plan in various other city-centric premium locations,which would be a huge value accretion for the company.

652

29

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Cash flow with higher

certainty renders a cushion

at INR108/share

Faster monetization of high

value premium projects and

traction in the IT/ITES

segment will be key near-

term catalysts


2818 July 2011

Company background

Prestige Estates Projects Ltd has been operating in the RE industry over the past 24years, during which it delivered ~157 projects of ~44msf of developable area across variousRE segments. The company has developed some of Bangalore’s largest integrateddevelopments and identifiable landmarks like Prestige Shantiniketan, UB City, and one ofBangalore's most successful malls, Forum.

Over the years, Prestige developed a strong relationship with reputed strategic and financialpartners such as CapitaLand (for retail projects), Oakwood, Marriott, Starwood and Hilton(for hospitality projects), and Red Fort Capital (as an SPV-level financial partner). InOctober 2010, Prestige raised ~INR12b through a public issue of ~66m shares (issueprice of INR183). The management said the key objectives of the issue were: (1) to fundconstruction of key ongoing and planned residential and commercial projects, and (2) torepay debt of INR2.8b.

Prestige has received several awards for its dominance in Bangalore and execution trackrecord. The awards includea) Best Real Estate Developer in India by Euromoney Magazine, 2005;b) Awards for three of its projects at the FIABCI;c) Crisil DA1 rating in recognition of quality and delivery of projects.

Prestige's key developments

Shantiniketan, Whitefield, Bangalore (14.5msf)The mixed-development project in Whitefield (Bangalore) spans ~14.5msf of developablearea. The project was launched in 2005 and is one of the most sought after integrateddevelopment projects in Bangalore. While delivery of the last leg of the residential andcommercial phase in going on, the company commenced construction of its retail projectsas well.a) Residential (8.3msf, ~3,000units, 95% sold) - delivery commenced;b) Commercial (5.3msf, >80% sold) - ~4.6msf completed;c) Retail developments (1.1msf, five-screen multiplex and convention centre, hotel) -

construction commenced.

Shantiniketan, Whitefield, Bangalore (Residential) (Commercial) : Key tenants are Sonus, Alcon, Huwai, Octagon


2918 July 2011

Golfshire (Villas) Nandi Hills, Bangalore (~2msf, 100% share)This is a 280 acre project with 225 super-luxurious residential villas in Nandi Hills positionedfor marquee buyers including top notch corporate personalities. It includes a 307-keyMarriott hotel, 18-hole golf course, convention center, club house and lake. The companyhas sold ~50 units in phase-I of 100 villas (expected completion in FY12-13).

Golfshire (villas) Nandi Hills, Bangalore

Kingfisher Tower, Vittal Mallya Road, Bangalore (0.75msf, 45% share)This ultra-luxury proposed development with the UB group will include a 34 storeyedtower and ~80 units. The company has sold ~80% of the projects on an invitation basis.The construction is yet to start.

White Meadows, Whitefield (~2msf, 79% share)Combination of villa (70units) and sky apartment (270 units), the project is ~40% sold.Construction of the project is underway and the expected delivery date is December 2013.

Cessna Business Park, Sarjapur (ORR), Bangalore(4.5msf, 60% share)This project comprises Cisco's largest campus outside the US with 14 blocks, of which sixblocks have been delivered (1.8 msf).

Cessna Business Park, Sarjapur (ORR), Bangalore Prestige Tech Park, Bangalore


3018 July 2011

Exora Business Park, ORR Bangalore (~3msf, 32.5% share)Phase I of this project provides 0.7msf of office space, delivered to key tenants such as JPMorgan. Phase II is under construction and expected completion is March 2013.

The Forum, Koramangala, Bangalore (0.7msf, 68% share)This is a shopping mall of 0.35msf of retail space, with an 11-screen multiplex (PVR). Theproject, completed in 2004, has average daily footfalls of 30,000-40,000 and 50,000-60,000on weekends. PVR Cinemas, Westside and Landmark are anchor tenants.

The Collection, UB City, Bangalore (0.2msf, 45% share)A super luxury mall on UB City premises with international brands like Louis Vuitton andDunhill.

Oakwood Premiere, UB City, Bangalore (0.2msf, 45% share)Luxury hotel with 177 rooms has property management partner Oakwood and facilitiessuch as a banquet hall, specialty restaurants, gymnasium and a swimming pool.

JP Morgan Office, Prestige Tech Park, Bangalore Exora Business Park, Sarjapur (ORR), Bangalore

The Collection, UB City, Bangalore Oakwood Premiere, UB City, Bangalore


3118 July 2011

Management background

Prestige's promoters have a track record of over 25 years in the Bangalore RE market,indicating their depth of understanding of customer behavior and market dynamics.

Irfan Razack, CMD: A visionary, RE icon and driving force behind Prestige. Has beenthe President of Bangalore Commercial Association (BCA), CREDAI, Karnataka as wellas a special invitee to the southern regional council of the Confederation of Indian Industries(CII). He also attended a course by the United Nations University International's LeadershipAcademy (UNU/ILA) in Jordan. He established Prestige in 1986 and has been theManaging Director of the Company since 1997. He has overall experience of 37 years inthe retail and RE industries. He was declared Real Estate Professional of the Year at theReal Estate Excellence Awards, 2008. Besides accolades bestowed on him over the years,in 2010, he was awarded Entrepreneur Extraordinaire award by the Builders Associationof India and Confederation of Real Estate Developers Association of India.

Rezwan Razack, Joint Managing Director: A founding member, he has been the JointManaging Director of the company since 1997. He has over 35 years' experience in theretail and RE industries. He oversees the construction and engineering activities of thecompany and plays a pivotal role in the decision making process.

Venkat K. Narayana, CFO: He has experience of over 11 years and has been associatedwith Prestige over the past eight years. He is responsible for the finance functions of thecompany, including corporate tax, planning and corporate affairs. He was instrumental inintroducing private equity investments into the group and for entering into key strategicjoint ventures.

Swaroop Anish, Senior Vice President (Business Development): He joined Prestigein November 1996 and has experience of over 21 years in the RE industry. He is responsiblefor business development, sales and marketing of the company.

V Gopal, Senior Vice President (Project & Planning): He has experience of over 26years and is head of the engineering, construction and planning division of the company.He is in charge of project execution and has been associated with Prestige over the past19 years.

Nayeem Noor, Senior Vice President (Public Relations): He joined Prestige in 1992and has experience of more than 35 years. He is head of the department of public relationsand liaison and is an interface between the company, government departments and statutoryauthorities.

T Arvind Pai, Senior Vice President (Legal): He joined Prestige in 1999 and has over20 years' experience. He looks after the legal affairs of the company, supports its landacquisition and development activities and is responsible for the management of its generalcontracting and legal processes and documentation.

Asha Vasan, Vice President (Marketing & Operations): She joined Prestige in 1992and has over 18 years' experience. She is responsible for marketing and sales of officeand commercial space and some of the premium residential projects.

Prestige's core management

has a strong industry

expertise and long

association with the

company


3218 July 2011

Financials and valuation

Income Statement (INR Million)

Y/E March 2009 2010 2011 2012E 2013E

Net Sales 8,981 10,244 15,431 18,239 21,571

Change (%) -7.8 14.1 50.6 18.2 18.3

Construction expenses 5,680 7,033 10,479 11,547 12,620

Staff Cost 314 490 548 630 725

Selling & Adminstrative exp 461 398 485 666 948

EBITDA 2,589 2,236 3,739 5,114 7,104

% of Net Sales 28.8 21.8 24.2 28.0 32.9

Depreciation 398 491 606 709 909

Interest 689 783 1,234 1,365 1,556

Other Income 180 616 682 783 747

PBT 1,682 1,579 2,581 3,823 5,386

Tax 323 283 914 1,185 1,670

Rate (%) 19.2 17.9 35.4 31.0 31.0

Adjusted PAT 773 1,475 1,667 2,638 3,717

Change (%) 17.3 90.8 13.0 58.3 40.9

Balance Sheet (INR Million)

Y/E March 2009 2010 2011 2012E 2013E

Share Capital 125 2,625 3,281 3,281 3,281

Reserves 6,060 5,013 17,862 20,047 23,311

Net Worth 6,185 7,638 21,143 23,328 26,592

Loans 11,125 16,015 15,175 15,163 15,955

Capital Employed 19,615 26,374 38,558 40,731 44,787

Gross Fixed Assets 10,679 11,307 13,163 15,186 17,884

Less: Depreciation 1,542 2,065 2,971 3,680 4,589

Net Fixed Assets 9,138 9,242 10,192 11,506 13,295

Capital WIP 1,309 2,054 3,975 5,894 8,002

Curr. Assets 19,473 23,194 33,663 34,033 35,845

Inventory 9,786 12,506 14,334 15,422 16,534

Debtors 2,490 3,627 9,347 7,296 6,471

Cash & Bank Balance 1,410 1,729 3,679 4,019 4,212

Loans & Advances 5,788 5,332 6,303 7,296 8,628

Current Liab. & Prov. 12,481 10,821 12,951 14,381 16,034

Net Current Assets 6,991 12,373 20,712 19,652 19,812

Application of Funds 19,612 26,374 38,558 40,731 44,787

E: MOSL Estimates

Neptune Courtyard,

White Meadows, Golfshire

and Kingfisher Tower

will be key revenue drivers

in FY12 and FY13

Lower revenue contribution

from Shantiniketan and

growing contribution from

premium segment sales will

improve margins

We expect Prestige to incur

~INR4b/4.8b in FY12/13

respectively towards

on construction of rental

assets and hotel projects


3318 July 2011

Financials and valuation

Ratios (INR Million)

Y/E March 2009 2010 2011 2012E 2013E

Basic (INR)

Adjusted EPS 2.4 4.5 5.1 8.0 11.3

Growth (%) 17.3 90.8 13.0 58.3 40.9

Cash EPS 4.4 6.8 6.9 10.2 14.1

Book Value 23.6 29.1 64.4 71.1 81.1

DPS 0.0 0.0 1.2 1.2 1.2

Payout (incl. Div. Tax.) 0.0 0.0 27.2 17.2 12.2

Valuation (x)

P/E 24.6 15.5 11.0

Cash P/E 18.0 12.3 8.9

EV/EBITDA 14.0 10.2 7.4

EV/Sales 3.4 2.9 2.4

Price/Book Value 1.9 1.8 1.5

Dividend Yield (%) 1.0 1.0 1.0

Profitability Ratios (%)

RoE 13.4 18.8 11.6 11.9 14.9

RoCE 13.1 10.3 11.7 13.1 16.2

Leverage Ratio

Debt/Equity (x) 1.6 1.9 0.5 0.5 0.4

Cash Flows Statement (INR Million)

Y/E March 2009 2010 2011 2012E 2013E

PBT before Extraordinary Items 1,031 1,579 2,581 3,823 5,386

Add : Depreciation 398 491 606 709 909

Interest 689 783 1,234 1,365 1,556

Less : Direct Taxes Paid 323 283 914 1,185 1,670

(Inc)/Dec in WC 2,237 4,521 6,485 -1,401 -32

CF from Operations -443 -1,913 -3,348 6,113 6,214

(Inc)/Dec in FA -1,285 -1,340 -3,477 -3,943 -4,805

(Pur)/Sale of Investments 583 -484 -1,070 0 0

CF from Investments -703 -1,824 -4,547 -3,943 -4,805

(Inc)/Dec in Networth 1,170 1,424 13,188 1,791 2,870

(Inc)/Dec in Debt 1,988 4,890 -840 -12 792

Less : Interest Paid 689 783 1,234 1,365 1,556

Dividend Paid 773 1,475 1,273 2,244 3,323

CF from Fin. Activity 1,696 4,057 9,840 -1,830 -1,217

Inc/Dec of Cash 508 320 1,951 340 192

Add: Beginning Balance 903 1,410 1,729 3,679 4,019

Closing Balance 1,411 1,729 3,680 4,019 4,212

E: MOSL Estimates

Change in working capital

with receivable from

FY11 pre-sales to boost

operating cash flow

Net cash flow is likely to be

muted due to the need for

capex in annuity projects

We expect Prestige to

maintain net DER(x) of

0.4-0.5x over FY12-13


3418 July 2011

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Disclosure of Interest Statement Prestige Estate Projects1. Analyst ownership of the stock No2. Group/Directors ownership of the stock No3. Broking relationship with company covered No4. Investment Banking relationship with company covered No

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Documents

Southern Pride - breport.myiris.combreport.myiris.com/MOTOSW/PREESTAP_20110718.pdf · Prestige Estate Projects BSE SENSEX S&P CNX CMP: INR125 TP: INR175 Buy 18,507 5,567 Southern