Prestige Estates

Prestige Estate Projects has entered the capital market on 12^th October 2010, with a public issue of Rs. 1,200 crore, offering equity shares of Rs. 10 each, for which price band has been fixed between Rs. 172 to Rs. 183 per share.

In the current times of stiff IPO pricing by the issuers and BRLMs, one more issue seems to have got added to the list. Infact, this is seen as a negative and alarming trend for the primary market and sensing that, SEBI chief, last month, had warned that I-Bankers are overpricing the IPOs. This has happened for the first time, wherein, chief of capital market regulator has seen to be so vocal in public.

Apart form stiff pricing, issue size of Rs. 1,200 crore, itself is seen quite high, by a developer, which has presence largely in Bangalore, Chennai, Mysore, Cochin, Hyderabad and Mangalore.

This issue can very well get compared with listed peers, Purvankara Projects, Sobha Developers and Brigade Enterprises, who have a similar strong presence in cities, in which this company is operating. We have tabulated the consolidated FY10 financial performance of all these companies, along with their financial worth as on 31^st March 2010.

* Mkt. Cap of company at pre-IPO level is Rs. 4,500 crore, which will rise to Rs. 5,700 crore, post IPO.

However, a realty company needs to be valued based on its land bank which it is capable to develop over a period of time.

Prestige is having total saleable area of 39.46 million sq. feet located at Bangalore, Chennai, Mysore, Cochin, Hyderabad, and Mangalore. In Chennai, its major land parcel is located at Sriperambadur, which is infact an outskirt of Chennai.

As against this, Purvankara has total land bank of 106.80 million sq. feet as stated by the company in its RHP, which went public on 31^st July 2007. Brigade Enterprises had total area of 35.67 million sq. feet, as stated by the company in its RHP, while going public, on 10^th December 2007. Similarly, Sobha Developers, while going public on 23^rd November 2006, was having land reserve of 2,747 acres while land arrangement of 3,373 acres. This land could give an estimated saleable area of 275 million sq. feet of land reserve and about 330 million sq. feet of land arrangement, if calculated with an FAR of about 2.

So, Prestige is seen to be having lower quantity of saleable area as compared to Sobha and Purvankara and almost equal to Brigade. However, location decides the value of the land or saleable area, but looking into the profit margin of Prestige, it does not give any indications of the company enjoying higher realization or higher margin from its projects.

Though the company has given total area of 23.43 million sq. feet, as its ongoing projects, comprising of residential, commercial, hospitality and retail, and accounting for saleable and leasable area, but has not given the total area already sold, out of these. Hence, it is also difficult to take a correct valuation call on the value of ongoing projects.

Now, coming on the objects of the issue, the company had estimated Rs. 622 crore for financing ongoing and under development projects. Rs. 280 crore has been earmarked for repayment of part loans of the company. However, if we see the break up of Rs. 622 crore, Rs. 177 crore will be required in FY12 and Rs. 209 crore will be required in FY13. Why company can't make use of its expected annual cash profit of over Rs. 200 crore from FY12 onwards? Apart from this, the company had a total debt of Rs. 2,019 crore as at 30-06-10 and repayment of just Rs. 280 crore, will still keep the company quite leveraged, considering net worth of Rs. 788 crore, as at 30-06-10 and Rs. 2,000 crore, post IPO. This will also make the company, the most leveraged amongst the listed peers, as given above.

So on post issue basis, the company is looking for market cap of Rs. 5,700 crore and enterprise value of Rs. 7,700 crore, which is far stretched when compared to its listed company peers. This kind of valuation is not given to realty companies having strong presence in Mumbai, where average selling price is ruling between Rs. 10,000 to Rs. 20,000 per sq. feet.

Hence, one can really say that the issuer and BRLM has courage to price the issue so aggressively and only advice which can be given by us is to just avoid it. Better and much cheaper players are available in the listed space.