New capex to drive Prestige Estates' rental portfolio scale up

The company is expected to be debt free by the end of June quarter

In a weak market, the Prestige Estates stock has been moving up over the past week, gaining about 11 per cent. After the completion of the first phase of the deal with Blackstone, its debt levels have come down to a tenth of previous levels at just under Rs 900 crore. Once the second phase is completed in the June quarter, it is expected to become net debt-free.

From over Rs 1,000 crore, the share of annual rentals accruing to Prestige Estates will come down to Rs 260 crore after the deal. The company has an ambitious plan to scale up its annuity portfolio by over 11 times to Rs 2,800 crore- Rs 3,000 crore over the next four years. The company is looking at investing Rs 12,000 crore over the four-year period to achieve the cash flow.

About a third of rentals are expected to come from projects in the Mumbai market; the company has tied up with DB Realty, which will be the land partner to develop over 10 million sqft across key Mumbai micro-markets, such as Worli, Mahalakshmi, and Bandra Kurla Complex.

In other segments, it plans to grow its residential business. The company is targeting sales to increase from current levels of Rs 4,500-Rs  5,000 crore to Rs 6,000-Rs 7,000 crore over the medium term, aided by launc­hes in the Mumbai and Delhi-NCR markets. The company is looking at keeping the residential segment net debt-free in the medium-to-long term with an overall net debt-to-equity ratio of 0.5 times.

Manish Agrawal of JM Financial believes with a balanced portfolio of annuity and residential assets, the company remains well placed to scale up over the medium term. What can be a source of worry is the slow pace of the pick up in leasing assets and the lack of sustained demand in the residential segment.

Adhidev Chattopadhyay of ICICI Securities believes the Blackstone deal gives the company adequate headroom to take on debt and fund incremental capex, but clarity on phasing of capex investments, especially in Mumbai, is required. An add­itional risk, according to him, is prolonged weakness in office leasing over the medi­um term which may result in subsequent phases of new projects getting delayed.