Prestige stock hits 52-week high on Marriott deal, strong launch pipeline

Increase in debt in September quarter is an overhang

The Prestige Estates stock hit its 52-week high after it signed a deal with Marriott International to build six hotels comprising 1,000 rooms over the next 5-6 years. This will double the hospitality portfolio of Prestige, currently at 1,262 rooms with an annual revenue of Rs 400 crore. 

The management indicated that the reduction in the goods and services tax from 28 per cent to 18 per cent for premium and luxury hotels, lower corporate tax, and regional airport development are helping boost market demand for such hotels. This is the second deal for the company in the month after it announced a 28.9 per cent stake buy in a Mumbai project of DB Realty. 

In addition to the hospitality segment, the company remains confident of hitting its 2019-20 (FY20) guidance of 25-30 per cent sales growth. While sales bookings in the first half of FY20 were 40 per cent of its annual guidance of Rs 5,000-6,000 crore, the company, according to Adhidev Chattopadhyay of ICICI Securities, has a significant number of residential launches lined up from the third quarter of FY20 onwards in the affordable/mid-income housing space, which should drive volumes. 

Sales growth expected in the year is on the back of a robust launch pipeline of 10 million square (sq) feet (ft), compared to 14 million sq. ft launched over the past two years. In addition to Bengaluru, Hyderabad, and Chennai, the company has also ventured into new markets of Mumbai and National Capital Region. 

In the commercial segment (office and retail), the company is expected to achieve revenues of Rs 1,000 crore in the current financial year, compared to Rs 750 crore in 2018-19. Analysts at Spark Capital expect rental income to increase to about Rs 1,200 crore over the next two years, led by addition of 3-4 million sq ft of office (2.5 million sq ft) and retail (0.7 million sq ft) and steady rental hike possibility due to strong commercial market in Bengaluru. 

While there is traction in the residential and commercial segments, the worry for the Street is the leverage situation. Consolidated net debt increased by Rs 350 crore in the July-September quarter to Rs 8,470 crore due to land acquisition in Hyderabad and payments for acquiring balance stakes in group companies. The company expects net debt-to-equity to trend towards 1.4x by March of 2020, from the current 1.86x, as it monetises its current inventory and launches new projects.