Prestige Estates IPO bears the brunt as debt mounts

BANGALORE: Four major broking houses have slammed the ongoing IPO of Prestige Estates, asking investors not to subscribe to it due to high debt levels at the company. HDFC Securities, Sharekhan, Edelweiss and Angel Broking have sent out separate notes warning that Prestige’s debt levels don’t inspire confidence and that the chances of risk are very high.

Bangalore-based Prestige’s IPO opened for subscription on Monday. The company proposes to raise `1,200 crore and has priced its shares in the band of `172-183 per share.

“The company is also valued at a higher level compared to its peers and has a stretched balance sheet. Focus on joint development model also gives a limited scope to improvement in margins,” said Param Desai, analyst with Angel Broking.

The firm says that Prestige has a total debt of `2, 000 crore with a gross debt-equity of 2.6 times. Post-IPO, the company’s debt equity is expected to be one times.

Investors have become increasingly wary of real estate IPOs, making things difficult for companies looking to raise money. Bank funding for real estate projects is not available beyond a point due to restrictions imposed by the Reserve Bank of India. Investors are also worried over rising debt levels at real estate companies and their ability to complete ongoing projects and sell houses at reasonable prices customers.

Prestige largely focuses on the joint development model unlike its peers, Sobha Developers and Puravankara Projects. The company’s operating margin is as low as 21% compared with its peers, who have margins of about 25%.

“There is a concern as the joint development model followed by the company may result in lower EBITDA margins, offsetting any possible gains of premium positioning,” said Aashiesh Agarwaal, analyst with Edelweiss Securities.

Prestige is also valued slightly higher at `172-183 per share. According to Edelweiss Securities,
Prestige’s valuation post-IPO will be `5,790 crore.

“With the joint development model, higher debt-equity ratio and presence of structured instruments/variable rate entities along with minority stakes in many rental projects, the issue offer limited margin of safety,” said Mr Agarwal. Sharekhan says that though the company has execution skill, the valuation is aggressive and the company is expected to trade at price or book value of 2.9-3 times at its lower and upper ends of price band, respectively.
HDFC Securities also holds that the issue seems to be expensive relative to its peers on both P/E and P/BV bases.

Prestige’s earnings per share works out to `4.5 per share on both the lower and upper ends of the price band. The company’s P/E at the offer price band of `172-183 per share is 38.2-40.7 times. In comparison, the P/E of its peers, Sobha Developers, Puravankara Projects, and Brigade Enterprises focused on Bangalore realty market is 26.7 times, 18.7 times and 36 times.