Annuity business to see a fresh capex cycle; ‘Add’ retained with TP of Rs 311
PEPL had consolidated net debt of Rs 84.6 bn as of Dec’20 which will now reduce to ~Rs 9 bn (net D/E of 0.3x) post completion of Phase 1 of the transaction.
Prestige Estates Projects’ (PEPL’s) management held an investor call to update on the way forward post completion of Phase 1 of the proposed transaction with the Blackstone Group wherein the company has initially received Rs 74.7 bn in Phase 1 and expects to receive the pending Rs 16.8 bn by the end of Q1FY22 (June’22). PEPL had consolidated net debt of Rs 84.6 bn as of Dec’20 which will now reduce to ~Rs 9 bn (net D/E of 0.3x) post completion of Phase 1 of the transaction.
PEPL will be left with Rs 2.6 bn of annuity income stream post this transaction and as per mgmt, it is targeting to grow annual rental income to Rs 28-30 bn by FY26e through incremental capex of Rs 120 bn over FY22-26e. We retain Add with a SOTP based TP of Rs 311/share. Key risks to our call are a slowdown in residential demand and continued weakness in office leasing.
Completion of deal to significantly bring down debt levels: As per company’s management, the Phase 1 proceeds of Rs 74.6 bn have been utilised to reduce the gross debt in these annuity assets by Rs 45.9 bn. Post completion of Phase 2 of the transaction, PEPL will receive an additional Rs 17 bn which will enable it to become net cash positive by Q1FY22.
What is the way forward? While the company’s estimated net cash position post this deal leaves it with adequate headroom to re-lever its balance sheet over the medium term to fund the incremental capex, we await further clarity on phasing of capex in ongoing/upcoming projects especially in Mumbai before incorporating these projects in our estimates. An additional risk is prolonged weakness in office leasing over the medium term which may result in subsequent phases of ongoing/ upcoming projects being delayed.