The last one year has been tough for many realty stocks. The BSE Realty index has fallen about 9 percent in the last one year on concerns over rate hikes and slowing economic growth.
However, the situation for the real estate sector is likely to improve as housing demand momentum remains intact as interest rates are in-line with expectations.
Companies with strong balance sheets and large market shares may reap the benefits of strong momentum in housing demand.
Brokerage firm Motilal Oswal Financial Services believes shares of Prestige Estates Projects can jump as much as 63 percent from the current levels.
The brokerage firm has a buy call on the stock with a target price of ₹675.
Shares of Prestige Estates Projects have been under pressure in the last one year. They hit their 52-week high of ₹526.60 on April 11, 2022. As of February 21 closing, they are 21 percent down from their 52-week high level.
Sales momentum for Prestige Estates Projects is healthy and the company aims to double the pre-booking by the financial year 2025-26.
"Prestige Estates Projects reported sales bookings of ₹9,000 crore in nine months of the financial year 2022-23 (9MFY23) and expects to end the year with pre-sales of over ₹12,000 crore on the back of 10msf of the new project launches in Q4FY23," said Motilal Oswal Financial Services.
"Further, by FY26, the company targets to double new bookings in the residential segment to ₹25,000 crore, with a contribution of ₹15,000 crore coming from non-Bengaluru markets. While it already has a presence in Mumbai and Hyderabad, it is scouting for new opportunities in NCR and Pune," the brokerage firm added.
Motilal Oswal highlighted that the company expects to spend ₹2,500-3,000 crore annually on new project additions in order to achieve its pre-sales target of ₹25,000 crore.
Prestige Estates Projects has ₹2,000 crore of capital from the HDFC platform, which will be utilized for investment requirements over the next 12 months. It is also in talks with Kotak to set up a similar fund, Motilal Oswal pointed out.
Despite an aggressive capital expenditure (Capex) plan of the company, its balance sheet may remain healthy.
"The company currently has net debt of ₹4,200 crore and although the absolute amount of incremental debt required to fund the Capex appears large, the consistent rise in the company’s net worth will ensure that the net debt-to-equity ratio will peak out at 0.6 times," Motilal Oswal said.
"It is also important to note that (1) ₹20,000 crore in surplus cash highlighted earlier is only from the residential segment and does not include any income from its operational annuity and PMS segments; (2) this surplus cash will be generated only from the current pipeline and as new bookings scale up, the incremental inflows will further enhance the company’s internal accruals. We believe that Prestige Estates Projects’ net debt could peak at ₹6,000-8,000 crore," said Motilal Oswal.
Motilal Oswal is not concerned about the stress on Prestige Estates Projects’ balance sheet.
The brokerage firm said that as the company's residential segment further scales up, the cash flow generation will be sufficient to take care of business development spending and commercial Capex requirements without straining the balance sheet.
The brokerage said the current valuation of the stock does not fully factor in the increase in the company's rental income.
"Once the commercial portfolio fully stabilizes over the next five to six years, it will generate rental income of ₹3,200 crore, which is right now not fully implied in the current valuation," said Motilal Oswal.
According to a MintGenie poll, an average of 18 analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.