Prestige Estates IPO Review and Analysis – Valuation Too High for a Bad Company (Low Margins,High Debt,Stagnant Sales) in a Bad Sector (Real Estate)

Prestige Estates is an Indian Real Estate Company with its operations focused in the southern part of India mainly in the techie city of Bangalore.The company is one on the long list of Realty Companies which have been waiting impatiently to raise money from the Stock Markets trying to pay off their debts.It is raising around Rs 1200 crores or $250mm .Oberoi Realty was a decent Realty Stock as far as the Sector goes which managed good subscription numbers in the last week.With “animal spirits”  returning fueled by Bernanke’s Helicopter Policy expect more such shoddy Realty issues to hit the market.Note the Sector is an investor minefield with even well connected Fund Managers not trusting the financial statements published by these companies.With the Indian Stock Market already featuring a wide variety in terms of quality and quantity of Realty Stocks,Prestige Estates brings no difference and on analysis seems easy to avoid.Here are some features to this company

1) Concentration Risk and High Indebtedness – The company has debt of around Rs 2000 crores and most of its business is concentrated in the city of Bangalore.Note the Bangalore Real Estate Markets was one of the worst affected by the 2008 downturn and in the case of another severe global downturn expect the potent mix of high debt and concentrated risk to be lethal.

2) Company got downgraded by Rating Agency CRISIL –  The company which used to get a top notch DA1 rating by CRISIL got downgraded to DA2 after 2008.Though I don’t care a lot for Rating Agencies after the Subprime Meltdown in the West,its a negative point for Prestige Estates

3) Convoluted Maze of Holdings which defies Analysis – The Company and its Subsidiaries own land and other properties through a complex and convulted maze which defies a simple Analysis.There are issues of litigation with land and titles which would prove impossible for any analyst to understand.Not a Warren Buffett kind of investment for sure though it would apply to all Realty Companies in India.The investment bankers have filed 650 pages in the DRHP challenging a simple analysis of the company it seems.Note only this the DRHP lists related party transactions with 53 Group companies

4) The Company has developed 142 projects with area of around 27 million sq feet and is contructing another 33 projects which comprise a mix of residential,commercial and retail projects along with a Land Bank of 250 Acres.Almost all of these compeleted and ongoing projects are being developed in South India

5) Stagnant Sales in last3-4 Years with Low Margins– The Company’s topline has been stagnant over these 3 years at around Rs 900-1100 crore or $200 million with a Net Margin between 8-10%.The Net Profit Margin jumped to 13% in FY10 before falling again in the first quarter of FY11.Note this is considerable less than other Real Estate Companies like DLF and Oberoi.

6) Negative Cash Flows – Despite FY 2010 being one of the best years for the company in terms of margins and sales,it still managed a negative cash flow.This has been a feature of the company that it has managed to generate negative operating cash flow for most of the last 5 years.

7)Valuation Too High – The Company is asking for 3x P/B post IPO and more than 30 P/E which is exorbitant for the kind of fundamentals that the company has.Don’t know on what basis these companies and bankers price their stock since even a 20 P/E would be too high considering the negative factors associated with the company.

Summary

Prestige Estates is another low quality shady highly indebted Realty Company which should be strictly be avoided.It  defies any simple analysis because of its convoluted structure and cross holdings.The Company Sales have been stagnant and Margins Low and it has high concentration risk as well.The Management inspires no confidence at all and is a typical example of the badly managed Real Estate Sector in India.Should be avoided at all costs  by investors.Note 5 of the last 9 IPOs in India in the last  month are giving losses to investors.This promises to be no different given the fundamentals.