Rationale

 The reaffirmed ratings for Prestige Estates Projects Limited (PEPL) factor in the healthy operating performance of its residential segment in FY2024, wherein, on a consolidated basis, the company sold an area of 20.25 million square feet (msf) (higher by 34% YoY) and reported pre-sales and collections of Rs. 21,040 crore (63% YoY growth) and Rs. 11,069 crore (27% YoY growth), respectively. Its pre-sales and collections are expected to improve to Rs. 22,000-22,500 crore and Rs. 14,000-14,500 crore, respectively, in FY2025, primarily driven by adequate committed sales and construction progress for the ongoing projects and a healthy launch pipeline for the upcoming projects. The cash flow adequacy ratio remained healthy at 75% of the balance construction cost of Rs. 20,797 crore and total debt outstanding of Rs. 6,216 crore as on March 31, 2024 (72% as of December 2023) in the residential segment. Consequently, the cash flow from operations (CFO) is estimated to improve. The ratings note the comfortable leverage levels with gross debt/CFO at 2.18 times as on March 31, 2024, similar to previous year levels of 2.19 times, supported by the healthy CFO. While the debt is expected to increase to fund the growth plans, the leverage measured by gross debt/CFO is projected to remain below 3 times in the medium term. The ratings also favourably note the Group’s diversified operation across various segments, including residential, commercial, retail, hospitality and property management (services). The performance of all the key segments remained healthy in FY2024 and is expected to be sustained in FY2025. The revenue from the commercial office leasing increased by 36% YoY in FY2024, while that from the retail segment grew by 248% in FY2024, although on a lower base. The hospitality division reported a 20% YoY revenue growth in FY2024, supported by a higher average room rent (ARR) and occupancy. Further, the ratings draw comfort from the Group’s established operational track record of more than 37 years in the real estate industry, its strong project execution capabilities and the sizeable market share in Bangalore’s residential real estate segment. The ratings, however, are constrained by the exposure to funding and execution risks, given the significant investments in the commercial real estate segment, including large-sized projects in Mumbai and New Delhi. The company has significant plans to expand its ongoing residential portfolio to maintain the growth momentum and strengthen its market presence in the existing as well as new micromarkets. As of March 2024, PEPL had a future project pipeline of ~75 msf, to be launched in FY2025. Further, the company’s expansion to newer geographies exposes it to execution and market risks, as well as risks of any non-performance by joint venture (JV) partners of their obligations. Notwithstanding the healthy sales, the company faces the inherent cyclicality of the real estate and hospitality industries, and vulnerability to external factors. Nonetheless, ICRA draws comfort from PEPL’s track record of project execution and sales in both residential real estate and commercial real estate. PEPL’s consolidated gross debt increased to Rs. 11,462.3 crore as of March 2024 (PY: Rs. 8120 crore) and further, the capex debt is expected to rise in the near to medium term with large-scale expansion plans in the commercial and retail real estate segment. However, the gross debt/CFO are estimated to remain below 3 times in the medium term. ICRA notes that the overall borrowing cost remains on the higher side, given the sizeable proportion of high-cost general corporate debt in the overall consolidated debt profile. The Stable outlook on the long-term rating reflects ICRA’s opinion that PEPL will continue to maintain healthy sales and collection in the residential real estate segment, backed by a strong launch pipeline, resulting in healthy growth in cash flows from operations, liquidity and comfortable leverage metrics. The company is also expected to benefit from its diversified operation across various segments.