Brigade Enterprises: Buy

Pick-up in demand in the commercial and retail space in Bangalore, sound balance-sheet and revenue addition from hotel rental assets are positives.

At a time when investors are worried about leverage, especially in the real estate universe, Brigade Enterprises' sale of its hospital asset to generate cash does appear to be a practical strategy. Boosted by a net gain of Rs 82 crore, Brigade's December quarter sales rose smartly by 137 per cent to Rs 136 crore. Pick-up in commercial and retailing space demand in Bangalore, a sound balance-sheet and revenue addition from hotel rental assets expected before mid-2011 are all positives for this Bangalore-based real estate player. At the current market price of Rs 95, the stock trades at 8.5 times its expected per share earnings for FY-12.

Investors should buy the stock of Brigade Enterprises with a two-three- year perspective as revenues from many of its projects can be expected only after FY-12. The stock can be bought in phases, linked to sharp dips in broad markets. Volatile capital and leasing values as well as any credit crunch with tightening bank norms, however, enhances the risk profile of real-estate companies.

Asset sale

Brigade sold its Columbia Asia Hospital asset in the second quarter of this year, concluding the deal in the December quarter. This acted as a major boost to its revenues. The company has utilised part of this sum to repay about Rs 60 crore of debt, bringing down net debt to Rs 670 crore. The company would also be looking at selling part of its commercial buildings in its Metropolis/Gateway projects and hopes to raise about Rs 300 crore through asset sales by FY-12. While in good times, the company may have typically preferred to retain these assets and lease them, we believe it may be a prudent strategy now to opt for ‘cash in hand' rather than periodic inflows (rentals) that may be subject to market vagaries. The company's present debt-equity ratio of 0.71 can be expected to come down further in a year or so.

Other than sale of existing assets, Brigade managed fresh bookings of 0.4 million sq ft in the December quarter, twice that of the September quarter and the highest in the last eight quarters. However, revenue from these fresh bookings would be felt significantly only in the March quarter. Leasing activity has picked pace with the company leasing an additional 0.3 million sq ft sequentially. Some of its key assets such as the Orion Mall have seen 65 per cent of the space already leased out, even as it is expected to be operational only by the end of the fiscal.

Other commercial properties such as the Summit VII have seen an outright 35 per cent being taken up by Cap Gemini with negotiations underway for the rest. While residential property accounts for higher proportion of total area under execution, we believe the three million sq ft of commercial portfolio being let out could be more value accretive for the company, what with the segment showing clear signs of a pick-up in Bangalore.

Boost to earnings

According to a recent Cushman & Wakefield report, Bangalore emerged as the top destination for commercial and retail space absorption, with the city being the only Tier-I metro to see demand outstripping supply in these segments. The report states that of all the key metros, Bangalore is expected to witness highest demand for office space between 2010 and 2014 of about 42 million sq ft. driven by the recovery in IT/ITeS. Brigade, with a well-established presence in the city, could be a key beneficiary.

Besides the above, rentals from its Sheraton gateway hotel asset will start kicking in a quarter or two from now. This can be expected to provide some near-term boost to consolidated earnings.

The lease assets would be crucial to boosting EBITDA margins for Brigade. While this quarter saw extraordinary profit margins owing to asset sale, an EBITDA margin of 20-25 cent may be sustainable once lease rentals start flowing.

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