Stock Fundamentals

Brigade Enterprises: Standing tall

Bavadharini KS | Updated on June 10, 2018 Published on June 10, 2018

The company is set to gain from the improving residential market and projects nearing completion

In the past one year, structural reforms and weak consumer sentiments in the real estate sector have resulted in a slowdown in project launches and increase in unsold inventories, particularly in the residential segment.

However, with the effects of RERA (Real Estate Regulatory Authority) and GST (Goods and Service Tax) tapering down, along with a decline in unsold inventories, project launches are picking up. In this regard, Bengaluru-based realty player, Brigade Enterprises, is well prepared to gain from the improving residential market conditions, with launches lined up and multiple projects nearing completion.

The company has a well-diversified revenue mix. It develops and sells both residential and commercial property (such as office spaces). It is also into the hospitality business (hotels) and construction of malls. This has helped the company stay afloat even during turbulent market conditions.

It has a strong pipeline in the commercial segment and the expansion in hospitality segment would boost its growth, going ahead.

Brigade’s land bank is in favourable locations, which bodes well for the company’s realisations while selling or leasing out residential or office spaces.

Investors with a two-three year perspective can buy this stock. At ₹233, the stock trades at a reasonable 15.7 times its likely per share earnings for FY-20. The stock has taken a beating due to the headwinds in the residential segment last year, but the sales momentum is expected to be robust in the coming quarters. Also, the foray into the affordable segment is expected to help the company’s earnings, going ahead.

Though the company has raised debt in recent months, the increase is mostly in the commercial and hospitality segments where the management is confident of stable earnings. Brigade has a fairly comfortable debt position.



Rental income to grow

Brigade Enterprises is one of the leading realty players in Bengaluru. The lease/office rental segment contributes about 12 per cent of the company’s total revenue.

Between FY-13 and FY-18, this segment witnessed compound annual revenue growth rate of about 24 per cent. The office space had seen sustained demand, despite the slowdown in the real estate sector. In the recent March quarter, the leasing activity increased by about 25 per cent Y-o-Y, and Bengaluru has remained a key driver of office leasing in India, according to the latest advisory firm, CBRE (India) research report.

For Brigade, the construction of office buildings with realisable value of ₹800 crore over the next few years has started. According to the management, the company would launch office spaces in the coming quarters. Currently, it has about six million square feet under construction. Across its projects — World Trade Centre (Kochi), Brigade Opus, such as Brigade International Financial Centre in GIFT City and Brookefield project — the company has finalised leasing agreements of about 5 lakh sq ft.

The company is expected to complete one million square feet of Tech Garden, Brookefield, Bengaluru by FY-19 (Phase I) and about 20 per cent of the space has already been leased.

Going ahead, the company would generate stable revenues from this segment, given the favourable demand conditions for office space from sectors such as BFSI, e-commerce, IT and research and consulting. Another 15 per cent of its revenue is derived from the lucrative hospitality business. In this segment too, the company has launches in the offing.

The Four Points by Sheraton in Kochi is expected to become operational in Q3 FY-19. Revenue from this segment grew at 17 per cent annually from FY-13 to FY-18. Recently, the hospitality segment (Holiday Inn) was demerged into a separate entity, paving the way for monetising the business.

Strong residential pipeline

A chunk (nearly 73 per cent) of the revenue comes from the residential segment of the company. With the markets adapting to RERA, the unsold inventory levels are coming down in the real estate sector. The company has plans to launch projects this year, particularly in the affordable housing segment, as volumes are robust in the space and project completion is quicker.

For FY-19, the company has planned to launch 12 million sq ft across residential, commercial strata sale, commercial leasing and hospitality segments. This includes the expected launches in the affordable housing space (about 5 million sq ft) also.

The average pricing is likely to be between ₹5,000 and ₹6,000 per sq ft. This will boost the company’s earnings, as affordable houses (units costing less than ₹65 lakh) are likely to be sold faster than those in the premium segment.

Some of the projects such as Brigade Buena Vista, Brigade Bricklane, Parkside Mysore and Brigade Oak Tree Place are to be launched in the Q2 of FY-19. Other projects in the pipeline are likely to be launched in Q3 and Q4 of FY-19.

The company’s prospects remain bright with the launch of affordable houses not only in the Bengaluru market but also in cities such as Hyderabad.

The company has acquired 13 acres of land close to Banjara Hills, Hyderabad, (claimed to be at walking distance from the Metro station) of which 2 million sq ft is for affordable housing. It is expected to be priced at around ₹5,000 per sq ft. The favourable location of the properties also aids pricing.

Stable financials

For FY-18, the revenue and profit of the company declined 6 per cent and 10 per cent respectively. This fall could be on the back of delay in RERA approvals and the overall realty sector slowdown during the year. The company’s debt-equity ratio is reasonably healthy, at 0.89 times.

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