Brigade Enterprises: On solid ground

With interest rates softening and the commercial property segment showing strength, investors can consider buying shares of Bengaluru-based Brigade Enterprises (Brigade). The company develops and sells both residential and commercial property and owns and operates hospitality assets, offices and malls.

The company’s annual revenue and profit growth has averaged 30 per cent and 25 per cent respectively, in the last three years. It has lined up a strong pipeline of residential and commercial project launches as well as expansions in the hospitality segment.

An integrated township developer, the company has a diversified revenue mix from property sale, lease rentals and hospitality. These factors should aid earnings growth.

The stock has run up from ₹77 when we recommended it in May 2014 to ₹132 currently. Even after the increase, the stock trades at about 16 times its 2014-15 earnings,lower than peers such as Prestige Estates Projects and Oberoi Realty (at 22-23 times). Investors can therefore buy shares of Brigade, given the company’s growth potential.

Brigade’s earnings from property sale are expected to be robust on the back of a strong line-up of ongoing and upcoming projects. Residential and commercial property sale forms the mainstay, accounting for 75 per cent of its revenue and 80 per cent of profits.

The company develops gated communities that include homes and commercial space, primarily in Bengaluru. It has also expanded to Mysore, Chennai and Kochi.

The company has ongoing projects with its share totalling 9.1 million sq ft, of which 4.3 million sq ft are yet to be sold. The management expects 30-35 per cent revenue growth in 2015-16 from unrecognised revenue (homes already sold) and new sales. Also, new launches of 7.7 million sq ft are expected this year, with about 5.8 million sq ft of residential space.

Brigade recently purchased 15 acres of land in Perungudi, Chennai, from Kansai Nerolac Paints for ₹550 crore. Its total land bank is about 566 acres in multiple cities, including GIFT City, Gujarat; three-fourth is in Bengaluru. About 50 million sq ft can potentially be developed with the available land bank.

In 2014-15, the company sold 7 per cent more area compared to a year ago. Average sale price was mostly flat, possibly due to lower share of commercial space.

However, in the June 2015 quarter, sale value increased 35 per cent compared with the same period last year, thanks to higher area sold and price improvements.

Rental income growth Brigade earns nearly 15 per cent of its revenue by way of rent from its commercial properties. This includes office space ( World Trade Centre, Bengaluru), retail properties ( Orion mall) and outlets(Solitaire).

Given that leasing has high operating margins — of over 85 per cent — the segment contributes over 30 per cent to operating profits. Vacancies are less than 5 per cent currently.

The office space segment has been strong, especially in Bengaluru, where Brigade owns over 750,000 sq ft of office space. New office properties are set for launch in Bengaluru, Kochi and Gujarat.

The company also owns hotels such as Grand Mercure and Sheraton Gateway in Bengaluru, besides serviced apartments. The segment accounts for about 10 per cent of revenue.

Average room rent and operating profit improved for both the properties, but there was a marginal dip in Grand Mercure’s occupancy levels.

The company has tied up with Holiday Inn Express to construct three-star hotels. It expects about 1,000 rooms to be operational in two to three years, (from 350 rooms now).

Stable financials Brigade’s revenue jumped 80 per cent year-on-year to ₹357 crore in the recent June quarter. This was aided by nearly 30 per cent increase in sale area as well as higher share of commercial property sale.

Operating profit margin remained stable, at about 30 per cent. In 2014-15, revenue increased 38 per cent year-on-year to ₹1,257 crore. Profit grew 30 per cent to ₹115 crore in the same period.

In the June quarter, interest expenses increased 50 per cent year-on-year to ₹44 crore. This was due to the company’s debt increasing to ₹1,281 crore as on June 2015, up from ₹840 crore a year ago. Nearly half the debt is for its leased properties.

Leverage levels are at 0.92 times and the management expects it to remain at about one time in the near future.

Borrowing cost decreased to 11.4 per cent in June quarter 2014-15, down from 11.9 per cent in the previous quarter. This should help reduce finance costs.

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