News Analysis

Brigade Enterprises: Healthy Q4 but tough times ahead

Bavadharini KS BL Research Bureau | Updated on June 19, 2020 Published on June 19, 2020

Since the outbreak of the pandemic, the real-estate sector — both commercial and residential segments — has taken a hard hit. But despite the challenging market conditions, Brigade Enterprises, a Bengaluru-based realty developer, has delivered healthy performance in the latest March quarter. Brigade reported new sales growth of 10 per cent y-o-y to about 1.1 million square feet.

While the company was able to maintain new sales growth momentum in both residential and office space segment, its hospitality segment (contributing about 12 per cent to revenue) was impacted severely due to travel restrictions. In the coming quarters, disruption in the hotel business and other commercial business activities will continue, impacting the revenue.

Brigade reported a loss of ₹11 crore for Q4 FY20, mostly due to an impairment loss of ₹20 crore recognised for the company’s hospitality and leasing segment due to lesser than anticipated occupancy.

According to the company’s management, Brigade was able to significantly reduce its overheads however, given the subdued revenue growth, the operating margin came down to 22 per cent in the recent March quarter compared to 29 per cent in same period last year.

Tough times ahead

Amid pay cuts and job losses, recovery of residential demand could be challenging. This segment is its mainstay, contributing nearly 80 per cent of the revenue. Future cash flows could also come under pressure as the company has more than two-third of the on-going project area in the residential segment. According to the management, the company witnessed a drop in collections in April, but it expects collection to improve soon.

Also, the commercial and hospitality segments, which contribute 14 and 12 per cent, respectively, to the overall revenue of Brigade, could face headwinds going ahead. For one, with many companies’ employees working from home, it could lead to significant slowdown in office space demand. It could also lead to deferment of leasing decisions by companies for the next few months. The company has about 1.15 million sq ft to be leased in its operational commercial properties.

Similarly, rental pre-commitments from corporates are likely to be impacted for the next 1-2 quarters as they figure out a strategy for future (work-from-home). For instance, in Brigade Tech Gardens, one of the company’s commercial properties, there was cancellation of about 2 lakh sq ft during the March quarter.

It had already offered 50 per cent rent waiver for its retail clients for the lockdown period. The minimum guaranteed rent is also reduced for some clients until September. According to Brigade’s management, pressure on revenue, particularly in the commercial segment, could continue till September. The company has several on-going commercial projects, about 5.15 million sq ft.

Also, the delivery timeline of some of the projects could be impacted by at least three months.

Some positives

Despite the slowdown in the real estate market, Brigade had achieved an average realisation of ₹5,580 per sq ft, a growth of 14 per cent in the recent March quarter compared to the same period last year. This showcases the pricing power and strong market presence of the company. Most of its projects are located in key areas, which bodes well for growth prospects when the demand recovers. Further, the company was able to launch four new projects of 2.46 million sq ft (three in residential and one commercial) during the March quarter of FY20.

Given the prime location of its office properties, it was able to collect 92 per cent of its rent between March and May. While the short term looks challenging, Brigade has a strong balance sheet with comfortable debt levels and can withstand the headwinds going ahead.

Published on June 19, 2020
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