Brigade Enterprises. Brigade Enterprises: Good times continue

The demand in the real-estate sector started recovering slowly in early 2018. With higher transparency in transactions, correction of prices and improving mechanisms for dispute redressal, buyers’ confidence seems to be slowly coming back in the market.

Though new project launches have picked up, the unsold inventories would take two years to sell. In this context, Bengaluru-based real estate player Brigade Enterprises is in a sweet spot. The company has sold around 12 lakh sq ft during the first half of FY19, an 82 per cent increase compared with the same period last year.

The company has a strong pipeline of residential projects coming up over the next year, which should boost its revenue and profits. It also has presence in commercial segments (office and hospitality). Also, the favourable location of its projects and land banks bode well for the company.

The ongoing volatility in the market has taken a toll on the Brigade stock too. It has declined nearly 28 per cent since the end of April 2018. But this presents an opportunity for long-term investors. Those with a two to three-year perspective can buy this stock. At ₹204, the stock trades at 10 times its likely per share earnings for FY20. This is fairly cheap compared to peers such as Sobha, another Bengaluru-based realty player, that trades at 18 times its likely per share earnings for FY20.

Brigade’s presence in affordable housing projects should also help the company’s earnings. Unlike many companies in the sector, Brigade is financially healthy.

Diversified revenue

Brigade has diversified into the sale of residential and commercial properties, hotels and a few infrastructure projects. The residential segment is the mainstay business for the company, contributing nearly 80 per cent of the revenue. More than two-third of the on-going project area is in residential real estate.

Brigade is able to command good pricing for its properties. The company has an average price realisation of ₹5,600 per sq ft (in the nine months ended December 2018), higher than the average pricing of ₹4,681 per sq ft, in Bengaluru.

This is likely to go up in the future, given the favourable location of the properties. While most projects are in key areas of Bengaluru, the company has also expanded its operations to Mysuru, Chennai and Hyderabad. The entry into affordable housing projects would also help boost sales as these are large volumes projects with quicker project completion. About 40 per cent of the projects launched in FY19 by the company are in the affordable housing segment.

The company also earns about 11 per cent from its rents in commercial properties. During FY19, the company launched commercial properties such as Brigade Senate I and II and Arcade @ Orchards in Bengaluru. Leasing commands high operating margin of over 65 per cent while margins in residential real estate sales are about 23 per cent in the nine months ended December 2018.

About 10 per cent of the company’s revenue comes from hotels. It has launched projects which include Grand Mercure (GIFT City), Four Points by Sheraton (Kochi), Ibis Style (Mysore) and Holiday Inn Express (Bengaluru). The company is able to maintain occupancy levels of nearly 70 per cent or over across most of its hotel businesses.

With residential demand slowly reviving, especially in the Bengaluru market, and commercial market being robust, Brigade is well-positioned in terms of project launches and is poised for growth.

Growth prospects

According to a recent Knight Frank report, the leasing activity in Bengaluru is robust with rentals highest in the past decade. This trend is likely to continue given the demand for offices space outpacing the available supply. The weighted average rentals, due to limited supply, witnessed substantial growth of 17 per cent Y-o-Y in Bengaluru in the second half of 2018, according to the report. Brigade had planned to launch three million sq ft of commercial projects in the second half of FY19.

On the residential side, Brigade planned to launch projects of around 8-9 million sq ft in the second half of FY19 (of which 3.47 million sq ft has been launched in the December quarter). While most of the projects are in Bengaluru, two are in Mysore, two in Chennai and one in Hyderabad. Though there are concerns of liquidity crunch due to NBFC crisis, the company has low exposure to NBFC funding and relies more on banks.

The company also has strong land bank in favourable locations across the South with 76 per cent of developable area dedicated to residential segment, 19 per cent for commercial lease and the rest for hospitality business.

Stable financials

Brigade was able to register sales value growth of 70 per cent Y-o-Y in the nine months ending December 2018 and achieved 0.2 million sq ft of sales during the same period. Since there is a change in accounting method, numbers are not comparable to last year’s revenue and profit. The revenue for the nine months ended December 2018 stood at ₹2,212 crore and profit at ₹208 crore. The debt-to-equity ratio is reasonable at 1:1.

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