Stock Call. Can Brigade Enterprises weather the storm?

Though lockdown restrictions have been eased, construction activity and demand in the property market continue to remain somewhat sluggish. However, according to ANAROCK, a property consultant, Mumbai, Delhi and Bengaluru witnessed a rebound in sales and project launches to the extent of 60 per cent of the pre-Covid levels during the September quarter (CY2020).

Companies focussed on these markets may thus be in a better position to weather the slowdown than the rest.

Brigade Enterprises is one such company that has not only a strong market presence in Bengaluru but also a comfortable debt position. Affordability of the company’s property (mostly in the middle-income segment) along with prevailing low-interest rates are positives.

In the June quarter, the revenue fell nearly 71 per cent y-o-y to ₹20.33 crore; it reported a loss of ₹63 crore during the same period.

This was mainly due to stoppage of construction activities, resulting in slower collections.

Further, the company was able to collect 98 per cent of its office rental income in the June quarter, though not enough to offset the weak revenue from its other segments.

The company also has healthy launches planned in the coming quarters, both in residential and commercial segments.

Thanks to these reasons, the stock has run up 49 per cent since the March lows. This rally, combined with the poor financial performance in the March and June quarters, has pushed up the valuation to 26 times its trailing 12-month earnings, compared with its three-year average earnings (19 times).

Existing investors can continue to hold the stock.

Steady pipeline of launches

In the residential segment, the demand for affordable and mid-income housing is better, especially after easing of restrictions in Karnataka by the State government. This trend is likely to continue with the festival season around the corner. Since most of its ongoing and upcoming projects are in these segments, this gives the company better revenue visibility. Prime location of the projects bodes well, too.

Overall, during the June quarter, the company witnessed 0.4 million sq ft of new bookings, which is about 40 per cent of its usual pre-sales, according to the management. It derives about 57 per cent of its revenue from the residential segment.

Over the next few quarters, the company has planned to launch 2.1 million sq ft of residential projects in Hyderabad, Bengaluru and Chennai. The company has been able to command better pricing even during turbulent market conditions.

In the June quarter, the average pricing in the Bengaluru market was around ₹4,980 per sq ft, while for Brigade, the average realisation was around ₹5,956 per sq ft. The company’s realisation increased 14 per cent y-o-y during this period.

The company derives about 38 per cent of its revenue from lease rentals (office and malls) and about 5 per cent from hospitality (hotel). It launched 1.3 million sq ft in the commercial segment during the June quarter.

It has plans to launch about 0.5 million sq ft in the coming quarters in the commercial segment.

Risks

As the maximum contribution to revenues is from the residential segment, if the recovery in residential demand is slower, Brigade’s future cash flows could also come under pressure as 70 per cent of the residential projects are under construction. Brigade could also face delay in completion of projects as construction activities are only at 50 per cent of normal capacity.

Also, the commercial and hospitality segments could continue to face challenges. For one, office space could face demand slowdown with many employees working from home.

The company has about 1.16 million sq ft to be leased in its operational commercial properties, which accounts for about 24 per cent of the total leaseable area.

Similarly, rental pre-commitments from corporate firms are yet to take shape as companies figure a strategy for the future.

Brigade witnessed lease cancellation of about 0.3 million sq ft during the March quarter; 0.2 million were taken up by existing tenants.

For its retail segment, the company has already offered 50 per cent rent waiver for its retail clients for the lockdown period.

The minimum guaranteed rent was also reduced for some clients until September.

Despite malls reopening, the footfalls continue to be low. The pressure on revenue, particularly in the commercial segment, could continue in the near-term.

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