Brigade Enterprises Limited: Pick-up of Business Activities and Economic Recovery Should Support Growth

Summary

---

• Focus on digital marketing, online booking of apartments and collections yielded results in difficult times when India was under lockdown.
• Strong balance sheet is an added advantage and Brigade is in a good position to manage operations. Business obligations should be met by maintaining adequate liquidity.
• Given the company’s brand equity, business diversity and performance track record, performance should improve as and when situation normalises.

---

Brigade Enterprises Limited is one of India’s leading property developers, having over 3 decades of experience in building positive experiences for all stakeholders. The company is among few developers enjoying reputation of developing Grade A commercial properties. Since inception, the company has completed over 250 buildings of 70 million sq. ft of developed space in residential, offices, retail and hospitality sectors across 7 cities.

Growth Enablers of Brigade Enterprises Limited

• Reduction in Rates Should Provide Support: India saw its economy getting a hit from COVID-19 impact, making mandatory for central bank to step in. Rate reduction in India announced by central bank should provide needed liquidity and can also help real estate sector. Though most of damage has been restricted by adequate liquidity, reduction in rates should act as a primary growth enabler. Central bank also allowed banks to restructure loans in impacted sectors. With a rebound in economy, real estate sector should also see its business getting back on track.
• Pre-COVID Business Levels Should be Attained Soon: Post unlock, construction was resumed at 30% labour strength. It has been reached at 50%. The company expects this to reach 100% by end of 3Q21. Residential business has seen some green shoots, with pick-up in enquiries and sales. As and when economy recovers, business in malls and hotels should also follow.
• Management of Expenses Should Support: Because of lockdown imposed due to COVID-19, construction activity saw an impact, while real estate segment saw lower revenue recognition. Due to lockdown, travel restrictions and weak consumer sentiment, there was underperformance in malls and hotels. Impact was also seen on collections and was, to some extent, mitigated by management of capital expenditure and reduction in overheads. Total expenses in 1Q21 were INR30,062 lakhs while in preceding quarter, expenses were INR63,761 lakhs. Management of expenses should continue given uncertainty regarding COVID-19 pandemic. With business operations coming back on track, normalcy should be achieved soon.
• Recovery Visible in Business Segments: In real estate, sales volume for 1Q21 was 0.4 million sft, while sales value was INR2,499 million. There is a strong pipeline of ongoing projects of 16.24 million sft. Brigade has, in this segment, intensified strategy of online sales which should pay-off well in coming times. The company saw 95% of rental collection in its office portfolio, and office leasing enquiries have now been resumed. Gradual revival should be seen in retail segment. With lifting of lockdown, some activity has been seen in hospitality space. The company’s hotels are operational, while continued efforts to achieve operational breakeven are being made.
• Strong FY20 Ensures Sound Track Record: During FY20, Brigade Enterprises launched multiple projects across residential and commercial. The company saw sales of 4.3 million square foot, an increase of 44% year-over-year. Out of this, 3.9 msf was for residential including three projects in affordable housing segment, while commercial projects saw sales of 0.4 msf.
• Industry Dynamics Should Provide Much Needed Support: Growth of real estate sector is complemented by growth in corporate environment and demand for office space and urban and semi-urban accommodations. Indian real estate sector should reach market size of USD1 trillion by 2030 from USD120 billion in 2017 and contribute 13% to GDP by 2025. Retail, hospitality, and commercial real estate have seen significant growth, offering much-needed infrastructure for growing needs. Office space has been driven mostly by growth in ITeS/IT, BFSI, consulting and manufacturing sectors. In 2019, demand of office sector with commercial leasing reached 69.4 msf.
• Real Estate Saw Huge Investments: Real estate sector in India has seen high growth as demand for office and residential spaces increased. Real estate saw ~INR43,780 crore (USD6.26 billion) investments in 2019. Retail segment saw PE investment of ~USD1 billion in 2019. Institutional investment in sector was USD712 million during quarter to March 2020. Real estate attracted ~USD14 billion of investments from foreign PE between 2015 and Q32019.

 

Favourable Valuations is An Added Advantage

 

Brigade Enterprises Limited compounded its revenue at ~6.68% over FY16-20, while it compounded its EBITDA at ~8.05%. The company should be able to compound its revenues over FY16-21E at ~7.14%. Growth should predominantly be supported by upbeat consumer sentiments, opening of economy, and normalisation of business activities. Over FY16-21E, Brigade Enterprises is capable of compounding its EBITDA at ~8.43%. At current market price of INR180, stock is presently trading at ~28.12x of FY20 EPS, while sectoral average is ~32.12x. 

 

In 1Q21, for residential business, realization per sft has gone up by 14% on year-over-year basis. During this quarter, stability was seen in leasing segment for offices with over 95% collections. Post a strict lockdown, all hotels are now operational, and the company should see momentum getting picked up as normalisation occurs. Brigade Enterprises decided to restrict cash outflows and deferred all non-essential capital expenditure and renovation. During 1Q21, cost saving measures have been taken like reduction of manpower costs of ~40% and reduction of ~70% in other overheads. Over FY16-20, Brigade Enterprises compounded its dividend at ~10.67%, exhibiting a relentless focus on providing returns to shareholders. At sectoral average of ~32.12x, target price comes out to be INR217.90, exhibiting ~21.06% growth from current trading price.

---

Exclusivity:

This article is exclusive to investoguru.

Stock Disclosures:

The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.