Brigade Enterprises Ltd BRIENT) - Moneycontrol.comstatic-news.moneycontrol.com/static-mcnews/2019/04/... · 2019-04-01 · Brigade Enterprises Ltd BRIENT) BUY ... affordable housing,

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

Init

iatin

g C

overage

March 29, 2019

CMP: | 249 Target: | 330 ( 33%) Target Period: 12-18 months

months

Brigade Enterprises Ltd ( BRIENT)

BUY

Upping the ante in lease portfolio…

Brigade Enterprises (BEL), with over three decades of experience in real

estate, is one of the leading property developers in South India primarily in

the Bengaluru market. Currently, its business portfolio comprises real estate

business (50.6 msf), leasing portfolio (8.9 msf) and hospitality business

(1788 keys). We like BEL given its focus on ramping up the leasing portfolio.

We expect its share of lease income to grow at 20.6% CAGR to | 560.1 crore

in FY18-23E. In the residential business, we expect BEL’s sales volume to

grow at a CAGR of 30.8% at 3.5 msf in FY18-21E on the back of a healthy

launch pipeline and more focus towards the affordable housing segment.

Hence, we initiate coverage on Brigade Enterprises with a BUY

recommendation and an NAV based target price of | 330/share.

Surging lease portfolio to provide stable cash flows…

BEL has an operational lease portfolio (five office assets & three retail malls)

with a total leasable area of ~2.6 million square feet (msf). It generated lease

revenues of ~| 225 crore in FY18. Going ahead, the company is looking to

expand its rental portfolio largely through 51: 49 JV with GIC (Tech Garden

- 3.3 msf) & (Chennai WTC Office space – 2.1 msf). Hence, we expect BEL’s

leasing portfolio to expand from 2.6 msf to 8.9 msf (BEL’s share – 6.3 msf)

over next one to two years. With this, we anticipate BEL’s share of lease

income will grow at 20.6% CAGR to | 560.1 crore in FY18-23E.

Real estate sales volume to grow at 30.8% CAGR in FY18-21E

During FY15-18, BEL’s sales volume declined from 2.8 msf to 1.8 msf in the

residential business on the back of a slowdown in the sector and very few

launches. However, BEL recouped its sales volume with the healthy launch

pipeline (so far launched 5.1 msf in FY19E, one of the highest in the last four

years), and focus towards affordable housing. It clocked sales volume of 2.0

msf in 9MFY19. It could close its FY19E sales volume with 2.8 msf with the

launch of its big size project Brigade Serene Utopia. Going ahead, we expect

BEL to sustain its sales momentum. We expect its sales volume to grow at

a CAGR of 30.8% at 3.5 msf in FY18-21E.

Attractively priced considering ramp up in lease portfolio

We initiate coverage on BEL with a target price of | 330/share considering a

sharp ramp up in its leasing portfolio and sustained sales momentum in the

residential business. We value its lease portfolio at | 327/share using NAV

methodology (cap rate: 9% & discount rate: 13-14%). The residential

business contributes | 186 per share (valued ongoing & new launches

aggregating 16.5 msf cash flows at 14% discount rate & land bank at 1x

amount invested).

Key Financial Summary

ss

(| crore) FY17 FY18 FY19E FY20E FY21E

Net Sales 2024.1 1897.2 2905.0 3093.0 2627.9

EBITDA 574.4 554.5 758.5 881.8 882.9

EBITDA Margin(%) 28.4 29.2 26.1 28.5 33.6

Net Profit 167.2 139.2 251.8 239.2 138.4

EPS (|) 12.2 9.7 19.5 19.7 10.8

P/E(x) 19.8 25.1 12.5 12.3 22.4

EV/EBITDA(x) 10.0 11.8 8.9 8.9 8.7

RoE(%) 9.8 5.7 11.4 10.9 5.8

RoCE(%) 10.7 7.8 10.6 10.0 8.6

Source: ICICI Direct Research, Company

Particulars

Market Capitalization (| cr) 3388

52 Week High / Low (|) 309 \ 157

Cash & Investments 382.4

EV 6636

Promoter Holding (%) 46.9

FII Holding (%) 12.6

DII Holding (%) 15.8

Key Highlights

Lease portfolio to expand from 2.6

msf to 8.9 msf in next two to three

years

BEL’s share of lease income to grow

by 20.6% CAGR to | 560.1 crore in

FY18-23E

Sales volume in real estate business

to grow at 30.8% CAGR to 3.5 msf in

FY18-21E

Price Chart

Research Analyst

Deepak Purswani, CFA

[email protected]

Harsh Pathak

[email protected]

0

150

300

450

6,000

8,000

10,000

12,000

Mar-16

Jul-16

Nov-16

Mar-17

Jul-17

Nov-17

Mar-18

Jul-18

Nov-18

Mar-19

Nifty (L.H.S) Price (R.H.S)

ICICI Securities | Retail Research 2

ICICI Direct Research

Initiating Coverage | Brigade Enterprises Ltd

Company Background

With over three decades of operations, Brigade Enterprises (BEL) is a leading

property developer in the South Indian real estate market. Headquartered in

Bengaluru, Karnataka, the company’s businesses are classified into three

segments – real estate (residential & commercial projects sales), lease

rentals (retail & offices) and hospitality. Thus, it has a presence in all domains

of real estate viz. residential, offices, retail, hospitality and education with a

developable land bank of 43.5 msf. While BEL’s residential portfolio includes

projects from all budget ranges, what makes the company interesting is its

focus on affordable housing and significant expansion in Grade-A

commercial portfolio.

Real estate: BEL’s real estate business mainly comprises residential

project sales and a small portion of sales from commercial projects. Its

residential portfolio is a mix of a wide budget range of products viz.

affordable housing, mid-premium, premium, ultra-premium housing,

along with retirement homes. This business portfolio comprises 50.6

msf land bank. BEL’s ongoing projects (including unsold inventory from

completed projects) are at 10.4 msf. This is expected to be developed

and sold over the next four to five years. In FY18, the real estate business

clocked sales volume of 1.57 msf, sales value of | 896 crore. This

business segment contributed 73% to overall revenues in FY18.

Lease assets: BEL has a distinguished reputation of developing Grade-

A commercial properties. Some of its marquee commercial projects

include office assets like The World Trade Center in Bengaluru & Kochi

and retail assets like Orion Mall, Orion East and an upcoming mall –

Orion OMR in Bengaluru. As of FY18, the company had a total leasable

area of 2.4 msf (2.6 msf in 9MFY19) and enjoyed 95.3% leased

occupancy. The segment contributed 15% to overall revenues in FY18

Hospitality: BEL’s hospitality offerings include operational hotels viz.

Sheraton Grand Bengaluru, Grand Mercure, Bengaluru and Mysore,

Holiday Inn Chennai, etc. The segment clocked revenues to the tune of

| 237.1 crore and contributed 12% to overall revenues in in FY18.

Exhibit 1: Timeline

Source: Company, ICICI Direct Research




Exhibit 2: Brigade’s portfolio at a glance





Sector Overview

Overview of Indian commercial real estate

Minimal per capita space in India paves way for improvement ahead

India’s total Grade-A office stock is currently expected at 577 msf. Top

markets like Bengaluru, MMR, Pune and NCR have a combined 397 msf of

Grade-A office stock. While this supply seems encouraging and at par with

world’s top cities like Los Angeles, London, Hong Kong & Shanghai, India’s

office space per capita is 0.4x, which is one of the lowest in the world.

Exhibit 3: Office space supply & per capita office space trend

12.0

10.5

9.7

5.0

2.3

0.4

0

2

4

6

8

10

12

14

0.0

100.0

200.0

300.0

400.0

500.0

600.0

New

York

Los A

ngelo

s

San Fransis

co

Munich

London

Sin

gapore

Sydney

Tokyo

Shanghai

Hong Kong

Beijin

g

Bengalu

ru

Mum

bai (M

MR

)

NCR

Pune

Belg

ium

Hong Kong

Germ

any

US

A

Italy

India

Area Per capita supply

Source: CBRE Research, ICICI Direct Research

Least rental rate in the world despite highest absorption rate

India’s top markets viz. Bengaluru, MMR, Pune and NCR have the highest

office space absorption in the world, with combined absorption at 135.8 msf.

This exceeds the total combined absorption of top 11 global cities (128.4

msf). The Bengaluru market’s office absorption alone exceeds the total

absorption of China’s top markets viz. Shanghai, Beijing and Hong Kong.

Despite robust office space absorption, the Indian office market has least

rental rates in the world.

Exhibit 4: Office space absorption and rental trends

10.0

9.6

9.1

14.6

5.6

6.3

3.1

19.0

28.6 5.4

17.2

56.7

29.1

31.1

18.9

62

36

57

50

148

89

44

108

85

108

120

14

25

15 16

0

20

40

60

80

100

120

140

160

0.0

10.0

20.0

30.0

40.0

50.0

60.0

New

York

Los A

ngelo

s

San Fransis

co

Munich

London

Sin

gapore

Sydney

Tokyo

Shanghai

Hong Kong

Beijin

g

Bengalu

ru

Mum

bai (M

MR

)

NCR

Pune

(m

sf)

Absorption (CY13 to Q1CY18) Rent (as of March 31, 2018)





Office space absorption to exceed supply amid lower vacancy rates

India witnessed robust absorption of Grade-A office space (expected at

~42.1 msf, which could exceed the overall supply that is expected at ~38.9

msf in CY18). Amid strong demand for Grade-A office space, vacancy levels

have fallen ~810 bps from ~23.1% in 2012 to ~15.0% in 2017. The vacancy

rate is forecasted to come down further to 12.0% as of CY19E. Higher

absorption rates, coupled with declining vacancy rates could drive up rental

rates for Grade-A office spaces, going ahead.

Exhibit 5: Office space absorption to exceed supply

32.9

30.7

27.1

39.7

35.1

29.3

38.9

34.9

23%

22%

20%19%

17%

15%

14%

12%

29.5 30.0

30.0 34.5

39.0

34.2

42.1

39.4

0%

5%

10%

15%

20%

25%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2012 2013 2014 2015 2016 2017 2018F 2019F

msf

Supply Vacancy (%) Absorption


Absorption led by IT/ITeS sector; co-working space absorption on the rise

The IT/ITeS sector accounts for the highest office space absorption at 42%

in India as of 9MCY18. Even historically, the sector has been the highest

office space absorber. However, an emerging trend of demand for co-

working spaces has been on the rise lately. While share of co-working

spaces was nil in 2016, this segment was responsible for 5% of office space

absorption in 2017, which further increased to 10% in 9MCY18.

Exhibit 6: Pan-India office occupier distribution

11% 8%15% 14% 13% 12% 11% 9%

8%4%

10% 9% 8% 7% 8%5%3%

3% 3% 4%3%

7%

4%

36% 41%

33% 36% 38% 41% 36%42%

26%29%

24%15% 15% 17% 15%

10%

2%3% 4%

1%7%

10%9%

11%

17%13% 12%

22%15%

11%

9%9%

5%10%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016 2017 9MCY18

Co-working Provider Telecom, Healthcare-Biotech, Real Esatate Construction & other Industries

Misc Manufacturing/Industrial

IT/ITeS Consultancy Business

e-Commerce BFSI

Source: JLL, ICICI Direct Research

Absorption is expected to exceed supply leading to

decline in vacancy rates




Bengaluru - Silicon Valley of India, to drive office space absorption

Bengaluru, the second largest technology hub in the world, has emerged as

a global destination for technology and R&D outsourcing. With 950

technology companies, the city accounted for 38% of India’s total

technology exports in 2017. Additionally, the city has emerged as the

country’s start-up hub with more than ~1,300 technology established start-

ups making it the ‘Silicon Valley of India.’

Being the Silicon Valley of India, majority of office space demand in the

Bengaluru market is from the IT sector. Total space absorption from this

sector was at 42% as of CY17 (30% from technology, 12% from e-

commerce). The city’s office market absorption consistently outpaced

overall supply post CY12 (barring CY15), while vacancy consistently fell from

14.5% in CY12 to 5.1% in CY17. In CY19, Bengaluru is expected to witness

absorption of 23.5 msf vs. forecasted new supply of 22.0 msf office space.

This is expected to further push down vacancy from 5.1% in 2017 to 3.4%

in CY19.

Exhibit 7: Bengaluru office market supply, absorption and vacancy trends

7.3

7.7

10.7

12.7

7.9

7.7

13.0

9.0

6.7

8.3

11.2

12.0

11.9

9.3

13.6

10.0

14.5%

12.8%

11.1%10.4%

6.6%

5.1%4.3%

3.4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2012 2013 2014 2015 2016 2017 2018F 2019F

(m

sf)

Supply Absorption Vacancy (RHS)


Bengaluru market has highest average rental growth for Grade-A offices

Among the top seven office markets in India, Bengaluru has the highest

absolute space absorption and consistently falling vacancy levels. With the

presence of leading technology companies, presence of ~1,300 start-ups

and growing demand from co-working spaces, the Bengaluru market enjoys

highest average rental rate growth vis-à-vis other office markets in India. It

is further expected to continue leading rental growth, going ahead.

Bengaluru market sector-wise absorption

Technology

30%

e-Commerce

12%

BFSI

23%

Engg. &

Manufacturing

22%

Co-

working

5%

Others

8%


*for CY17-Q1CY18




Residential real estate: On the verge of revival

Residential market shows green shoots of demand

India’s residential real estate market grappled with a host of issues related

to lack of transparency, inadequate policy reforms, defaults from property

developers, etc. This eroded homebuyers’ sentiments, resulting in

consistently declining sales volumes in CY13-17. In turn, developers held

back from coming up with new projects, resulting in fewer launches during

the same period. However, in the past five years, a wave of transformative

reforms and initiatives such as Goods and Services Tax (GST), Housing for

All by 2020 and the landmark Real Estate Regulation and Development Act

i.e. RERA (2016) have effectively revived sentiments of both - developers

and homebuyers. This is reflected in the pick-up of sales volumes and

launches in CY18 for the first time since CY13.

Exhibit 8: Residential real estate launches, sales volumes trend

420,105

319,659

244,065

175,882

103,570

182,207

329,238

279,822 267,957

244,686

228,072

242,328

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2013 2014 2015 2016 2017 2018

no. of units

Launches Sales

Source: Knight Frank, ICICI Direct Research

Bengaluru outperforms other micro markets

Of the top Indian real estate markets, Bengaluru has emerged as the best

performing with sales volumes jumping 27% YoY to 43,775 units in CY18.

Also, it showed the most improvement in average realisation, which grew,

albeit mildly, by 2% YoY to | 4,681 per sq ft in CY18. The Bengaluru market,

having the highest office space absorption trend (indicative of new job

creations intensifying), draws a higher working population, leading to

incremental residential demand and bodes well for Bengaluru’s residential

segment.

Green shoots of revival visible




Exhibit 9: Region wise residential real estate trends

Parameter Region H2CY18 Change YoY CY17 CY18 Change YoY

India 118040 10% 228072 242328 6%

Bengaluru 17973 35% 34546 43775 27%

Mumbai 31481 4% 62256 63893 3%

NCR 22596 10% 37653 40643 8%

Pune 17070 4% 33966 33521 -1%

Chennai 7401 11% 15520 15986 3%

Ahmedabad 8101 4% 15741 16188 3%

India 89509 119% 103570 182207 76%

Bengaluru 11836 41% 22410 27382 22%

Mumbai 38389 413% 23253 74363 220%

NCR 6696 -3% 11726 15819 35%

Pune 18584 287% 12705 32684 157%

Chennai 3850 20% 9235 10373 12%

Ahmedabad 2844 -2% 4790 4167 -13%

India - - - - -

Bengaluru 4681 2% 4589 4681 2.0%

Mumbai 7192 -7% 7717 7192 -6.8%

NCR 4240 -1% 4165 4240 1.8%

Pune 4373 -3% 4508 4373 -3.0%

Chennai 4389 -3% 4525 4389 -3.0%

Ahmedabad 2840 1% 2820 2840 0.7%

Sales

(no. of units)

Launches

(no. of units)

Realization

(|/sq. ft.)


Affordable housing key to play pivotal role for improvement in affordability

Affordability is broadly represented as house price to household income

ratio. It is worth noting that the improvement in affordability across key

markets between 2010 and 2018 is rather on the back of a decline in the per

ticket price of units, resulting from lower unit size. Thus, with slower increase

in per capita income, affordable housing, which has smaller per unit size

and, hence, lower per ticket value, is poised to play a pivotal role in

revitalising the Indian residential real estate market.

Exhibit 10: Average unit size in 2018 (indexed to 2011 unit size)

75.82

92.01

82.2

75.82

94.32

103.5

82.56

106.9

0

20

40

60

80

100

120

Mumbai NCR Bengaluru Pune Chennai Hyderabad Kolkata Ahmedabad

2018 2011





Real estate policy reforms to act as a catalyst

In the last of couple of years, the Indian real estate sector has seen some

transformative reforms such as Goods & Service Tax (GST) Act and the

landmark Real Estate Regulation and Development Act (2016) i.e. RERA. All

these reforms are expected to increase pie of organized players in the real

estate sector in the long run.

Real Estate Regulation & Development Act: RERA mandates that developers

need to keep 70% of the money collected from home buyers towards the

construction of the project in the separate escrow account. This will ensure

the timely delivery of the project. While, it has also increased the working

capital requirement of the sector, it is likely to benefit the organised players

in the long run. Beside this, RERA provision requires that developers need

to register the project with RERA before launching the project and maintain

book of accounts, records and documents, separately for each real estate

project. Failure to meet commitment within stipulated time attracts heavy

penalties for the developers. Thus, by bringing in accountability within the

system, RERA is considered to be a landmark reform that should play a vital

role in bringing back homebuyer’s sentiments back to market.

Goods & Service Tax: GST came into effect from July 1, 2017. The under-

construction housing projects (ex. Affordable housing) were put under the

12% GST rate slab, with input tax credit (ITC) benefits, while GST rates for

affordable housing were 8% with ITC benefits. However, recently the GST

Council slashed GST rates for under-construction housing projects (ex-

affordable housing) were reduced to 5% without ITC benefits, with a special

rate for affordable housing at 1% without ITC benefits for the new projects

launching from April 1, 2019. Later on, the council also clarified that under-

construction projects before April 1, 2019 will have an option to either follow

the earlier GST structure to avail ITC or shift to new GST rate regime (1%

GST for affordable housing and 5% GST for other projects without ITC).

Furthermore, developers will have to procure 80% of materials from

registered dealers. With this clarification, developers can get ITC on ongoing

projects and it would not impact their EBITDA margins.

Incentives for affordable housing: With a view to incentivise the affordable

housing sector as a part of larger objective of Housing for All, the

government has proposed to provide 100% tax exemption to developers

under Section 80 IBA of Income Tax Act for affordable housing projects if

the housing project gets approved by the competent authority before March

31, 2019. These tax benefits have further been extended by one year till

March, 2020 in the recent Union Budget.




Investment Rationale

Surging lease portfolio – Stable cash flow business

BEL is a leading developer of Grade-A commercial assets in south India.

Currently, the company had eight operational rental assets (five office, three

retail assets) in its portfolio with gross leasable area of 2.6 msf. Its

commercial portfolio consists of office assets like WTC Bengaluru, retail

assets like Orion Mall. These marquee assets enjoy lease occupancy of

~100%. Its asset portfolio generated lease revenues of | 225 crore in FY18.

Currently, it has 6.3 msf (BEL’s share – 3.7 msf) under execution, which is

expected to be completed by FY20E. Beside this, it has planned

development of 2.0 msf, which could get completed by FY23E. Overall, it

enjoys leasing portfolio of 10.9 msf (BEL share – 8.3 msf), which should

provide its stable cash flow in the long term.

Exhibit 11: BEL's lease portfolio at a glance

Asset Name Location Type GLA (msf)

BEL's share

(msf)

Area leased

(as of Q3FY19)

Cost Incurred

(as of Q3FY19)

Balance

cost to be

incurred

Total

Estimated

Cost

Completed Projects

WTC Bangalore Bengaluru Office 0.6 0.6 100% - - -

WTC, Kochi - Phase I Cochin Office 0.4 0.4 94% - - -

Bhulwalaka Icon Bengaluru Office 0.2 0.2 100% - - -

GIFT City Tower 1 Gujarat Office & Retail 0.3 0.3 14% - - -

Brigade Vantage Chennai Office 0.1 0.1 100% - - -

Orion Mall at Brigade Gateway Bengaluru Retail 0.8 0.8 98% - - -

Orion East Mall Bengaluru Retail 0.1 0.1 87% - - -

Brigade Broadway Bengaluru Office & Retail 0.03 0.03 0% - - -

Others 0.03 0.03 100% - - -

Total Completed 2.6 2.6

Ongoing projects

WTC, Kochi - Phase II Cochin Office 0.4 0.4 - 96.0 7.0 103.0

Brigade Opus Bengaluru Office 0.3 0.3 - 198.9 1.1 200.0

Brigade Orion OMR# Bengaluru Retail 0.3 0.3 - 62.3 131.2 193.5

Brigade Tech Gardens Bengaluru Office 3.3 1.7 - 465.3 664.7 1130.0

WTC - Chennai Chennai Office & Retail 2.0 1.0 - 201.8 598.2 800.0

Total Ongoing 6.3 3.7 1024.3 1402.2 2426.5

Planned

Brigade Twin Tower Bengaluru Office 2.0 2.0* - 0 1230 1230

Gross Total 10.9 6.3

* BEL could dilute stake in this asset, going ahead. Also, since Brigade Twin Towers is currently in a very early stage of development, we have not considered this asset in our valuation

#Cost indicative of Brigade Orion OMR & Holiday Inn Express (134 keys)


Operational

T.A. - 2.6 msf

(BEL share -2.6 msf)

Ongoing

T.A. - 6.3 msf

(BEL share- 3.7 msf)

Planned

T.A. - 2.0 msf

(BEL share - 2.0 msf)

T.A. - 10.9 msf

BEL share: 6.3

msf

*T.A. = Total Area




Bengaluru office market in sweet spot with better operational prospects

Bengaluru contributes 71.2% (by area) to the total leasing portfolio. We

highlight that BEL is in a sweet spot as Bengaluru’s commercial market is

globally one of the most sought-after spaces for domestic and global

institutions to set up their offices. Bengaluru market’s office absorption (56.7

msf between CY13 and Q1CY18) alone exceeded the total absorption of

China’s top markets viz. Shanghai, Beijing & Hong Kong during the same

period. This reinforces the fact that increasing demand amid lower vacancy

levels (low single digit) also makes a strong case for rental appreciation.

Consequently, Bengaluru witnessed rental appreciation at a CAGR of 10.3%

in 2013-Q12018, highest among the top seven office markets. The strong

absorption along with healthy lease rate appreciation augurs well for BEL’s

leasing portfolio.

Exhibit 12: BEL’s lease assets in Bengaluru market

33%

67%

ex Bangalore Bangalore

Source: Company, ICICI Direct Research, CBRE Research

Exhibit 13: Movement of lease rentals (CY13-Q1CY18)

10.30

8.4

7.5

9

10

-1.3

-0.4

-2 0 2 4 6 8 10 12

Bengaluru

Hyderabad

Pune

Chennai

NCR

MMR

Kolkata

(%)

Source: Company, ICICI Direct Research, CBRE Research

Exhibit 14: Office space absorption and rental trends

10.0

9.6

9.1

14.6

5.6

6.3

3.1

19.0

28.6 5.4

17.2

56.7

29.1

31.1

18.9

62

36

57

50

148

89

44

108

85

108

120

14

25

15 16

0

20

40

60

80

100

120

140

160

0.0

10.0

20.0

30.0

40.0

50.0

60.0

New

York

Los A

ngelo

s

San Fransis

co

Munich

London

Sin

gapore

Sydney

Tokyo

Shanghai

Hong Kong

Beijin

g

Bengalu

ru

Mum

bai (M

MR

)

NCR

Pune

(m

sf)

Absorption (CY13 to Q1CY18) Rent (as of March 31, 2018)





World Trade Center’s License – Sets stage for MNC tenants

The World Trade Centers Association (WTCA) stimulates trade and

investment opportunities for commercial property developers, economic

development agencies and international businesses looking to connect

globally and prosper locally. There are more than 300 World Trade Centers

(WTCs) in nearly 100 countries as well as more than 1.0 million companies

and individuals under the WTCA. This provides a portfolio of branded offices

and commercial real estate, alongside an extensive suite of trade services

for tenants.

Brigade holds the license to construct World Trade Centers (WTC) in South

India. As a WTC is constructed as per global standards and specifications, it

makes BEL’s WTC premise a preferred choice for global MNCs for their

commercial space. Consequently, WTC premises command better

occupancy rates compared to other Grade A properties. It has built WTC in

Bengaluru and Kochi (Tower-I), which are already operational and is further

constructing WTC, Kochi (Tower-II) and WTC, Chennai, which are expected

to be operational by FY20E.

World Trade Center, Bengaluru

WTC, Bengaluru (0.6 mn sq ft) has been operational since 2011. It has Grade

A++ specification, 32 floor levels, a grand triple height atrium, a helipad and

observation deck, 3716 square metre plates and a nine level car park, among

other features. Additionally, it is a part of the Brigade Gateway integrated

enclave. Thus, it enjoys close proximity to BEL’s residential, retail and

hospitality assets like Brigade Gateway, Sheraton Hotel and Orion Mall. It is

well connected to transport facilities with proximity to metro station. WTC,

Bengaluru is 100% leased out and enjoys 10-20% premium rentals over

other office assets in its micro market.

World Trade Center, Kochi (Tower-I)

World Trade Center, Kochi (0.4 mn sq ft), located at the heart of the booming

IT-hub of Kakkanad, has been developed with Kochi Infopark, one of the

most sought-after business destinations in Kochi. It has state-of-the-art

infrastructure, easy accessibility, Grade A specifications and LEED Gold Pre-

certification. It is close to leading hospitality service providers like Marriot

and Holiday Inn. WTC, Kochi’s (T-I) leased occupancy is at 93.8% as of

Q3FY19.

World Trade Center, Kochi (Tower-II)

BEL is also constructing WTC, Kochi (Tower-II) with development potential

of 0.4 mn sq ft. It is expected to commence in FY20E. Since it is the extension

of WTC, Kochi Phase-I, it already meets predefined global standards set by

WTC.

World Trade Center, Chennai

BEL, in a joint venture with GIC, is constructing the WTC Chennai project,

which will have a development potential of 2.0 msf across two towers. It will

be the tallest commercial establishment in the city and will be a complete

business eco-system with residences, hotel and retail space. WTC Chennai

is a Grade A++ commercial development strategically located in the

established IT hub on OMR pre-toll at Perungudi. This commercial asset is

under-construction and is expected to be operational by FY20E end.

Successful attributes of a World Trade Centre

WTC Bengaluru


WTC Kochi (Phase-I)


WTC Kochi


WTC Chennai





BEL’s lease revenues expected to grow at 20.0% CAGR by FY23E

We expect BEL’s leasing portfolio to expand from 2.2 msf in FY18 to 8.9 msf

(BEL share – 6.3 msf) in the next one to two years. The expansion is largely

to be led by Tech Garden - 3.3 msf (BEL’s share-1.7 msf) & Chennai WTC

Office space – 2.0 msf (BEL share – 1.0 msf). Both these assets are expected

to be developed in a JV with GIC in which BEL holds 51% stake. With these

additions along with rental escalation of 5% per annum, we expect BEL’s

lease revenues to grow at 21.1% CAGR to | 560.1 crore in FY18-23E).

Exhibit 15: Rental income to grow at 20.0% CAGR to | 560.1 crore in FY18-23E

192.42

224.7

233.0

361.2

499.6

642.4

752.8

192.42

224.7

233.0

316.9

406.8

496.7

560.1

0

300

600

900

FY17 FY18 FY19E FY20E FY21E FY22E FY23E

(| crore)

Lease Rental Income (ex. CAM) BEL's share


20.0% CAGR




Real estate business – sales volume momentum to sustain

Brigade – Pioneer of concept of integrated enclaves

Brigade pioneered the concept of integrated enclaves in Bengaluru. The

company has a reputation of developing remarkable enclaves like Brigade

Gateway, Brigade Millennium, Brigade Gardenia, Brigade Metropolis, etc. It

has two more enclave projects in the making viz. Brigade Orchards and

Brigade Meadows, which are expected to be completed in the next two to

three years. Such integrated developments command better pricing than

other standalone developments.

Brigade Gateway: Iconic integrated enclave

Brigade Gateway is an iconic integrated enclave for BEL. It is a 40-acre

integrated enclave comprising a mix of residential (1,200 apartments),

commercial (World Trade Center), retail and hospitality (Sheraton

Bengaluru) assets along with a school (The Brigade School) etc. It also

comprises of other assets viz. Galaxy Club and Columbia Asia Hospital.

The integrated enclave also includes BEL’s marquee mall asset i.e. Brigade’s

Orion Mall. With a 0.82 msf leasable area, the mall has four floors of retail

space, which includes shopping zones, multiplex, F&B space, including

lakeside cafes and bowling & gaming zones. The mall also houses an 11-

screen PVR Cinemas multiplex and an 8000 sq. ft. gaming zone – Time Zone.

As of Q3FY19, the mall has 98% lease occupancy.

Exhibit 16: Brigade Gateway integrated enclave plan layout

Source: Google Maps, ICICI Direct Research

Brigade Orion Mall





Ongoing projects lend visibility on cash flows

BEL’s real estate business mainly consist of residential project sales with a

small portion of sales from commercial projects. Its residential portfolio is a

mix of wide budget range of products viz. affordable housing, mid-premium,

premium and ultra-premium housing, along with retirement homes. BEL‘s

ongoing projects (including unsold inventory from completed projects) are

at 10.4 msf, which is expected to be developed and sold over the next four

to five years. Out of 10.4 msf, BEL has sold projects on 3.6 msf area worth

| 1936 crore (average realisation: | 5378 per sq ft) as on Q3FY19. Out of the

sold amount, it has already collected | 1140 crore while remaining | 769.3

crore is expected to be collected during the progress of different ongoing

projects. The remaining collection worth | 769.3 crore along with unsold

units worth | 3295.9 crore, are expected to provide total collection of | 4092

crore over the next four to five years.

In terms of investment outlay, BEL has incurred expenditure worth | 2075.3

crore and is expected to incur further expenditure of | 1773 crore to

complete its ongoing project portfolio over the next four to five years.

Hence, BEL’s ongoing project portfolio is expected to provide pre-tax cash

flow of | 2319 crore over the next four to five years or ~| 1553 crore on a

post-tax basis.

Exhibit 17: Ongoing projects status at a glance

Ongoing BEL Projects Ongoing SPV Projects Stock Sales Total

Total super built‐up area of projects on sale basis 10.1 1.6 1.0 12.7

Less: LO Share 2.3 - - 2.3

Co share of saleable area 7.8 1.6 1.0 10.4

Sold till date 3.1 0.6 - 3.6

To be sold 4.7 1.1 1.0 6.8

(in | crore)

From Sold units 1638.3 298.0 - 1936.3

From Unsold Units 2452.6 588.3 255.0 3295.9

Estimated Receipts 4090.9 886.3 255.0 5232.3

Collection Till Date on Sold Units 934.7 205.3 1140.0

Balance collection for the projects (Sold and Unsold units)-A 3156.2 681.0 255.0 4092.3

Balance collection for the projects (From Sold Units) 703.6 92.8 796.3

Estimated Total cost to be spent 3014.7 636.6 197.0 3848.3

Cost incurred till date 1434.1 444.2 197.0 2075.3

Balance Cost to be incurred to finish the project- B 1580.6 192.4 - 1773.0

Gross Operating Cash Flows (A-B) 1575.6 488.7 255.0 2319.2





Residential sales volume to grow at 30.8% CAGR to 3.5 msf by FY21E

BEL’s sales volume declined from 2.2 msf to 1.6 msf in FY16-18 on the back

of very few launches during the same period. During the same period, the

sector was also grappling with the triple impact of demonetisation, GST &

RERA. However, BEL recouped its sales volume very well with a healthy

launch pipeline (so far launched 5.1 msf in FY19E, one of the highest in the

last four years). It clocked sales volume of 2.0 msf in 9MFY19 and could

close its FY19E sales volume with 2.8 msf with the launch of its big ticket

project Brigade Serene Utopia.

Going ahead, we expect BEL to sustain its sales momentum and expect its

sales volume to grow at CAGR of 30.8% at 3.5 msf in FY18-21E with a healthy

launch project pipeline and focus on affordable housing.

Exhibit 18: Launches grow drastically in 9MFY19


Exhibit 19: Sales volume expected at 3.5 msf in FY21E

1249.0

955.5

896.3

1533.8

1691.1

2087.6

2.2

1.6 1.6

2.8

3.1

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

500

900

1300

1700

2100

2500

FY16 FY17 FY18 FY19E FY20E FY21E

(m

sf)

(| crore)

Sales Value Sales volume


Even on a quarterly basis, BEL’s sales volume momentum has now jumped

to 7.7-8 lakh sq ft vs. quarterly average of 5.0 lakh sq ft after eight quarters.

The improvement in sales volume is on the back of healthy launches, revival

in the sector and more focus on affordable housing.

Exhibit 20: Quarterly movement of sales and average realisation trend

6.2

7.1

4.4

4.8

3.7

5.8

3.0

3.7

3.1

3.7

4.6

4.3

4.3

8.0

7.8

5.0

5415

55915485

5741 57155808

6210

5887 58655915

5667

5509

5122

5719 5741

3000

3500

4000

4500

5000

5500

6000

6500

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19

(| per sq. ft.)

(lakh sq. ft.)

Area Sold Average Area sold Average Realization (RHS)


Quarterly sales volumes have moved higher compared to its

long-term average of 5.0 msf. Also, average realisation has

shown improvement recently




Affordable Housing: Align portfolio to cater to growing demand

BEL is looking to align its project portfolio towards affordable housing

segment (ticket size up to | 65 lakh) to cater to increasing demand in

segments. Currently, affordable housing contributes only ~14% of its

current ongoing project portfolio. Going ahead, the company is looking at

~45% of its new launch (aggregating 8.8 msf) coming from the affordable

housing segments. Hence, affordable housing is expected to contribute

~29% of the total residential project portfolio. BEL’s focus on affordable

housing also lends us comfort in sustained sales momentum, going ahead.

Exhibit 21: Share of affordable housing projects significantly higher


Bengaluru - BEL’s major market, comfortably placed in affordability index

Bengaluru, with ~90% of its ongoing projects in the real estate segment,

has shown a substantial improvement in affordability in 2011-18. With

stability in property prices and a reduction in unit size over the last few years,

the affordability index for the Bengaluru market has improved significantly.

The affordability index for Bengaluru has come down from 6x in 2011 to 4x

in 2018. Currently, it is one of the lowest in the top seven micro markets,

below the benchmark average of 4.5x. We believe the Bengaluru residential

market, which has already shown a pick-up in sales momentum and

realisation, is in a sweet spot with a comfortable position on the affordability

front.

Exhibit 22: Affordability index


Ongoing projects – 9.6 msf Planned new Launches – 8.9

msf

Total – 18.5 msf




Brigade Utopia –Upcoming 5.9 msf mixed-use development project

Brigade Utopia project’s Phase-I is proposed on 47 acres of land and has a

total size of ~5.9 msf. It is expected to be a major landmark development in

the vicinity of Bengaluru Southeast (Whitefield Varthur area). It is an

integrated mixed use development project, with a combination of affordable

& luxury segments, along with office & retail assets and multiplex

entertainment zone. In phase I, BEL is planning to launch 3.0 mn sq ft (BEL

share - 2.0 mn sq ft) in Q4FY19E. The residential space is proposed to have

regular standard apartments, co-living spaces and some portion of senior

living space. The project is proposed to have 4000+ units in a configuration

of 2 & 3 BHK apartments (2 BHK units variants: 1240 sq ft & 1905 sq ft; 3 BHK

units: 1689 sq ft).

Exhibit 23: Brigade Utopia Master Plan





Hospitality Portfolio – looking to almost double its keys

BEL has 976 keys across five operational assets in its hospitality portfolio,

which includes marquee assets viz. Sheraton Grand, Bengaluru and Grand

Mercure, Bengaluru. Other operational assets in this portfolio are Grand

Mercure, Mysore, Holiday Inn Chennai and Holiday Inn Bengaluru. The

hospitality business clocked revenues to the tune of | 237.1 crore and

contributed 12% to overall revenues in FY18.

The company is further expanding its hospitality portfolio with addition of

812 keys, which will take BEL’s total hospitality portfolio to 1788 keys. The

planned projects are expected to be operational in various stages by FY21E.

Of these, Holiday Inn Express, Golden Triangle in Bengaluru (134 keys) and

Ibis Style in Mysore (151 keys) are expected to be operational in Q1FY20E.

BEL is expected to incur an estimated cost of | 320 crore (excluding cost of

construction for Holiday Inn express) for construction of these planned

projects, of which it has already incurred | 203.9 crore and is yet to incur

| 116.1 crore.

Exhibit 24: Hospitality portfolio at a glance

Asset Name Location

No. of

KeysARR (|/night) Occupancy

Operational

Status

Cost Incurred

(| crore)

Balance

Cost

Total

Estimated

cost

Operational

Grand Mercure Bangalore 126 7010 66 Operational - - -

Sheraton Grand Bangalore 230 7698 79 Operational - - -

Grand Mercure Mysore 146 3714 54 Operational - - -

Holiday Inn Chennai 202 4360 70 Operational - - -

Holiday Inn Bangalore 272 4091 39 Operational - - -

Total Operational 976

Ongoing

Holiday Inn Express, Golden Triangle Bangalore 134 NA NA Q1FY20

Ibis Style Mysore 151 NA NA Q1FY20 9.8 63.2 73.0

Four Points by Sheraton Kochi 218 NA NA Q4FY19 131.5 1.5 133.0

Ibis Styles, Gift City Gujarat 159 NA NA Q3FY20 62.6 51.4 114.0

Ibis Bangalore Bangalore 150 NA NA FY21E

Total Ongoing 812 203.9 116.1 320.0

Gross Total 1788 203.9 116.1 320.0


Sheraton Grand

Sheraton Grand is the marquee hospitality asset in Brigade’s portfolio. This

flagship hotel features 25,649 sq ft of elegantly designed meeting spaces

with features like modern architecture & design. It hotel reported 79%

occupancy while average room rate (ARR) was at | 7698/night as of Q3FY19.

Furthermore, it clocked revenues worth | 111 crore in FY18. Going ahead,

with an improvement in ARR and stable occupancy levels, we expect

Sheraton Grand to clock revenues worth | 123.8 crore in FY21E.

Sheraton Hotel at Brigade Gateway




Hospitality revenues to grow at 23.6% CAGR to | 447.7 crore in FY18-21E

In FY18, BEL clocked revenues worth | 237.2 crore from its operational

hospitality portfolio (916 keys). The company is developing five more

hospitality assets (total 812 keys), which will lead combined hospitality

portfolio to almost double to 1788 keys. These new assets, which will

become operational in various phases in the next three to four years, will

help BEL’s revenues to grow at 23.6% CAGR to | 447.7 crore in FY18-21E.

Furthermore, we also expect the EBITDA of the hospitality portfolio to grow

at 30.6% CAGR to | 131.4 crore in FY18-21E.

Exhibit 25: Revenues to grow at 23.6% CAGR in FY18-21E

193.0

237.2

291.6

374.7

447.7

100.0

200.0

300.0

400.0

500.0

FY17P FY18P FY19E FY20E FY21E

(| crore)


Exhibit 26: EBITDA to grow at 30.6% CAGR in FY18-21E

35.5

58.2

68.5

103.2

131.4

20

50

80

110

140

170

200

FY17P FY18P FY19E FY20E FY21E

(| crore)


BEL to sell minority stake to expand its hospitality portfolio

BEL demerged its hospitality business into a separate entity in FY18. Going

ahead, it plans to divest a minority stake in this entity to fund the planned

capex in hospitality. BEL is expected to incur an estimated cost of | 320 crore

(excluding cost of construction for Holiday Inn Express) for construction of

these planned projects, of which it has already incurred | 203.9 crore and is

yet to incur | 116.1 crore.

23.6% CAGR

30.6% CAGR




BEL’s leverage to peak out in FY20E

BEL has reported net debt of | 3247.0 crore and net debt-equity of 1.4x as

on FY18. These are Fully Convertible Debentures (| 257.5 crore), and other

investments including promoter loans (|179 crore), which are treated as

Debt as per Ind-As while the company treats them as the equity. Adjusting

these as equity, BEL net debt is at |2570.7 core and net debt to equity of

0.9x in FY18. Going ahead, with the completion & commencement of its

ongoing leasing portfolio in FY20E & Fy21E respectively, we believe BEL is

expected to peak out in FY20E and leverage to improve from FY21E

onwards. On adjusted basis, we believe BEL’s net debt to peak out at |4080.7

core and net debt to equity at 1.4x in FY20E. We also highlight that BEL’s

leasing business debt/EBITDA will halve from 12-13x currently to 5-6x post

commencement of the ongoing leasing portfolio.

Exhibit 27: Net debt to equity peaks out in FY20E

2,385.9

3,007.2

3,247.5

4,517.2

4,419.2

1.4

1.31.4

1.8

1.7

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY17 FY18 FY19E FY20E FY21E

(x

)

(| crore)

Reported Net Debt Net Debt / Equity (RHS)


Exhibit 28: Adjusted net D/E

2,570.7

2,811.0

4,080.7

3,982.7

0.91.0

1.41.3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY18 FY19E FY20E FY21E

(x

)

(| crore)

Adjusted Net Debt Adjusted Net Debt/Equity


Exhibit 29: Residential & hospitality debt/EBITDA comfortable


Exhibit 30: Debt/EBITDA for leasing business to halve


0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

FY19E FY20E FY21E FY22E FY23E

Debt to EBITDA (x)

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY19E FY20E FY21E FY22E FY23E

Debt to EBITDA (x)




Financials

Revenues expected to grow at 10.5% CAGR to | 2,167.1 crore in FY18-21E

BEL’s revenues are expected to grow at 10.5% CAGR to | 2,167.1 crore in

FY18-21E. The moderate pace of growth is attributable to revenue

recognition method under Ind-As 115. As per the new accounting method,

which came into effect from April 1, 2018, the company switched to project

completion method from percentage completion method earlier.

Consequently, it had to reverse revenues & PAT to the tune of ~| 2,300 crore

& ~| 400 crore, respectively. A major portion of these revenues is getting

booked in FY19E & FY20E. Hence, revenues from the residential business

showed an optical decline in FY21E. Nonetheless, lease revenues are

expected to grow at 31.5% CAGR to | 649.5 crore while hospitality revenues

are expected to grow at 23.6% CAGR to | 447.7 crore in FY18-21E.

Exhibit 31: Revenues to grow at 10.5% CAGR in FY18-21E

1320.8

1600

1422.5

2310.5

2248.7

1530.6

197.2

265.7

285.9

302.9

469.6

649.5

181.7

193.0

237.1

291.6

374.7

447.7

0 500 1000 1500 2000 2500 3000 3500

FY16

FY17

FY18

FY19E

FY20E

FY21E

Residential Leasing Hospitality


EBITDA margins to grow 440 bps to 33.6% in FY18-21E

EBITDA margins contracted 60 bps to 29.2% in FY16-18. However, with

revenue contribution from the lease portfolio expected to jump from 14.7%

in FY18 to 24.7% in FY21E and EBITDA margins of residential business

expected to expand 60 bps in FY 18-21E, we expect overall EBITDA margins

to expand 440 bps to 33.6% in FY18-21E.

Exhibit 32: EBITDA margin trends

24.1

24.9

24.4

23.0

24.0

25.0

71.3

65.3

69.0

64.9

59.4

63.3

35.3

19.0

24.8

23.5

27.5

29.3

29.828.4 29.2

26.128.5

33.6

10

20

30

40

50

60

70

80


Residential Leasing Hospitality Overal l (Excluding other income)





Cash profit to grow at 18.1% CAGR to | 456.0 crore in FY18-21E

We expect PAT to grow at 31.1% CAGR to | 239.2 crore in FY18-20E, before

declining in FY21E to | 138.4 crore. We highlight that the increase in PAT in

FY19E & FY20E is mainly on account of majority of revenues that were

reversed in FY18 that will get realised in FY19E & FY20E. Secondly, BEL is

aggressively expanding its lease portfolio, which will be operational over the

next four to five years. These under-construction assets will not generate

revenues to their full potential in FY21E. Hence, they do not contribute

meaningfully to the bottomline while depreciation gets fully realised in the

interim years, further bringing down PAT. Hence, we see an optical decline

in PAT in FY21E. However, in terms of cash profit, we expect BEL to clock

18.1% CAGR in cash profit to | 456.0 in FY18-21E.

Exhibit 33: Profit growth to remain flat in FY18-21E


Exhibit 34: Cash profit to growth at 18.1% CAGR in FY18-21E


Return ratios to remain stable in FY21E

BEL clocked RoE & RoCE of 6.1% & 8.1%, respectively in FY18. Going ahead,

we expect return ratios to improve in FY19E & FY20E but expect them to

remain broadly stable at 5.4% & 8.8%, respectively, in FY21E.

Exhibit 35: Return ratios to remain stable

10.311.2

8.1

11.0

10.2

8.8

8.9

9.9

6.1

10.9

9.7

5.4

4.0

6.0

8.0

10.0

12.0


RoCE RoNW





Risks & Concerns

SEZ benefits are available for units commencing up to March, 2020

BEL has two commercial properties – WTC Chennai and Brigade Tech

Gardens in SEZ. There are benefits for tenants such as 100% income tax

exemption on export income for SEZ units under Section 10AA of the

Income Tax Act for the first five years, 50% for the next five years, thereafter,

and 50% of the export profit ploughed back for the next five years. These

benefits for tenants are available to players who commence their operation

till March, 2020. Post that, these benefits are expected to be withdrawn.

Thus, if BEL is unable to lease out these assets before the sunset clause kicks

in, the company may find it difficult to lease the leftover area. Hence, it could

have to lower lease rate in such a scenario. Nonetheless, we have already

considered lower than expected lease rate in our valuation.

Need higher occupancy rates to service debt

BEL is expected to witness a sharp increase in its leasing portfolio from 2.2

msf to 7.4 msf (BEL – 6.0 msf). This includes some large asset expansion

such as Tech Garden (3.2 mn sq ft) and WTC Chennai (2.0 mn sq ft). Slower

than expected occupancy rates could impact its debt servicing in the interim.

Geographically concentrated in Bengaluru

BEL has ~70% of the commercial portfolio (operational & under-

development) & ~90% of the ongoing project in real estate business are

concentrated in Bengaluru. Any slowdown in Bengaluru property or

commercial market could have adverse impact on BEL’.

Slowdown in IT/ITeS sector

High proportion of the company’s leasing revenues comes from the IT/ITeS

sector. Any major slowdown in the overall IT/ITeS sector may slow down

office space leasing in Bengaluru. It could also impact its real estate in case

of slowdown in IT/ITeS sector.

Lack of clarity over fully convertible debentures

There are fully convertible debentures of | 257.6 crore in FY18 in Brigade’s

consolidated balance sheet. These debentures have been issued at the

special purpose vehicle (SPV) level. The instruments are long-tenured in

nature converted into equity at end of 20 years while the coupon and

principal payment have no scheduled due date. If these instrument are

converted into equity, it is possible that BEL’s equity stake in the SPV may

get diluted.




Management Profiles

MR Jaishankar

Chairman & Managing Director

MR Jaishankar holds a Bachelor of Science degree in Agriculture and a

Master of Business Administration. His commitment to quality and passion

for innovation has seen Brigade Group grow from a single-building, small-

scale private enterprise to a diverse multi-domain company, which is into all

verticals of real estate. Under his leadership, the Brigade Group has scaled

new heights. This has been recognised by many awards that the Brigade

Group has received over the years.

Githa Shankar

Whole-time Director

Githa Shankar holds a Bachelor of Arts degree, Bachelors in Library Science

and a Masters in Business Administration. Ms Shankar has over 30 years of

experience in the fields of advertising, stock broking, insurance, education

and real estate. She is the Managing Trustee of Brigade Foundation, which

started and runs the Brigade Schools in Bengaluru.

Pavitra Shankar

Executive Director

Pavitra Shankar holds a Bachelor’s Degree in Economics and Mathematics

from the University of Virginia, US and a Masters in Business Administration

in Real Estate and Finance from Columbia Business School, US. She is a

relative of the Promoter Group and has over a decade of rich experience and

oversees Residential Sales & Marketing and IT departments at Brigade.

Nirupa Shankar

Executive Director

Nirupa Shankar holds a Bachelor’s Degree in Economics from the University

of Virginia, US and has done her Masters of Management in Hospitality in

2009 from Cornell University. She forms part of the Promoter Group and has

been associated with the group since 2009 with a rich and versatile

experience. She oversees the company’s hospitality, office & retail ventures,

Human Resources (HR), Public Relations (PR) and Innovation functions.

Amar Mysore

Executive Director

Amar Mysore holds a Masters in Engineering from Pennsylvania State

University US. He is a relative of the promoter group and has more than a

decade of diverse experience in the fields of supply chain management,

manufacturing, power sector and real estate. Mr Mysore has been

instrumental in tying up green power for the company’s commercial, retail

and hotel properties. He is actively involved in the company’s IT initiatives

in adopting tech in the business processes to bring in higher efficiency.




Valuations

Surge in lease portfolio - Initiate coverage with BUY

At the CMP, Brigade is trading at 1.3x FY21E P/BV. We like BEL given its

focus on ramping up its lease portfolio. We anticipate a pick-up in sales

momentum in the residential portfolio. Furthermore, we expect the share of

lease income to grow 20.0% CAGR to | 560.1 crore during FY18-23E.

Secondly, a large part of the annuity portfolio has been formed on the asset

light model through the GIC platform. In the real estate business, we expect

BEL’s sales volume to grow at 30.8% CAGR to 3.5 msf in FY18-21E on the

back of a healthy launch project pipeline and the company’s focus on the

affordable housing segment. Hence, we initiate coverage on Brigade with a

BUY recommendation with an NAV based SoTP target price of | 330/share.

Exhibit 36: SoTP based valuation of BEL

Project Area (msf) Value NAV/share Contribution (%) Remarks

Residential/Commercial Sales

Completed 1.0 75 6 2

Ongoing 9.4 1136 83 25

New Launches 7.1 308 23 7

Land Bank 33.1 1016 75 23

Total 50.6 2534 186 57

Leasing Portfolio

Completed 2.6 2778 204 62

Ongoing 6.3 1672 123 37

Total 8.9 4450 327 99

No. of Keys

Hospitality Portfolio 1788 1341 99 30 12x FY20E EV/EBITDA

Total Gross Asset Valuation 8326 612 186

Less: FY20E Net Debt 3841 282 86 We have considered Brigade effective debt

Target Valuation 4485 330 100

We have considered cap rate of 9% and

discount rate of 13% for operational assets and

14% for under construction assets

We have discounted cash flow of Ongoing &

New launches residential assets at 14%

discount rate while land bank is valued at 1x

amount invested





Lease business

We value BEL’s lease portfolio at | 327/share. We expect the company’s

share of lease income to grow 20.0% CAGR to | 560.1 crore in FY18-23E

with incremental rental contribution from the commencement of ongoing

asset portfolio. We also consider lease rental escalation of 5% per annum in

our valuations. We consider cap rate of 9% to value its commercial & retail

portfolio. Also, we consider discount rate of 13% for operational assets &

14% for under construction assets.

Exhibit 37: BEL’s lease portfolio valuation

Project Area (msf) Value NAV/share

Leasing Portfolio

Completed 2.6 2777.9 204.2

Bengaluru 1.8 2351.6 172.8

Cochin 0.4 215.5 15.8

Gujarat 0.3 162.7 12.0

Chennai 0.1 48.1 3.5

Ongoing 6.3 1672.2 122.9

Bengaluru 3.9 879.8 64.7

Cochin 0.4 190.0 14.0

Chennai 2.0 602.3 44.3

Total Annuity Portfolio 8.9 4450.1 327.0


We highlight that we see further upside potential to our valuation on account

of possibility of

Compression of cap rates & discount rate: We consider a higher cap rate

and would see the possibility of a compression of cap rate for BEL’s

portfolio as our assumed cap rate is 160 bps vs. G-sec yield and 170 bps

higher than the upcoming Embassy IPO’s implied cap rate of ~7.3% on

FY20E. We have shown sensitivity to our target price for compression in

cap rates and discount rate below

Brigade Twin Towers: BEL acquired SABMiller land at ~| 230 crore

wherein it is looking to develop leasable area 2.0 msf. The estimated

cost (including land cost) for the development is expected at ~| 1230

crore and could fetch lease income of ~| 200 crore on the

commencement of this asset. Since, currently it is at a very early stage

of development, we do not consider this asset in our valuation. The asset

could add another ~5% to our valuation




Real estate business

We value BEL’s real estate portfolio at | 186/share. We incorporate project-

wise valuation for ongoing & new launches (aggregating over 16.5 msf). We

consider sales, completion and handing over of these projects over the next

five years and further discount the net cash inflows at discount rate of 13.0%.

The remaining land bank aggregating 465 acres (total development potential

of 33.1 msf) has been considered on total amount paid for acquiring this land

bank at worth | 1015.6 crore or | 75/share. The weighted average realisation

& construction cost for FY19E across ongoing & launch projects works out

to | 5415/sq ft & | 3178/sq ft, respectively. Going ahead, we build in 5%

escalation per annum in realisation and construction cost per sq ft.

Exhibit 38: BEL’s real estate portfolio valuation

Project Area (msf) Value NAV/share

Residential/Commercial - Sale

Completed 1.0 75.4 5.5

Ongoing 9.4 1135.9 83.5

Bengaluru 8.5 1001.4 73.6

Mysore 0.7 97.0 7.1

Chennai 0.2 37.5 2.8

New Launches 7.1 307.5 22.6

Bengaluru 4.6 259.3 19.1

Mysore 0.2 7.1 0.5

Chennai 1.4 22.4 1.6

Hyderabad 0.8 18.8 1.4

Land bank 33.1 1015.6 74.6

Total Residential 50.6 2534.4 186.3


Hospitality division

We value BEL’s hotel business at | 99/share (12x FY20E EV/EBITDA). Our

target valuation implies | 0.8 crore/room on its planned development of

1788 keys. The company is adding a total of 812 keys, which will lead

combined hospitality portfolio to almost double to 1788 keys. These new

assets, which will become operational in various phases in the next three to

four years, will help BEL’s revenues to grow at 23.6% CAGR to | 447.7 crore

in FY18-21E. Furthermore, we also expect the EBITDA of the hospitality

portfolio to grow at 30.6% CAGR to | 131.4 crore in FY18-21E.




Sensitivity to cap rate & WACC assumptions

We consider a cap rate of 9% to value BEL’s annuity portfolio. Based on our

analysis, every 1% change in our cap rate will impact our target price by 5-

7% whereas, every 1% change in our WACC assumption will impact our

target price by 6-7% since WACC assumption is likely to impact both our

residential as well as leasing portfolio valuation. In the residential business,

we consider 5% escalation per annum in realisation and construction cost

per sq ft. Every 1% change to these assumptions is expected to change our

target price by ~4% & 3%, respectively.

Exhibit 39: Sensitivity to cap rate & WACC assumptions

Cap rate (%)

WA

CC

(%

)

7.0% 8.0% 9.0% 10.0% 11.0%

11.0% 434.1 404.3 381.1 362.6 347.5

12.0% 402.7 375.5 354.3 337.3 323.5

13.0%* 373.9 349.0 329.6 314.1 301.4

14.0% 347.4 324.6 306.8 292.6 281.0

15.0% 323.0 302.1 285.8 272.8 262.1


Exhibit 40: Sensitivity to realisation & construction growth pa

Realisation growth pa

Constructio

n c

ost

grow

th p

a

3.0% 4.0% 5% 6.0% 7.0%

3.0% 318.4 330.7 343.3 356.3 369.5

4.0% 311.6 323.9 336.5 349.5 362.7

5.0% 304.6 317.0 329.6 342.5 355.7

6.0% 297.5 309.8 322.5 335.4 348.6

7.0% 290.2 302.5 315.2 328.1 341.3


In terms of P/BV, BEL has traded at average P/BV of 1.3x in the last four

years. Currently, it is trading at 1.4x P/BV.

Exhibit 41: P/BV pattern for BEL

0

100

200

300

400

500

Nov-1

4

Mar-15

Jul-15

Nov-1

5

Mar-16

Jul-16

Nov-1

6

Mar-17

Jul-17

Nov-1

7

Mar-18

Jul-18

Nov-1

8

Mar-19

|

Price 2.5x 2x 1.5x 1x 0.5x

Source: Company, Bloomberg, ICICI Direct Research

Exhibit 42: P/BV average

0.8

1.2

1.6

2.0

Nov-14

Mar-15

Jul-15

Nov-15

Mar-16

Jul-16

Nov-16

Mar-17

Jul-17

Nov-17

Mar-18

Jul-18

Nov-18

Mar-19

(x)

P/BV Multiple Average P/BV 1+ STD 1- STD

Source: Company, Bloomberg, ICICI Direct Research




Financial Summary

Exhibit 43: Profit & Loss Statement

| crore FY18 FY19E FY20E FY21E

Net Sales 1,897.2 2,905.0 3,093.0 2,627.9

Other Income 48.3 50.7 53.3 55.9

Total revenues 1,945.5 2,955.7 3,146.2 2,683.8

Cost of Materials Sold 844.8 1,573.7 1,604.0 1,191.7

Employee Cost 154.5 177.7 186.6 195.9

Other Expenditure 343.4 395.1 420.6 357.4

Total Operating Expenditure 1,342.7 2,146.5 2,211.2 1,744.9

EBITDA 554.5 758.5 881.8 882.9

Interest 259.4 273.3 321.6 401.1

Depreciation 137.7 140.5 213.0 317.6

PBT 205.7 395.5 400.5 220.1

Tax 62.8 130.5 132.1 72.6

Reported PAT 142.9 265.0 268.3 147.5

Minority Interests (80.1) (134.5) (136.2) (74.8)

Profit for the company 139.2 251.8 239.2 138.4

EPS (|) 10.2 18.5 17.6 10.2


Exhibit 44: Balance Sheet


Equity Capital 136.1 136.1 136.1 136.1

Reserves & Surplus 2,374.0 2,392.4 2,500.0 2,587.2

Networth 2,287.0 2,320.3 2,458.9 2,557.2

Total Debt 3,389.6 3,744.1 4,566.0 4,495.4

Deferred Tax Liability 38.1 38.1 38.1 38.1

Source of Funds 5,938 6,311 7,240 7,257

Gross Block 2,143.8 2,173.8 3,335.4 4,942.3

Less: Accumulated Dep 353.5 494.0 706.9 1,024.6

Net Block 1,790.3 1,679.8 2,628.5 3,917.7

Capital WIP 2,120.7 3,055.7 3,098.3 1,563.4

Total Fixed Assets 3,911.0 4,735.5 5,726.8 5,481.1

Investments 54.0 235.9 235.9 -

Inventories 2,179.5 2,209.7 2,111.6 1,868.0

Trade Receivables 177.0 185.7 180.7 175.7

Loans & Advances 290.0 474.8 449.7 437.3

Cash & Bank Balances 146.6 260.8 48.8 76.2

Other Current Assets 412.8 664.7 616.1 599.1

Total Current Assets 3,658.6 4,491.9 4,023.0 3,755.4

Trade Payable 526.5 589.2 573.5 557.7

Provisions 8.1 13.7 13.3 9.1

Other Current Liabilities 973.2 2,145.0 1,529.4 1,030.9

Total Current Liabilities 1,884.0 3,169.0 2,525.9 1,996.1

Net Current Assets 1,774.5 1,322.9 1,497.1 1,759.3

Application of Funds 5,938 6,311 7,240 7,257

Source: Company, ICICI Direct Research;

*Debt figure includes fully convertible debentures (| 257.5 crore), and other investments including promoter loans (|179 crore),

which are treated as Debt as per Ind-As,. It is an accounting entry and the company treats them as equity.




Exhibit 45: Cash Flow Statement


Profit before Tax 194.2 395.5 400.5 220.1

Depreciation 137.7 140.5 213.0 317.6

Interest paid 259.4 273.3 321.6 401.1

Cash Flow before wc changes 557.6 745.4 852.7 873.9

Net Increase in Current Assets (422.7) 397.0 564.6 278.0

Net Increase in Current Liabilities 8.7 229.3 (1,112.2) (529.8)

Net cash flow from op. activities 48.7 997.6 253.1 566.4

Purchase of Fixed Assets (915.7) (965.0) (1,204.2) (72.0)

(Purchase)/Sale of Investments (163.3) - 235.9 -

Net cash flow from inv. activities (1,084.2) (914.3) (915.1) (16.1)

Proceeds from Borrowing 2,120.3

Interest paid (223.2) (273.3) (321.6) (401.1)

Dividend Paid (40.8) (50.4) (50.2) (51.2)

Net cash flow from fin. activities 1,031.7 30.8 450.1 (522.9)

Net Cash flow (3.8) 114.2 (211.9) 27.4

Opening Cash 70.7 146.6 260.8 48.8

Closing Cash 146.6 260.8 48.8 76.2


Exhibit 46: Ratio Analysis

FY18 FY19E FY20E FY21E

Per Share Data

Reported EPS 10.2 18.5 17.6 10.2

Cash EPS 20.3 28.8 33.2 33.5

BVPS 168.1 170.5 180.7 187.9

Operating Ratios

EBITDA / Net Sales 29.2 26.1 28.5 33.6

PAT / Net Sales 7.3 8.7 7.7 5.3

Return Ratios

RoE 6.1 10.9 9.7 5.4

RoCE 8.1 11.0 10.2 8.8

RoIC 17.1 33.8 26.7 21.2

Valuation Ratios

EV / EBITDA 3.3 2.3 2.5 2.9

P/E 23.7 13.1 13.8 23.9

EV / Net Sales 3.5 2.3 2.5 2.9

Market Cap / Sales 1.7 1.1 1.1 1.3

Price to Book Value 1.4 1.4 1.3 1.3

Turnover Ratios

Asset turnover 0.3 0.5 0.4 0.4

Gross Block Turnover 2.0 2.9 2.2 1.9

Solvency Ratios

Net Debt / Equity 1.3 1.4 1.8 1.7

Current Ratio 1.6 1.1 1.3 1.5

Quick Ratio 0.5 0.4 0.5 0.6





RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,

Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




ANALYST CERTIFICATION

We /I, Deepak Purswani, CFA, MBA, Harsh Pathak, MBA, Research Analysts, authors and the names subscribed to this report; hereby certify that all of the views expressed in this research report accurately reflect our views about

the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned

Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered

Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities Limited Sebi Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank

and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on

www.icicibank.com

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship

with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the

securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected

recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would

endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI

Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in

circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein

is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers

simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting

and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who

must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient.

The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities

whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks

associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-

managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past

twelve months.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other

benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of

interest at the time of publication of this report.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of

the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this

report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or

use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in

all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.




Documents

Brigade Enterprises Ltd BRIENT) - Moneycontrol.comstatic-news.moneycontrol.com/static-mcnews/2019/04/... · 2019-04-01 · Brigade Enterprises Ltd BRIENT) BUY ... affordable housing,