Brigade Enterprises: Growth drivers firmly in place

16 Mar 2023 , 10:26 AM

Recommendation: Buy

Target Price: Rs 590

The company’s net debt has halved over last two years, although ~Rs 10 billion of due land payments over the next three to four quarters could lead to a modest increase on a QoQ basis. Despite strong operating performance and outlook, the stock has corrected 18% over the last six months, offering an attractive entry point, believe analysts at IIFL Capital Services. At CMP, the implied EV/OCF for the Residential business is 6.6x, lower than peer set average of ~9x.

Residential – strong momentum to continue

Recent interactions of analysts at IIFL Capital Services with the management of Brigade Enterprises suggest that the pre-sales momentum will be strong in Q4 as well. BRGD has launched at least three projects (Valencia at Hosur road, Calista at Budigere Cross and plotted development at Mysore), all in the affordable and mid-income segments. The company expects to clock in ~20% volume growth in FY23 (~5.5-6msf), and sustain the momentum over next two to three years with a target of doing ~10msf over the medium term. BRGD has added ~14-15msf of land bank across Bangalore and Chennai over the last four to five quarters.

Annuity – steady growth path

BRGD’s 8.7msf of Annuity portfolio is ~83% leased, generating rentals of Rs 5.5 billion p.a. (>Rs 4 billion BRGD share). Over the next three to four quarters, BRGD expects to post Rs 7.5 billion of rentals (Rs 5.5 billion BRGD share) as leasing improves. Further, it is executing 1.3msf of Twin Towers (to be 100% leased) and ~1.3msf of Padmini tech Valley (mix of lease/strata to be finalized). In the Hospitality portfolio, BRGD’s EBITDA run rate is >Rs 1 billion; it is actively looking at divesting up to 50% stake to lower debt and fund growth in this segment.

Valuations inexpensive; balance sheet healthy

Strong OCF generation and Rs 5 billion QIP have led to ~50% reduction in net debt over two years. However, Rs 10 billion of due land payments for ~14-15msf of land bank addition could lead to modest increase in net debt on a quarterly basis. ~85% of gross debt is backed by LRD etc., and higher leasing, especially for BTG/WTC, and any transaction in Hospitality segment can further bring down debt.