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Brigade Enterprises
Commercial story intact;
Reiterate Buy
�� Underperformance unjustified; Reiterate Buy
We reiterate our Buy rating on Brigade with PO of Rs135/sh offering potential
upside of 40%. The stock has underperformed its Bangalore peers in last six
months given delays in new project launches and completion of its commercial
assets. We have built in conservative estimates for our NAV of Rs169 (reduced
by 13%) and cut EPS estimate for FY12/13 by 7% to factor flat prices in FY12.
We have also pushed back development of new commercial assets by 2 years.
Commercial assets to drive performance in FY12
Commercial assets account for 51% of NAV and Brigade has invested more than
Rs10bn in these assets over last 4 years. We expect the four key assets to start
generating revenue in FY12 and to be the key trigger for the stock performance.
The office and retail assets when fully leased are expected to generate lease
rentals in excess of Rs1.6bn annually. It is looking to sell part of the office assets
to repay part of the debt, which should also drive earnings and cash flow in FY12.
Delayed residential launches hurting performance
Brigade, like other Bangalore developers, has also faced delay in new launches
with no significant launches in residential segment since FY10. While
management has shared plans for launching 9mn sq ft by 1HFY12 with majority
being in Bangalore, we believe even if Brigade achieves 50% of the management
guidance, the stock could see a strong rebound. We believe new launches are
critical for sustaining earnings and cash flow growth beyond FY12.
Key risks- slower launches, high interest rates
The key risk is the slower pace of launches in residential segment and mortgage
rates rising by over 100bps in next 6-9 months.
Reiterate Buy; PO of Rs135
We reiterate our Buy rating with PO of Rs135 with potential upside of 40%. The
stock has underperformed its Bangalore peers in last 6 months which we expect
to change given its commercial heavy assets should start generating income from
FY12. Most of these assets have already seen delay of more than 12 months,
due to slower demand. But we expect these assets to see strong demand given
continued improvement in IT/ITeS demand and expansion plans of retailers. We
have cut our PO by 13% to factor in flat prices in FY12 against our earlier
expectation of 10% increase in residential and delayed the build out of other
commercial assets by 18-24 months given slow execution of the current projects.
The key triggers for the stock include –
Sale of office assets – It is looking to sell 30-35% of its office property located
in SBD in Bangalore to part repay the debt
Retail Mall and Hotel – The commissioning of retail mall and hotel by
3QFY12 likely will be a key trigger. The company has invested more than
Rs4bn in these assets.
Launch of residential projects – Over 7mn sq ft of projects are slated for
launch in 1HFY12 which should provide visibility on cash flows and earnings
beyond the current projects which are nearing completion.
Trading cheap to its Bangalore peers
The stock has underperformed its Bangalore peers in last 6 months given slower
ramp up in launches and delay in commissioning of some of the commercial
assets like the retail mall and hotel. The stock is currently trading at 40% discount
to its peers on P/B even though it has large built out commercial assets in its
book while others are carrying largely land bank. We believe this discount is set
to narrow in FY12 as two of its large office properties will start generating lease
rentals while both the retail mall and hotel will be launched in 2HFY12. The
residential launches are also expected to see the light of the day given the
company has already started pre-marketing the projects
Earnings to be volatile
We expect earnings in FY12 to be driven by sale of office assets and the
inventory in the current residential projects, leading to volatility in quarterly
earnings. But as it launches new residential projects in FY12, we should see
more stable earnings from FY13.
We have lowered our earnings estimates for FY12 and FY13 by 7% due to flat
residential prices and have also assumed slower ramp up in rental income. But
we expect a sharp increase in rental earnings from FY13 as all its commercial
assets would be generating income, leading to sharp improvement in EBIDTA
margin.
Price objective basis & risk
Brigade Enterprises (XBDGF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs135 is,
therefore, based on our NAV of Rs169. We expect Brigade to trade at a discount
of 20% to large developers like DLF on a discount to NAV basis, because of its
smaller size and concentration of land bank primarily in one location - Bangalore.
Key assumptions underlying our NAV are WACC of 15.1%, capitalization rate of
11% and inflation of 5% from FY13E on both selling prices and construction
costs. On a P/E basis, at our PO of Rs135, the stock would trade at 12x FY12E
earnings. Downside risks are lower-than-expected volume and a delay in the
revival of demand for commercial real estate in Bangalore.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Brigade Enterprises
Commercial story intact;
Reiterate Buy
�� Underperformance unjustified; Reiterate Buy
We reiterate our Buy rating on Brigade with PO of Rs135/sh offering potential
upside of 40%. The stock has underperformed its Bangalore peers in last six
months given delays in new project launches and completion of its commercial
assets. We have built in conservative estimates for our NAV of Rs169 (reduced
by 13%) and cut EPS estimate for FY12/13 by 7% to factor flat prices in FY12.
We have also pushed back development of new commercial assets by 2 years.
Commercial assets to drive performance in FY12
Commercial assets account for 51% of NAV and Brigade has invested more than
Rs10bn in these assets over last 4 years. We expect the four key assets to start
generating revenue in FY12 and to be the key trigger for the stock performance.
The office and retail assets when fully leased are expected to generate lease
rentals in excess of Rs1.6bn annually. It is looking to sell part of the office assets
to repay part of the debt, which should also drive earnings and cash flow in FY12.
Delayed residential launches hurting performance
Brigade, like other Bangalore developers, has also faced delay in new launches
with no significant launches in residential segment since FY10. While
management has shared plans for launching 9mn sq ft by 1HFY12 with majority
being in Bangalore, we believe even if Brigade achieves 50% of the management
guidance, the stock could see a strong rebound. We believe new launches are
critical for sustaining earnings and cash flow growth beyond FY12.
Key risks- slower launches, high interest rates
The key risk is the slower pace of launches in residential segment and mortgage
rates rising by over 100bps in next 6-9 months.
Reiterate Buy; PO of Rs135
We reiterate our Buy rating with PO of Rs135 with potential upside of 40%. The
stock has underperformed its Bangalore peers in last 6 months which we expect
to change given its commercial heavy assets should start generating income from
FY12. Most of these assets have already seen delay of more than 12 months,
due to slower demand. But we expect these assets to see strong demand given
continued improvement in IT/ITeS demand and expansion plans of retailers. We
have cut our PO by 13% to factor in flat prices in FY12 against our earlier
expectation of 10% increase in residential and delayed the build out of other
commercial assets by 18-24 months given slow execution of the current projects.
The key triggers for the stock include –
Sale of office assets – It is looking to sell 30-35% of its office property located
in SBD in Bangalore to part repay the debt
Retail Mall and Hotel – The commissioning of retail mall and hotel by
3QFY12 likely will be a key trigger. The company has invested more than
Rs4bn in these assets.
Launch of residential projects – Over 7mn sq ft of projects are slated for
launch in 1HFY12 which should provide visibility on cash flows and earnings
beyond the current projects which are nearing completion.
Trading cheap to its Bangalore peers
The stock has underperformed its Bangalore peers in last 6 months given slower
ramp up in launches and delay in commissioning of some of the commercial
assets like the retail mall and hotel. The stock is currently trading at 40% discount
to its peers on P/B even though it has large built out commercial assets in its
book while others are carrying largely land bank. We believe this discount is set
to narrow in FY12 as two of its large office properties will start generating lease
rentals while both the retail mall and hotel will be launched in 2HFY12. The
residential launches are also expected to see the light of the day given the
company has already started pre-marketing the projects
Earnings to be volatile
We expect earnings in FY12 to be driven by sale of office assets and the
inventory in the current residential projects, leading to volatility in quarterly
earnings. But as it launches new residential projects in FY12, we should see
more stable earnings from FY13.
We have lowered our earnings estimates for FY12 and FY13 by 7% due to flat
residential prices and have also assumed slower ramp up in rental income. But
we expect a sharp increase in rental earnings from FY13 as all its commercial
assets would be generating income, leading to sharp improvement in EBIDTA
margin.
Price objective basis & risk
Brigade Enterprises (XBDGF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs135 is,
therefore, based on our NAV of Rs169. We expect Brigade to trade at a discount
of 20% to large developers like DLF on a discount to NAV basis, because of its
smaller size and concentration of land bank primarily in one location - Bangalore.
Key assumptions underlying our NAV are WACC of 15.1%, capitalization rate of
11% and inflation of 5% from FY13E on both selling prices and construction
costs. On a P/E basis, at our PO of Rs135, the stock would trade at 12x FY12E
earnings. Downside risks are lower-than-expected volume and a delay in the
revival of demand for commercial real estate in Bangalore.
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