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Brigade Enterprises
3Q earnings disappoint, office
demand strong; Reiterate Buy
3Q earnings below expectation; Reiterate Buy
Brigade reported disappointing 3Q earnings at Rs104mn (against our expectation
of Rs170mn) primarily due to higher interest costs and lower revenue recognition.
Positively EBIDTA margin saw sharp rebound. We reiterate our Buy rating with a
lower PO of Rs100 (-9%) with potential upside of 40% from current levels. We
have cut our PO to factor in a delay in residential launches and six month delay in
completion of its retail mall project. We continue to like the stock given strong
rental growth visibility and good pipeline of residential launches in FY13.
Aggressive residential launches ahead
Brigade continues to aggressively look at new residential launches with another
5mn sq ft lined up over the next 6 months. It has seen strong response to its
launches in last 18months with 60% of the inventory pre sold. But the benefit of
these launches will start reflecting in revenues only from 2HFY13. We have cut
our earnings estimate for FY12-14 by 4-25% to factor in higher interest cost and
have also pushed the revenue recognition from new residential projects by 6
months to reflect the delay in launches.
Solid demand for its commercial assets
Brigade’s commercial projects in Bangalore have seen strong traction on leasing
with its Summit project 95% leased and vacancy in WTC reducing to 35%. The
benefit of the strong leasing should reflect in earnings from FY13. It has managed
to sell 30% of its inventory in WTC with the latest transaction at Rs7000/sq ft
against our estimate of Rs6000/sq ft. The retail mall (pre leased 85%) is expected
to start operations from 4Q with rental accrual expected from 2QFY13.
Debt remains under control
The debt has remained flat in FY12 at Rs8bn given strong inflow from residential
and commercial sale. Brigade expects to reduce debt by over 25% in FY13.
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 Rs100 is
therefore based on our NAV of Rs111. We expect Brigade to trade at a discount
of 10% to its NAV given high NAV visibility, good earnings momentum and low
regulatory risk. Key assumptions underlying our NAV are WACC of 15.1%,
capitalization rate of 11% and inflation of 5% from FY14E on both selling price
and construction costs. On a P/E basis, at our PO of Rs100, the stock would
trade at 11x FY13E earnings. Downside risks are lower-than-expected volume
and delay in 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
3Q earnings disappoint, office
demand strong; Reiterate Buy
3Q earnings below expectation; Reiterate Buy
Brigade reported disappointing 3Q earnings at Rs104mn (against our expectation
of Rs170mn) primarily due to higher interest costs and lower revenue recognition.
Positively EBIDTA margin saw sharp rebound. We reiterate our Buy rating with a
lower PO of Rs100 (-9%) with potential upside of 40% from current levels. We
have cut our PO to factor in a delay in residential launches and six month delay in
completion of its retail mall project. We continue to like the stock given strong
rental growth visibility and good pipeline of residential launches in FY13.
Aggressive residential launches ahead
Brigade continues to aggressively look at new residential launches with another
5mn sq ft lined up over the next 6 months. It has seen strong response to its
launches in last 18months with 60% of the inventory pre sold. But the benefit of
these launches will start reflecting in revenues only from 2HFY13. We have cut
our earnings estimate for FY12-14 by 4-25% to factor in higher interest cost and
have also pushed the revenue recognition from new residential projects by 6
months to reflect the delay in launches.
Solid demand for its commercial assets
Brigade’s commercial projects in Bangalore have seen strong traction on leasing
with its Summit project 95% leased and vacancy in WTC reducing to 35%. The
benefit of the strong leasing should reflect in earnings from FY13. It has managed
to sell 30% of its inventory in WTC with the latest transaction at Rs7000/sq ft
against our estimate of Rs6000/sq ft. The retail mall (pre leased 85%) is expected
to start operations from 4Q with rental accrual expected from 2QFY13.
Debt remains under control
The debt has remained flat in FY12 at Rs8bn given strong inflow from residential
and commercial sale. Brigade expects to reduce debt by over 25% in FY13.
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 Rs100 is
therefore based on our NAV of Rs111. We expect Brigade to trade at a discount
of 10% to its NAV given high NAV visibility, good earnings momentum and low
regulatory risk. Key assumptions underlying our NAV are WACC of 15.1%,
capitalization rate of 11% and inflation of 5% from FY14E on both selling price
and construction costs. On a P/E basis, at our PO of Rs100, the stock would
trade at 11x FY13E earnings. Downside risks are lower-than-expected volume
and delay in revival of demand for commercial real estate in Bangalore.
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