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Pick up in leasing momentum remains key

Along expected lines, Brigade Enterprises’ (BRGD) Q2FY22 residential sales bookings were up 73% YoY in value terms to Rs8.3bn while incremental leasing and hotel segment operations remained weak on account of Covid. The residential business outlook remains strong and we expect BRGD to clock Rs35bn of sales bookings in FY22. An additional positive was company management indicating that it expects to close 0.4-0.5msf of new leasing in Q3FY22 from its leasing pipeline of 1.0msf and we expect BRGD’s share of rental NOI to grow at 25% CAGR over FY21-24E to Rs5.7bn driven by incremental leasing in Chennai/Bengaluru projects. We revise our Mar’22 target price based on 1x NAV to Rs555 from Rs400 primarily assigning 30% business development premium to the company’s residential business. However, we cut our rating to ADD from BUY post the 49% appreciation in the stock price over the last three months. Key risks are prolonged weakness in office leasing and slowdown in residential demand.

* Strong quarter for residential sales: Q2FY22 saw BRGD achieving residential sales bookings of 1.3msf worth Rs8.3bn (up 73% YoY in value terms) with Hyderabad and Chennai prokects accounting for 37% of the sale value. While Q2FY22 saw new launches of 0.5msf (excluding new inventory in existing projects), with 4-5msf of upcoming launches in existing projects and 2-3msf in new projects, we model for Rs35bn of sales bookings in FY22 which is expected to grow to Rs46bn by FY24E driven by expected new project additions of 6-7msf annually through acquisitions.

* Robust office rental collections, incremental leasing remains key: BRGD achieved Q2FY22 office rental collections of 99%. The focus remains on incremental leasing and as per company, of the 1.0msf of leasing pipeline, ~0.4-0.5msf new leasing LOIs are expected to be signed in Q3FY22 with rentals to start flowing in from Jun’22. Consumption across the company’s malls recovered to 90% of pre-Covid levels during the quarter and continues to trend upwards and normalise to pre-Covid levels by Q4FY22. We have factored in a 30% rental income loss for BRGD’s two operational malls in Bengaluru in FY22E which clocked FY20 rental income of Rs1.2bn with mall rentals to trend back to FY20 levels from FY23E onwards. We estimate BRGD’s share of rental NOI to grow at a 25% CAGR over FY21-24E to Rs5.7bn driven by incremental leasing in Tech Gardens and WTC, Chennai projects.

* Net debt decreases QoQ on account of residential debt reduction: BRGD’s Q2FY22 collections remained healthy at Rs9.4bn of which Rs7.4bn was from residential segment. BRGD’s share of net debt reduced by Rs0.9bn QoQ to Rs20.3bn on account of residential segment debt reducing by Rs1.2bn QoQ to Rs3.5bn. With peak capex now complete in Tech Gardens, Bengaluru and World Trade Centre, Chennai we expect net debt levels to remain around current levels over FY22-23E.

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