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On a strong footing

Our interaction with management of Brigade Enterprises (BEL) reinforces our bullish stance on the company. Management indicated that housing demand remains robust, and it is targeting a double-digit sales CAGR for the next few years. BEL has raised prices by ~5% over the last year. It has a conservative stance regarding its annuity business capex (office/retail/hospitality) with focus on cash flow improvement rather than portfolio expansion.

With the housing cycle likely turning (refer to Hot Property – The more things change…), we expect the sales momentum to remain healthy going ahead. Pre-sales and leasing trajectory will be the key triggers, in our view. Maintain ‘BUY’ with a target price of INR572.

Buoyant housing demand brightens prospects

BEL logged a 45% pre-sales CAGR over FY18–21 aided by: i) greater focus on the housing segment via land buys and launch of major projects (Cornerstone Utopia and El Dorado); ii) market share gains; iii) enhanced presence in Hyderabad and Chennai. With these cities benefiting from strong tech hiring, management is looking at a double-digit sales CAGR over the next few years along with steady pricing growth.

Office segment – Capex intensity tapering

Post-covid-19, BEL has adopted a cautious stance towards capex trajectory. Its focus is on leasing the remaining 1.6msf space in Brigade Tech Gardens (BTG) and on completing Brigade Twin Towers (expected by FY24/25). It expects leasing demand to pick up going ahead, and gross rentals (office + retail) to be ~INR5-5.25bn in FY22 and ~INR7.3-7.5bn in FY24 (~INR2.5bn in H1FY22).

Retail/hospitality business – focus on cash flow management

The pandemic has had a relatively greater impact on the retail and hospitality business compared with the office segment. Nevertheless, these businesses haven’t required any significant cash support from the parent. BEL is focussing on cash flow management rather than portfolio expansion over the medium term.

Outlook and valuation: Pressing the right buttons; maintain ‘BUY’

As highlighted in our comprehensive sector report Real Estate - The Charge of the Consolidating Brigade, RERA-driven consolidation is throwing up growth opportunities for organised players such as BEL.

Revival in housing demand (refer to Real Estate – Leadership matters) and robust housing demand in tech-dominated cities of Bengaluru, Hyderabad and Chennai are likely to culminate in robust growth for BEL going ahead. Management has prudently shifted focus towards the housing segment while bringing capex intensity down in the annuity business. Sales growth, leasing progress (especially in BTG) and cash flow/debt trajectory are key stock catalysts. We maintain ‘BUY/SN’ and target price of INR572 (at 20% premium to NAV of INR477).

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