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Building a strong edifice

We upgrade our rating on Brigade Enterprises (BRGD) to BUY from ADD with a revised target price of Rs598/share (earlier Rs555) as we roll forward to Mar’23E NAV. With waning of Covid cases leading to reopening of offices/malls and resumption in international travel, we expect the company’s annuity and hotel business to see a significant leg up from Q1FY23. We expect BRGD’s share of rental NOI to grow at 25% CAGR over FY21-24E to Rs5.7bn driven by incremental lease out of 2.4msf of vacant area across assets by Mar’23 in Bengaluru and Chennai. Further, we expect the company’s hotel business to clock a marginal EBITDA of Rs0.3bn in FY22E, Rs0.8bn in FY23E and Rs1.1bn in FY24E vs. FY20 EBITDA of Rs0.9bn. For the residential business, we model for flattish sales value of Rs28.1bn in FY22E but expect sales bookings of Rs36.5bn in FY23E and Rs43.4bn in FY24E driven by new launches. Key risks are prolonged weakness in office leasing and slowdown in residential demand.

* Residential segment to see continued momentum: Q3FY22 saw BRGD achieving residential sales bookings of 1.1msf worth Rs6.8bn vs. I-Sec estimate of Rs8.0bn owing to limited new launches during the quarter owing to approval delays. The company has 2.4msf of new residential launches lined up in Q4FY22 and another 6- 7msf of launches in FY23E; it is also looking to replenish its land bank through new project additions of ~15msf across Bengaluru/Chennai/Hyderabad in FY23E. We model for flattish residential sales value of Rs28.1bn in FY22E owing to fewer launches but expect sales bookings of Rs36.5bn in FY23E and Rs43.4bn in FY24E.

* Strong rental NOI CAGR of 25% over FY21-24E: The company’s focus remains on incremental leasing (0.4msf of new leasing achieved in Q3FY22) with an additional 0.8msf of leasing pipeline. The company is targeting to lease out vacant space of 2.4msf across assets by Mar’23. With the reduction of Covid cases in India, occupiers are firming up back-to-office plans which is expected to result in improved leasing traction from Q1FY23. Further, consumption across the company’s malls in Q3FY22 recovered to 100% of pre-Covid levels for like-to-like brands with 85% of tenants having shifted to minimum guarantee in Jan’22. 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.

* Hotels may see full-fledged recovery in FY23E: While the Omicron wave has impacted Jan-Feb’22 occupancies, the reopening of F&B and resumption of leisure/weddings/domestic business travel and resumption of international flights augur well for a sustained recovery for BRGD’s hotel portfolio from Q1FY23. We expect BRGD’s hotel business to clock a marginal EBITDA of Rs0.3bn in FY22E, Rs0.8bn in FY23E and Rs1.1bn in FY24E.

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