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Launches to pick up; strong visibility on leasing

Focus on business development intact

* We met the management of Brigade Enterprises (BEL) to understand its business outlook. Key takeaways are (1) Demand momentum is intact owing to favorable affordability despite 200bps increase in interest rate (2) BEL expects to launch 13msf of projects over the next 12 months (3) re-iterated its target to grow sales volumes by 15-20% over the next three years (4) focus on business development to continue across Bengaluru, Chennai, and Hyderabad and (5) expect commercial portfolio to be fully leased by Sep-23

* On the back of a strong launch pipeline, we expect BEL’s pre-sales to record a 17% CAGR to 7msf by FY25. We believe pick up in business development activity will lead to re-rating in value of its residential segment as the current market price does not reflect the growth potential. We reiterate our Buy rating with an unchanged SOTP-based TP of INR720, implying 55% upside potential.

Demand momentum intact; 13msf of launches over the next 12 months

* Management indicated that demand momentum continues to remain intact as witnessed through steady progress on sustenance sales as well as strong response to recent launches

* As per the management, affordability continues to remain intact despite 200bps rise in mortgage rates as monthly EMIs at INR83,000-84,000 (for a mortgage of INR10m) are still below its peak of INR100,000 in 2015-16.

* Average household income for homebuyers in Bengaluru has doubled to INR4.5-5.0m over the last five years, and hence, affordability is still not a challenge until interest rate reaches a psychological barrier of double digits.

* While the company has been largely focused on sustenance sales over the last six quarters, management expects the launch intensity to improve from hereon. BEL is slated to launch 13msf of projects across Bengaluru (8.5msf), Chennai (3.5msf), and Hyderabad (1msf) over the next 12 months.

* The company remains confident of delivering 15-20% CAGR in pre-sales volumes over the next three years and is gearing up its launch and project pipeline to meet the target. We expect the company to deliver 17% CAGR in pre-sales over FY23-25 to 7msf at a value of INR48b.

Focus on business development to remain intact

* Over the last 12 months, the company has added 10msf of residential projects. Currently, BEL has ~40msf of residential projects under pipeline, of which, 13msf is slated to be launched over the next 12 months. The remaining 27msf of projects under pipeline provides visibility for three-four years.

* Management generally prefers a visible pipeline of five-six years, hence, focus on business development will remain intact, especially in its core markets of Bengaluru and Hyderabad.

* In Chennai, BEL is targeting a revenue of INR60b over the next five years from its residential projects alone and looking to consolidate its presence across verticals.

Confident of fully leasing its commercial portfolio by Sep’23

* Over the last 12 months, the company has leased 1.2msf of space in its operational commercial portfolio.

* While the leasing traction has been slower than expected, the company expects to fully lease out its portfolio by Sep’23. We expect the rental income to record a 15% CAGR to INR8b by FY25.

* Brigade Twin tower (1.2msf) is expected to be delivered over the next 18 months and will take the rental income to INR10b and EBITDA to INR7.5b. However, its contribution is not considered for valuation right now

* Additionally, it is evaluating one more commercial project (2.0msf) along with mixed use development in Chennai TVS land (0.3msf), which provides growth visibility in rental portfolio even beyond FY25.

Valuation and view

* We maintain our estimates across the residential and commercial segment as the company reiterated its 15-20% volume growth guidance in residential segment and remains confident of fully leasing its commercial segment by 1HFY24.

* We derive a value of INR60b for its commercial business (INR5.5b EBITDA valued at 8.5% cap rate) and INR25b for its hospitality business (INR1.5b EBITDA at 17.5x EV/EBITDA). And at its current valuation, it implies INR35-40b for its residential business, which would be equal to NAV of its existing residential project pipeline, indicating zero growth value.

* Thus, pick-up in business development activity by BEL will lead to re-rating in valuation for its residential segment. We reiterate our Buy rating with an unchanged SOTP-based TP of INR720, implying a 55% upside potential.

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