Brigade Enterprises: Invest at cut-off

Investors with moderate return expectations can consider an exposure in the initial public offering of the real-estate developer, Brigade Enterprises, with a two-year perspective.

A reasonable track record of property development, steady growth in revenues and execution of projects through reputed contractors are positives for the company.

Companies with a strong track record, huge land bank and a pan-India presence are those that have recently enjoyed a re-rating by the market. Smaller players with good fundamentals, such as Brigade, have not been able to attract similar valuations. The asking price of Rs 351-390 for the company does appear stiff at this juncture, given that it is a relatively small player with geographic concentration and a business model that is not too differentiated from some of the recently-listed players in the region.

However, the ongoing projects, if completed and sold on time, may help the company command better valuations. Based on this earnings assumption, the offer price values the company at 16-18 times its expected earnings for FY-09.

Brigade is a real-estate developer with a majority of its projects executed in Bangalore.

The company is primarily focussed on residential properties with experience in commercial and hospitality projects as well. It has so far executed 5.67 million sq. feet of saleable area. The issue proceeds are to be used for constructing ongoing projects and acquiring land.
Comfortable track record

Brigade has in the past executed projects across real-estate domains and has not narrowed its operations to specific segments.

While, broadly, it has presence in residential, commercial and hospitality segments, it has further diversified its activities within these domains. For instance, in the residential segment, the company is among the earlier players to venture into integrated enclaves, together with apartment buildings for the middle and high-income group.

Integrated enclaves, which are self-contained gated communities, have enabled the company attain development qualification in residential, commercial, retail, hospitality and other basic infrastructure projects simultaneously.

That 75 per cent and 66 per cent of two on-going projects have been pre-sold also reflects the increasing demand for such gated communities in metropolitan cities such as Bangalore.

In the commercial space, the company has a mix of lease and sell models. In the hospitality segment, it is now managing two serviced residence properties with more such ongoing projects and has also tied-up with brands such as Accor and Sheraton for running hotels and resorts.

We believe that the enclave projects and hospitality segments have the potential to aid profit margins.

These relatively recent ventures appear to have contributed to a jump in operating profit margins from 20 per cent in FY-05 to 31 per cent in FY-07.

The half-year ended September has further taken the OPMs to about 40 per cent. That the enclaves have also brought in high volume is evident from revenues jumping from Rs 162 crore to Rs 402 crore over FY-05 to FY-07.

With its past record, Brigade’s ongoing projects of 12.53 million sq. ft (about twice the projects executed so far) do not appear too challenging to execute.

That the company has in the past tied-up with Simplex infrastructures and B. E. Billimoria and Company also provides confidence to the timely execution of construction contracts.

With a number of developers having huge developable area, sub-contracting to qualified contractors may be the more prudent way for them to ensure timely and quality execution.
Risks

Of the total land reserves of 44 million sq. ft of developable area, about 35 per cent are yet to be registered in the company’s books and are still in the agreement stage.

The forthcoming projects of the company (about 30 million sq ft. of developable area) may face the risk of delays in take-off if such land is not transferred soon.

Further, a portion of the reserve, which is agriculture land, will be held in the name of some individuals on behalf of the company until it is converted.

Any roadblocks in such conversion could also disrupt future projects. We have, therefore, considered only ongoing projects for our valuations.

That the company has a relatively low-land bank also implies that future parcels would be purchased at higher cost, posing risk of spiking operating costs.

Cost of land has gone up from 15 per cent to 31 per cent of the total project expenses between 2004 and 2007.