Real estate is a buzzing sector in the Indian economy. The growth needs space to house itself and here is the opportunity for real estate companies. Both commercial and residential spaces are scarce and therein lies the opportunity. To build on this opportunity, many real estate players are planning big projects offering huge space.
Business
Brigade Enterprises (Brigade) is a Bangalore-based real estate developer, focussed on residential, commercial, and hospitality properties in Bangalore and nearby areas in South India. As of November 23, 2007, Brigade has developed a total of 67 properties, comprising 41 residential properties, 21 commercial properties, and five hospitality properties, aggregating to approximately 5.67 million square feet of saleable area and approximately 6.74 million square feet of developable area. The company is developing two integrated lifestyle enclaves, 12 residential properties, and two hospitality properties, aggregating to approximately 12.53 million square feet of saleable area and approximately 13.84 million square feet of developable area.
Forthcoming properties of the company include four integrated lifestyle enclaves, 16 residential properties, nine commercial properties, and five hospitality properties, aggregating to approximately 23.14 million square feet of saleable area and approximately 30.32 million square feet of developable area.
The company sells the residential properties and offers the commercial properties on lease to users, whereas it intends to operate the hospitality properties on its own through arrangements with international hotel operators, such as Starwood, InterContinental, Banyan Tree, and Accor. The company has a good clientele when it comes to leased out commercial properties.
Financials
The company has reported good numbers over a long period of time. On a consolidated basis, it has grown from Rs 160 crore in FY2004-2005 to Rs 417 crore in FY2006-2007, registering a CAGR of 61%. On the other hand, the net profit has risen from Rs 19.87 crore to Rs 71.49 crore, depicting a CAGR of 89% over the same period of time. For the six months ended September 30, 2007, Brigade reported revenues of Rs 230.74 crore and a net profit of Rs 44.37 crore.
Objective
Brigade is tapping the capital market to raise funds for financing the costs associated with acquisition of land. It also intends to partly finance the construction costs of ongoing projects.
Outlook
The stock is available at a P/E multiple of 45 to 50, taking into account annualised earnings for the six months ended September 30, 2007, on fully diluted equity, assuming exercise of the green shoe option. The company has good growth plans and has a good project execution record. The IPO is rated at 3 out of 5, denoting average fundamentals by rating agency. One should note that the business model is asset light and ensures that in the long run the company will have steady earnings in terms of lease rentals.
However, there are some concerns investors must bear in mind. The company is a regional player mainly operating in Bangalore, and faces high geographical concentration risk. Also, the projects under consideration are of large sizes and may results in delays and cost over-runs. Though the company has taken step to avoid such incidence. The asset light business model also leaves the company with a low land bank compared to peers, and brings forth the risk of the company acquiring lands at higher costs, leaving less scope for margins expansion.
