With scale-up plans on track, operations likely to improve; TP revised to Rs 345
Brigade Enterprises’ (BEL’s) Q2FY18 net profit of Rs 410 mn missed our estimate; new sales (Rs 2.2 bn) were impacted by RERA/GST uncertainty (down 36% y-o-y, up 18% q-o-q) with the company not launching any project during the quarter. We, however, expect BEL’s operations to improve going ahead, led by planned new launches (6msf in H2FY18 including 3msf in affordable housing space). Steady build-up in its leasing and hospitality portfolio with improved prospects of portfolio expansion post RERA are key positives. We revise our TP to Rs 345/share (Rs 340 earlier) due to lower capital costs (borrowing cost fell 100 bps in past 1 year). Maintain Buy. RERA/GST uncertainty impacts new sales: Revenue of Rs 4.8 bn (up 8% y-o-y, down 13% q-o-q) was driven by POCM-based revenue recognition in ongoing projects. Ebitda margin declined 90bps y-o-y. Net profit stood at Rs 410 mn (up 43% y-o-y, 29% q-o-q) versus our estimate of Rs 445 mn. Operations: volumes at 366k sft were down 37% y-o-y and up 17% q-o-q. Collections at Rs 3.6 bn declined compared to Rs 5.3 bn in previous quarter; management expects recovery in H2FY18.
Scale-up plans on track: BEL is developing 21msf across residential, hospitality and leasing verticals. It expects to launch 6msf projects over next 2 quarters. The company expects good demand for its projects, now that RERA/GST uncertainty is abating. It plans to double its hospitality portfolio from 1,000 keys currently over next 2-3 years. Outlook and valuations: Robust Bengaluru market fundamentals and preference for organised players post RERA should aid BEL’s well-balanced portfolio. Pick-up in operations will be determined by: (i) completion of annuity assets; (ii) launch of planned projects, and (iii) demand improvement in Bengaluru market. We lower our discount rate to arrive at a revised target price of Rs 345.