INDUSTRY REAL ESTATE CMP (as on 03 Nov 2015) Rs 162 Target Price Rs 210 Nifty 8,061 Sensex 26,591 KEY STOCK DATA Bloomberg/Reuters BRGD IN/BRGD.BO No. of Shares (mn) 113 MCap (Rs bn) / ($ mn) 18/279 6m avg traded value (Rs mn) 11 STOCK PERFORMANCE (%) 52 Week high / low Rs 180/121 3M 6M 12M Absolute (%) 10.6 6.9 9.5 Relative (%) 16.3 8.5 14.0 SHAREHOLDING PATTERN (%) Promoters 57.41 FIs & Local MFs 4.23 FIIs 2.80 Public & Others 35.56 Source : BSE Parikshit D Kandpal parikshitd.kandpal@hdfcsec.com +91-22-6171-7317 Margin outperformance A tilt in the revenue mix towards high-margin projects helped Brigade Enterprises (BEL) report beat on consolidated net profits (56% ahead of our estimates). Debt levels remained comfortable with net D/E at 0.89x down vs. 0.96x end of 1QFY16. Despite strong financial performance, we remain cautious on debt levels. BEL has Rs 5.4bn unpaid land dues, apart from Rs 3.3bn of pending asset capex on lease assets. The company s plan to develop new office space of 5.2mn sqft, may be capex intensive and put pressure on the balance sheet. The pressure, however, will be partly alleviated by Rs 24.4bn of pre-tax inflow from residential business and the GIC tie-up. Residential recovery is key to bridge the CF mismatch and keep D/E under check. Over FY16-18E, re-rating is contingent on (1) Pickup in pre-sales, (2) Rentco portfolio nearing maturity by FY17-18E, (3) D/E reducing after peaking out over FY17/18E and,, (4) Upsides from GIFT and the GIC tie-up. We maintain BUY with SOTP of Rs 210/sh. At CMP, BEL trades at 8.7x FY17E EPS/ 1.1x FY17E BV. RESULTS REVIEW 2QFY16 03 NOV 2015 Brigade Enterprises BUY Highlights of the quarter Strong financial performance: BEL s 2QFY16 conso. revenue, EBIDTA and net profit grew (7.7%), 42.6% and 87.5% YoY, respectively. EBIDTA margins expanded by 1,346bps YoY and came in at 38.1%. This can be attributed to the shift towards high-realisation projects. New projects to add to capex: Whilst BEL has Rs3.3bn of pending capex (over FY16-18E), the company is planning to add 3.5mn sqft (HUL land, Whitefield) and 1.7mn sqft (Kansai land Chennai) under assets. Acquired by the GIC:BEL JV, these lands may require Rs15bn outlay towards development (Rs 7.5bn BEL share). We expect D/E to increase beyond 1x (from 0.89x end 2QFY16). New launches to help achieve 3mn sqft pre-sales: BEL has achieved 1.3mn sqft pre-sales during 1HFY16E and maintained 3mn sqft of pre-sales guidance for FY16E. During 2HFY16, BEL expects to launch new projects with 3.8mn sqft saleable area. Financial Summary (Consolidated) Year Ending March (Rs mn) 2QFY16 2QFY15 YoY (%) 1QFY16 QoQ (%) FY14 FY15 FY16E FY17E Net Sales 3,401 3,686 (7.7) 3,534 (3.8) 9,468 13,108 16,523 19,369 EBITDA 1,297 909 42.6 1,039 24.8 2,985 3,830 4,990 5,978 APAT 387 206 87.5 246 57.4 920 952 1,268 1,705 Diluted EPS (Rs) 3.4 0.6 515.6 0.7 378.8 7.9 8.4 13.8 18.6 P/E (x) 20.4 19.2 11.7 8.7 EV / EBITDA (x) 9.4 8.9 6.6 5.6 RoE (%) 7.0 10.3 13.1 16.3 Source : Company, HDFC sec Inst Research HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Consolidated revenue declined 7.7% YoY, in line with our estimate EBIDTA grew 42.6% YoY ahead of our estimates by 42.6% Net profit grew 87.5% YoY ahead of our estimates by 56% EBIDTA margins expanded 1,346bps owing to higher contribution from better margins projects. This may not sustain and we model 30.2% for full year FY16E BEL recorded pre-sales volume/value/realisation of 0.71mn sqft/ Rs4bn/ Rs5,590/sqft Quarterly Financial Snapshot (Consolidated) Particulars 2QFY16 2QFY15 YoY (bps) 1QFY16 QoQ (bps) Net Sales 3,401 3,686 (7.7) 3,534 (3.8) Construction Expenses (1,303) (1,956) (33.4) (1,638) (20.4) Employee Expenses (301) (280) 7.5 (283) 6.6 Other Operating Expenses (500) (541) (7.5) (574) (12.9) EBITDA 1,297 909 42.6 1,039 24.8 Interest Cost (452) (317) 42.3 (443) 2.1 Depreciation (255) (264) (3.3) (236) 8.1 Other Income 58 50 15.8 39 49.2 PBT 648 378 71.3 399 62.3 Minority Interest 25 - Share of associates 1 3 Tax (237) (175) 35.4 (154) - APAT 387 206 87.5 246 57.4 Margin Analysis (Consolidated) 2QFY16 2QFY15 YoY (bps) 1QFY16 QoQ (bps) Material Expenses % Net Sales 38.3 53.1 (1,474) 46.4 (804) Employee Expenses % Net Sales 8.9 7.6 126 8.0 86 Other Operating Expenses % Net Sales 14.7 14.7 3 16.2 (155) EBITDA Margin (%) 38.1 24.7 1,346 29.4 873 Tax Rate (%) 36.5 46.2 (968) 38.5 (194) APAT Margin (%) 11.4 5.6 578 7.0 442, * Consolidated financials Pre-sales Trend 2QFY16 2QFY15 YoY (%) 1QFY16 QoQ (%) Sales Volume (mn sqft) 0.7 0.8 (11.7) 0.6 15.6 Sales Value (Rs mn) 3,980 4,087 (2.6) 3,336 19.3 Average Realization (Rs/sqft) 5,590 5,071 10.2 5,416 3.2 Page 2
During 2QFY16, consolidated net debt decreased by Rs 168mn to Rs 12.6bn. Strong collections of Rs 5.6bn (Rs 1.6bn increase qoq) resulted in this outperformance Consolidated net debt decreased by Rs 168mn; gross D/E may peak at 1.2x in the worst case BEL s consolidated net D/E decreased from 0.96x in 1QFY16 to 0.89x during 2QFY16 (reduced Rs 168mn sequentially to Rs 12.6bn. Consolidated gross debt increased by Rs327mn to Rs 14.3bn). This was primarily on account of outgo on land payments/other investments/cwip. While we continue to remain cautious on BEL s rising debt levels, we find comfort in the debt partly being backed by Rentco annuity income and partly by working capital debt for projects. BEL may not have near-term liquidity concerns. We expect consolidated gross debt to increase to Rs 16.6bn by FY17E (an increase of Rs 2.2bn from current levels). Gross D/E will peak at 1.2x in worst case scenario. BEL consolidated net D/E has decreased from 0.96x in 1QFY16 to 0.89x in 2QFY16 Management has guided for debt peaking out at 1.2x We expect BEL s ongoing projects to generate pre-tax surplus of Rs 24.4bn. This shall limit further build up in debt Debt/Equity Ratio Trend (X) (Consolidated) (Rs mn) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Net worth 9,580 7,942 8,326 7,778 7,896 8,482 9,368 13,182 12,813 12,645 Net debt (Rs mn) 12,148 12,339 12,487 12,730 12,794 13,008 13,142 14,744 13,388 14,276 Net D/E (x) 0.79 0.64 0.67 0.61 0.62 0.65 0.71 0.89 0.96 0.89 Details Of Ongoing Projects Ongoing BEL projects Ongoing SPV projects Stock sales Area (mn sqft) Total launched saleable area 12.87 4.33 0.06 17.26 Less: LO Share 2.76 0 0 2.76 Co share of saleable area 10.11 4.33 0.06 14.5 Sold till date 5.4 2.39 0 7.79 To be sold 4.71 1.94 0.06 6.71 Estimated Sale value (Rs mn) Value of sold units 26,594 11,903-38,497 Value of unsold units 25,391 9,865 515 35,771 Total sale value - a 51,985 21,768 515 74,268 Collection till date on sold units - b 16,655 5,680-22,335 Balance collection (including sold units) - c = a-b 35,330 16,088 515 51,933 Estimated cost for projects (incl Land/NRD) - d 36,584 15,899 278 52,761 Cost incurred till date - e 17,146 7,772 278 25,196 Balance cost to be incurred f = d-e 19,438 8,127-27,565 Pre-tax surplus - g = c-f 15,892 7,961 515 24,368 Total Page 3
We expect BEL to exceed its cumulative FY15-17E guidance (Rs45bn) with pre-sales of ~Rs 47.6bn and pre- sales volume of ~9.3mn sqft We have estimated 33.8% EPS CAGR for FY15-17E Key assumptions and estimates Summary Of Key Assumptions And Estimates Estimates Growth (%) Comments FY15 FY16E FY17E FY16E FY17E Volume assumptions Residential - Brigade share (mn sqft) 2.8 3.0 3.1 5.7 We expect BEL to achieve its cumulative FY15-17E guidance with presales of ~Rs 47.6bn. Presales volume 5.3 could be ~9.3mn sqft. Orchards, Panorama, Cosmopolis, Exotica and Meadows are key volume drivers Average rate (Rs/sqft) 5,077 5,305 5,537 4.5 Price increase in line with inflation and product mix 4.4 changes Sales value Brigade share (Rs mn) 14,215 15,699 17,248 10.4 9.9 10.2% FY15-17E pre-sales CAGR Rental Income: Gross area for lease (mnsf) 1.6 2.0 2.3 23.6 Addition of smaller assets will lead to gradual ramp-up of 15.6 annuity portfolio Average Occupancy (%) 90.0 90.0 90.0 - - Brigade leased space (mnsf) 1.5 1.8 2.1 23.6 15.6 Multiplied by average occupancy Average Rental (Rs/sqft/month) 105 84 82 (20.1) (2.4) Rental trend in line with product mix Brigade share - rental income (Rs mn) 1,842 1,819 2,053 (1.3) 12.8 5.6% FY15-17E sales CAGR Earnings forecast Residential Sales (Rs mn) 9,739 12,974 15,309 33.2 18.0 25.3% CAGR for FY15-17E on back of robust pre-sales Rental income (Rs mn) 1,742 1,819 2,053 4.4 8.5% FY15-17E rental CAGR - in line with new lease 12.8 addition mentioned above Hospitality (Rs mn) 1,628 1,729 2,007 6.2 11.0% FY15-17E CAGR in line with hospitality assets 16.1 addition Total 13,109 16,523 19,369 26.0 17.2 21.5% CAGR for FY15-17E EBIDTA (Rs mn) 3,830 4,990 5,978 30.3 19.8 24.9% CAGR for FY15-17E EBIDTA Margin (%) 29.2 30.2 30.9 98.0 66.7 Higher realisation in real estate projects to aid margins Net interest expense* 1,314 1,762 1,756 34.1 (0.3) Interest increase in line with capex PAT (Rs mn) 952 1,268 1,705 33.1 34.5 33.8% CAGR for FY15-17E PAT Margin (%) 7.3 7.7 8.8 40.8 113.3 PAT margins changes in line with EBIDTA margin trend EPS (Rs) 8.4 13.8 18.6 63.9 34.5 Cash flows forecast CFO - a 260 4,866 2,185 CFI - b (3,876) (1,833) (581) FCF - a+b (3,616) 3,033 1,605 Free cash flow recovery in FY16-17E CFF-c 3,734 (2,954) (1,329) Total change in cash - a+b+c 118 79 276 Source: HDFC sec Inst Research Page 4
We value: Residential real estate business at Rs 64/share, Commercial annuity assets at Rs 209/share, Hospitality at Rs 63/share, Land bank at Rs 29/share We reduce net debt and balance land payments at Rs 132/share and Rs 22/share respectively, to arrive at total SOTP valuation of Rs 210/share for BEL Valuation Sum Of The Parts Rs mn Rs/share Comments Gross NAV residential/commercial sale 7,177 64 NAV based on the methodology discussed Gross NAV office/retail/malls 23,504 209 NAV based on the methodology discussed Land bank 3,240 29 NAV based on the methodology discussed Hotels 7,036 63 9x FY17E EV/EBIDTA Total GAV (Rs mn) 40,956 365 Gross net asset value Less: Net Debt 14,795 132 FY16E net debt Less: Unpaid land cost 2,515 22 NAV 23,646 210 Source: HDFC sec Inst Research SOTP Valuation We have adopted DCF methodology to arrive at BEL s NAV/share. We value the residential real estate business at Rs 64/share, commercial annuity assets at Rs 209/share, hospitality at Rs 63/share, land bank at Rs 29/share and reduce net debt and balance land payments at Rs 132/share and Rs 22/share, respectively, to arrive at total SOTP valuation of Rs 210/share. We don t ascribe any NAV discount to BEL as we have only valued the projects that have visibility over the next five years. For land bank beyond that period, we have valued at the current market rates. Real estate development NAV calculation methodology We have divided BEL s entire land bank (with launch visibility over the next five year) into residential projects (based on the information given by the company). We have not added Rs 2.7bn outgo on Kansai land as we await more clarity on how it will be developed We have arrived at the sale price/sq ft and the anticipated sales volumes for each project based on our discussions with industry experts. We have deducted the cost of construction based on our assumed cost estimates, which have been arrived at after discussions with experts. We have further deducted marketing and other costs that have been assumed at 5% of the sales revenue. We have deducted income tax based on the tax applicable for the project. The resultant cash inflows at the project level have been discounted based on WACC of 16% (cost of equity 22% based on beta of 2.2x & debt/equity ratio of 0.5x). All the project-level NAVs have then been summed up to arrive at the NAV of the company For commercial office/retail space we have discounted rentals using 14% WACC for the Page 5
1% increase in average base sale price impacts our NAV positively by 1.9% Every 100bps increase in sale price inflation impacts our NAV positively by 5.2% 100bps increase in cost inputs decreases our NAV by 3.4% 100bps increase in discounting rate impacts our NAV negatively by 4.6% forecasted period and terminal value using the cap rate of 11%. For land beyond five year visibility, we have valued at current market price. We have valued hotels at 9x FY17E EV/EBIDTA From the NAV, we have deducted the net debt and likely outgo on balance land payments as of FY16E to arrive at the final valuation of the company. NAV sensitivity analysis Sensitivity to property price Our model is sensitive to changes in the assumptions regarding property prices. For every 1% change in the base property prices (see exhibit above for base price assumptions), the NAV will change by approximately 1.9%. Nav Sensitivity To Change In Average Sale Price % change in sale price -10-5 0 5 10 NAV/share (Rs) 169 190 210 230 250 Change in NAV (%) (19.3) (9.5) - 9.7 19.5 Sensitivity of NAV to changes in sale inflation In our base case, we have assumed the annual sale price inflation at 5%. For every 100bps increase in the annual sale price inflation, the NAV will increase by about 5.2%. Nav Sensitivity To Change In Sales Inflation Sales inflation rates (%) 3 4 5 6 7 NAV/share (Rs) 187 198 210 220 231 Change in NAV (%) (10.9) (5.4) - 5.2 10.5 Sensitivity of NAV to changes in cost inflation In our base case we have assumed the cost of inflation to be 6%. For every 100bps increase in construction cost inflation, the NAV will change by about 3.4%. Nav Sensitivity To Change In Cost Inflation Cost inflation rates (%) 4 5 6 7 8 NAV/share (Rs) 224 217 210 202 195 Change in NAV (%) 7.1 3.5 - (3.4) (6.9) The combined impact of a 100bps increase in sale price inflation and cost inflation will be a NAV increase of 1.8%. Sensitivity of NAV to changes in discount rate In our base case, we have assumed a discount rate of 16%. For every 100bps increase in the discount rate, the NAV will fall by 4.6%. Nav Sensitivity To Change In WACC WACC rates (%) 14 15 16 17 18 NAV/share (Rs) 228 219 210 200 190 Change in NAV (%) 8.8 4.4 - (4.6) (9.1) Page 6
Income Statement (Consolidated) Y/E March (Rs mn) FY13 FY14 FY15 FY16E FY17E Net Sales 8,227 9,468 13,108 16,523 19,369 Growth (%) 34.2 15.1 38.5 26.0 17.2 Material Expenses 4,618 3,462 5,836 7,751 8,927 Employee Expenses 757 914 1,048 1,267 1,497 Other Operating Expenses 764 2,106 2,395 2,514 2,967 EBIDTA 2,088 2,985 3,830 4,990 5,978 EBIDTA (%) 25.4 31.5 29.2 30.2 30.9 EBIDTA Growth (%) 46.2 42.9 28.3 30.3 2.2 Other Income 119 199 200 202 204 Depreciation 773 818 992 1,209 1,481 EBIT 1,434 2,367 3,039 3,982 4,701 Interest 898 1,131 1,314 1,762 1,756 PBT 536 1,236 1,725 2,220 2,945 Tax (64) 346 575 666 854 PAT 600 890 1,150 1,554 2,091 Minority Interest 1 20 (212) (286) (385) Share of associates 13 10 15 - - APAT 612 920 952 1,268 1,705 APAT Growth (%) (7.8) 50.2 3.5 33.1 34.5 EPS 5.3 7.9 8.4 13.8 18.6 EPS Growth (%) 5.4 48.2 6.6 63.9 34.5 Balance Sheet (Consolidated) Y/E March (Rs mn) FY13 FY14 FY15 FY16E FY17E SOURCES OF FUNDS Share Capital 1,123 1,123 1,127 1,127 1,127 Reserves 10,999 11,680 12,440 13,444 14,756 Total Shareholders Funds 12,121 12,802 13,567 14,572 15,883 Minority Interest 55-258 545 930 Long Term Debt 8,427 5,327 8,926 7,926 8,676 Short Term Debt 2,121 4,888 7,707 7,778 7,849 Total Debt 10,549 10,215 16,632 15,703 16,525 Deferred Taxes 244 355 366 366 366 Long Term Provisions & Others - - - - - TOTAL SOURCES OF FUNDS 22,968 23,372 30,823 31,185 33,704 APPLICATION OF FUNDS Net Block 10,495 12,230 11,718 12,543 11,847 CWIP 3,886 2,460 4,857 4,857 4,857 Goodwill - 37 1,902 1,902 1,902 Investments, LT Loans & Advs 74 822 345 345 345 Inventories 9,099 11,231 15,444 18,744 20,744 Debtors 198 372 150 151 153 Cash & Equivalents 470 383 829 908 1,184 ST Loans & Advances, Others 5,307 5,880 7,738 8,239 9,961 Total Current Assets 15,074 17,865 24,160 28,042 32,041 Creditors 850 2,033 2,984 3,282 3,447 Other Current Liabilities & Provs 5,711 8,022 9,208 13,255 13,875 Total Current Liabilities 6,561 10,054 12,192 16,537 17,322 Net Current Assets 8,513 7,811 11,968 11,505 14,720 Deferred tax assets 13 34 34 34 TOTAL APPLICATION OF FUNDS 22,968 23,372 30,823 31,185 33,704 Page 7
Cash Flow (Consolidated) Y/E March (Rs mn) FY13 FY14 FY15 FY16E FY17E PBT before minority 536 1,236 1,725 2,220 2,945 Non-op income & EO items (55) (122) (36) (202) (204) Taxes (60) (253) (513) (666) (854) Interest expenses 1,270 1,131 1,314 1,762 1,756 Depreciation 773 818 992 1,209 1,481 Working Capital Change (2,175) 2,094 (3,222) 542 (2,939) OPERATING CASH FLOW ( a ) 288 4,903 260 4,866 2,185 Capex (842) (1,541) (2,191) (2,035) (785) Free cash flow (FCF) (554) 3,362 (1,932) 2,831 1,401 Interest/dividend income 23 32 102 202 204 Investments (26) (828) (1,786) 0 0 INVESTING CASH FLOW ( b ) (845) (2,338) (3,876) (1,833) (581) Share capital Issuance 41 0 25 0 0 Debt Issuance 1,870 (1,226) 5,279 (929) 822 Interest expenses (1,270) (1,193) (1,308) (1,762) (1,756) Dividend (196) (197) (262) (263) (394) Others 92 0 0 0 0 FINANCING CASH FLOW ( c ) 538 (2,616) 3,734 (2,954) (1,329) NET CASH FLOW (a+b+c) (19) (50) 118 79 276 Non-operating and EO items - - - - - Closing Cash & Equivalents 470 420 501 908 1,184 Key Ratios (Consolidated) FY13 FY14 FY15 FY16E FY17E PROFITABILITY (%) GPM 43.9 63.4 55.5 53.1 53.9 EBITDA Margin 25.4 31.5 29.2 30.2 30.9 EBIT Margin 17.4 25.0 23.2 24.1 24.3 APAT Margin 7.4 9.7 7.3 7.7 8.8 RoE 5.0 7.0 10.3 13.1 16.3 Core RoCE 6.6 7.0 6.4 8.8 9.9 RoCE 7.0 7.4 5.9 8.0 8.8 EFFICIENCY Tax Rate (%) (12.0) 28.0 33.4 30.0 29.0 Asset Turnover (x) 0.4 0.4 0.4 0.5 0.6 Inventory (days) 384 392 371 378 372 Debtors (days) 12 11 7 3 3 Payables (days) 45 56 70 69 63 Cash Conversion Cycle (days) 351 347 309 312 312 Debt/EBITDA (x) 5.1 3.4 4.3 3.1 2.8 Net D/E 0.8 0.8 1.2 1.0 1.0 Interest Coverage 1.6 2.1 2.3 2.3 2.7 PER SHARE DATA EPS (Rs/sh) 5.3 7.9 8.4 13.8 18.6 CEPS (Rs/sh) 12.3 15.5 17.2 22.0 28.3 DPS (Rs/sh) 1.5 2.0 2.0 3.0 3.0 BV (Rs/sh) 108.0 114.1 120.3 129.3 140.9 VALUATION P/E 30.3 20.4 19.2 11.7 8.7 P/BV 1.5 1.4 1.3 1.3 1.1 EV/EBITDA 13.5 9.4 8.9 6.6 5.6 OCF/EV (%) 1.0 17.5 0.8 14.7 0.1 FCF/EV (%) (2.0) 12.0 (5.7) 8.6 4.2 FCFE/Market Cap (%) 0.3 5.2 11.2 0.8 2.6 Dividend Yield (%) 0.9 1.2 1.2 1.9 1.9 Page 8
Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 BRIGADE ENTERPRISES : 2QFY16 RESULTS REVIEW RECOMMENDATION HISTORY 300 280 260 240 220 200 180 160 140 120 100 Brigade TP Rating Definitions BUY Date CMP Reco Target 8-Dec-14 159 BUY 253 2-Feb-15 170 BUY 253 27-Apr-15 145 BUY 210 21-May-15 150 BUY 210 3-Nov-15 162 BUY 210 : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 9
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