Post on 10-Jun-2020
transcript
ICIC
I S
ecurit
ies –
Retail E
quit
y R
esearch
Init
iatin
g C
overage
March 29, 2019
CMP: | 249 Target: | 330 ( 33%) Target Period: 12-18 months
months
Brigade Enterprises Ltd ( BRIENT)
BUY
Upping the ante in lease portfolio…
Brigade Enterprises (BEL), with over three decades of experience in real
estate, is one of the leading property developers in South India primarily in
the Bengaluru market. Currently, its business portfolio comprises real estate
business (50.6 msf), leasing portfolio (8.9 msf) and hospitality business
(1788 keys). We like BEL given its focus on ramping up the leasing portfolio.
We expect its share of lease income to grow at 20.6% CAGR to | 560.1 crore
in FY18-23E. In the residential business, we expect BEL’s sales volume to
grow at a CAGR of 30.8% at 3.5 msf in FY18-21E on the back of a healthy
launch pipeline and more focus towards the affordable housing segment.
Hence, we initiate coverage on Brigade Enterprises with a BUY
recommendation and an NAV based target price of | 330/share.
Surging lease portfolio to provide stable cash flows…
BEL has an operational lease portfolio (five office assets & three retail malls)
with a total leasable area of ~2.6 million square feet (msf). It generated lease
revenues of ~| 225 crore in FY18. Going ahead, the company is looking to
expand its rental portfolio largely through 51: 49 JV with GIC (Tech Garden
- 3.3 msf) & (Chennai WTC Office space – 2.1 msf). Hence, we expect BEL’s
leasing portfolio to expand from 2.6 msf to 8.9 msf (BEL’s share – 6.3 msf)
over next one to two years. With this, we anticipate BEL’s share of lease
income will grow at 20.6% CAGR to | 560.1 crore in FY18-23E.
Real estate sales volume to grow at 30.8% CAGR in FY18-21E
During FY15-18, BEL’s sales volume declined from 2.8 msf to 1.8 msf in the
residential business on the back of a slowdown in the sector and very few
launches. However, BEL recouped its sales volume with the healthy launch
pipeline (so far launched 5.1 msf in FY19E, one of the highest in the last four
years), and focus towards affordable housing. It clocked sales volume of 2.0
msf in 9MFY19. It could close its FY19E sales volume with 2.8 msf with the
launch of its big size project Brigade Serene Utopia. Going ahead, we expect
BEL to sustain its sales momentum. We expect its sales volume to grow at
a CAGR of 30.8% at 3.5 msf in FY18-21E.
Attractively priced considering ramp up in lease portfolio
We initiate coverage on BEL with a target price of | 330/share considering a
sharp ramp up in its leasing portfolio and sustained sales momentum in the
residential business. We value its lease portfolio at | 327/share using NAV
methodology (cap rate: 9% & discount rate: 13-14%). The residential
business contributes | 186 per share (valued ongoing & new launches
aggregating 16.5 msf cash flows at 14% discount rate & land bank at 1x
amount invested).
Key Financial Summary
ss
(| crore) FY17 FY18 FY19E FY20E FY21E
Net Sales 2024.1 1897.2 2905.0 3093.0 2627.9
EBITDA 574.4 554.5 758.5 881.8 882.9
EBITDA Margin(%) 28.4 29.2 26.1 28.5 33.6
Net Profit 167.2 139.2 251.8 239.2 138.4
EPS (|) 12.2 9.7 19.5 19.7 10.8
P/E(x) 19.8 25.1 12.5 12.3 22.4
EV/EBITDA(x) 10.0 11.8 8.9 8.9 8.7
RoE(%) 9.8 5.7 11.4 10.9 5.8
RoCE(%) 10.7 7.8 10.6 10.0 8.6
Source: ICICI Direct Research, Company
Particulars
Market Capitalization (| cr) 3388
52 Week High / Low (|) 309 \ 157
Cash & Investments 382.4
EV 6636
Promoter Holding (%) 46.9
FII Holding (%) 12.6
DII Holding (%) 15.8
Key Highlights
Lease portfolio to expand from 2.6
msf to 8.9 msf in next two to three
years
BEL’s share of lease income to grow
by 20.6% CAGR to | 560.1 crore in
FY18-23E
Sales volume in real estate business
to grow at 30.8% CAGR to 3.5 msf in
FY18-21E
Price Chart
Research Analyst
Deepak Purswani, CFA
deepak.purswani@icicisecurities.com
Harsh Pathak
harsh.pathak@icicisecurities.com
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Nifty (L.H.S) Price (R.H.S)
ICICI Securities | Retail Research 2
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Company Background
With over three decades of operations, Brigade Enterprises (BEL) is a leading
property developer in the South Indian real estate market. Headquartered in
Bengaluru, Karnataka, the company’s businesses are classified into three
segments – real estate (residential & commercial projects sales), lease
rentals (retail & offices) and hospitality. Thus, it has a presence in all domains
of real estate viz. residential, offices, retail, hospitality and education with a
developable land bank of 43.5 msf. While BEL’s residential portfolio includes
projects from all budget ranges, what makes the company interesting is its
focus on affordable housing and significant expansion in Grade-A
commercial portfolio.
Real estate: BEL’s real estate business mainly comprises residential
project sales and a small portion of sales from commercial projects. Its
residential portfolio is a mix of a wide budget range of products viz.
affordable housing, mid-premium, premium, ultra-premium housing,
along with retirement homes. This business portfolio comprises 50.6
msf land bank. BEL’s ongoing projects (including unsold inventory from
completed projects) are at 10.4 msf. This is expected to be developed
and sold over the next four to five years. In FY18, the real estate business
clocked sales volume of 1.57 msf, sales value of | 896 crore. This
business segment contributed 73% to overall revenues in FY18.
Lease assets: BEL has a distinguished reputation of developing Grade-
A commercial properties. Some of its marquee commercial projects
include office assets like The World Trade Center in Bengaluru & Kochi
and retail assets like Orion Mall, Orion East and an upcoming mall –
Orion OMR in Bengaluru. As of FY18, the company had a total leasable
area of 2.4 msf (2.6 msf in 9MFY19) and enjoyed 95.3% leased
occupancy. The segment contributed 15% to overall revenues in FY18
Hospitality: BEL’s hospitality offerings include operational hotels viz.
Sheraton Grand Bengaluru, Grand Mercure, Bengaluru and Mysore,
Holiday Inn Chennai, etc. The segment clocked revenues to the tune of
| 237.1 crore and contributed 12% to overall revenues in in FY18.
Exhibit 1: Timeline
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 3
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Exhibit 2: Brigade’s portfolio at a glance
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 4
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Sector Overview
Overview of Indian commercial real estate
Minimal per capita space in India paves way for improvement ahead
India’s total Grade-A office stock is currently expected at 577 msf. Top
markets like Bengaluru, MMR, Pune and NCR have a combined 397 msf of
Grade-A office stock. While this supply seems encouraging and at par with
world’s top cities like Los Angeles, London, Hong Kong & Shanghai, India’s
office space per capita is 0.4x, which is one of the lowest in the world.
Exhibit 3: Office space supply & per capita office space trend
12.0
10.5
9.7
5.0
2.3
0.4
0
2
4
6
8
10
12
14
0.0
100.0
200.0
300.0
400.0
500.0
600.0
New
York
Los A
ngelo
s
San Fransis
co
Munich
London
Sin
gapore
Sydney
Tokyo
Shanghai
Hong Kong
Beijin
g
Bengalu
ru
Mum
bai (M
MR
)
NCR
Pune
Belg
ium
Hong Kong
Germ
any
US
A
Italy
India
Area Per capita supply
Source: CBRE Research, ICICI Direct Research
Least rental rate in the world despite highest absorption rate
India’s top markets viz. Bengaluru, MMR, Pune and NCR have the highest
office space absorption in the world, with combined absorption at 135.8 msf.
This exceeds the total combined absorption of top 11 global cities (128.4
msf). The Bengaluru market’s office absorption alone exceeds the total
absorption of China’s top markets viz. Shanghai, Beijing and Hong Kong.
Despite robust office space absorption, the Indian office market has least
rental rates in the world.
Exhibit 4: Office space absorption and rental trends
10.0
9.6
9.1
14.6
5.6
6.3
3.1
19.0
28.6 5.4
17.2
56.7
29.1
31.1
18.9
62
36
57
50
148
89
44
108
85
108
120
14
25
15 16
0
20
40
60
80
100
120
140
160
0.0
10.0
20.0
30.0
40.0
50.0
60.0
New
York
Los A
ngelo
s
San Fransis
co
Munich
London
Sin
gapore
Sydney
Tokyo
Shanghai
Hong Kong
Beijin
g
Bengalu
ru
Mum
bai (M
MR
)
NCR
Pune
(m
sf)
Absorption (CY13 to Q1CY18) Rent (as of March 31, 2018)
Source: CBRE Research, ICICI Direct Research
ICICI Securities | Retail Research 5
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Office space absorption to exceed supply amid lower vacancy rates
India witnessed robust absorption of Grade-A office space (expected at
~42.1 msf, which could exceed the overall supply that is expected at ~38.9
msf in CY18). Amid strong demand for Grade-A office space, vacancy levels
have fallen ~810 bps from ~23.1% in 2012 to ~15.0% in 2017. The vacancy
rate is forecasted to come down further to 12.0% as of CY19E. Higher
absorption rates, coupled with declining vacancy rates could drive up rental
rates for Grade-A office spaces, going ahead.
Exhibit 5: Office space absorption to exceed supply
32.9
30.7
27.1
39.7
35.1
29.3
38.9
34.9
23%
22%
20%19%
17%
15%
14%
12%
29.5 30.0
30.0 34.5
39.0
34.2
42.1
39.4
0%
5%
10%
15%
20%
25%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
2012 2013 2014 2015 2016 2017 2018F 2019F
msf
Supply Vacancy (%) Absorption
Source: CBRE Research, ICICI Direct Research
Absorption led by IT/ITeS sector; co-working space absorption on the rise
The IT/ITeS sector accounts for the highest office space absorption at 42%
in India as of 9MCY18. Even historically, the sector has been the highest
office space absorber. However, an emerging trend of demand for co-
working spaces has been on the rise lately. While share of co-working
spaces was nil in 2016, this segment was responsible for 5% of office space
absorption in 2017, which further increased to 10% in 9MCY18.
Exhibit 6: Pan-India office occupier distribution
11% 8%15% 14% 13% 12% 11% 9%
8%4%
10% 9% 8% 7% 8%5%3%
3% 3% 4%3%
7%
4%
36% 41%
33% 36% 38% 41% 36%42%
26%29%
24%15% 15% 17% 15%
10%
2%3% 4%
1%7%
10%9%
11%
17%13% 12%
22%15%
11%
9%9%
5%10%
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 2016 2017 9MCY18
Co-working Provider Telecom, Healthcare-Biotech, Real Esatate Construction & other Industries
Misc Manufacturing/Industrial
IT/ITeS Consultancy Business
e-Commerce BFSI
Source: JLL, ICICI Direct Research
Absorption is expected to exceed supply leading to
decline in vacancy rates
ICICI Securities | Retail Research 6
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Bengaluru - Silicon Valley of India, to drive office space absorption
Bengaluru, the second largest technology hub in the world, has emerged as
a global destination for technology and R&D outsourcing. With 950
technology companies, the city accounted for 38% of India’s total
technology exports in 2017. Additionally, the city has emerged as the
country’s start-up hub with more than ~1,300 technology established start-
ups making it the ‘Silicon Valley of India.’
Being the Silicon Valley of India, majority of office space demand in the
Bengaluru market is from the IT sector. Total space absorption from this
sector was at 42% as of CY17 (30% from technology, 12% from e-
commerce). The city’s office market absorption consistently outpaced
overall supply post CY12 (barring CY15), while vacancy consistently fell from
14.5% in CY12 to 5.1% in CY17. In CY19, Bengaluru is expected to witness
absorption of 23.5 msf vs. forecasted new supply of 22.0 msf office space.
This is expected to further push down vacancy from 5.1% in 2017 to 3.4%
in CY19.
Exhibit 7: Bengaluru office market supply, absorption and vacancy trends
7.3
7.7
10.7
12.7
7.9
7.7
13.0
9.0
6.7
8.3
11.2
12.0
11.9
9.3
13.6
10.0
14.5%
12.8%
11.1%10.4%
6.6%
5.1%4.3%
3.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2012 2013 2014 2015 2016 2017 2018F 2019F
(m
sf)
Supply Absorption Vacancy (RHS)
Source: CBRE Research, ICICI Direct Research
Bengaluru market has highest average rental growth for Grade-A offices
Among the top seven office markets in India, Bengaluru has the highest
absolute space absorption and consistently falling vacancy levels. With the
presence of leading technology companies, presence of ~1,300 start-ups
and growing demand from co-working spaces, the Bengaluru market enjoys
highest average rental rate growth vis-à-vis other office markets in India. It
is further expected to continue leading rental growth, going ahead.
Bengaluru market sector-wise absorption
Technology
30%
e-Commerce
12%
BFSI
23%
Engg. &
Manufacturing
22%
Co-
working
5%
Others
8%
Source: CBRE Research, ICICI Direct Research
*for CY17-Q1CY18
ICICI Securities | Retail Research 7
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Residential real estate: On the verge of revival
Residential market shows green shoots of demand
India’s residential real estate market grappled with a host of issues related
to lack of transparency, inadequate policy reforms, defaults from property
developers, etc. This eroded homebuyers’ sentiments, resulting in
consistently declining sales volumes in CY13-17. In turn, developers held
back from coming up with new projects, resulting in fewer launches during
the same period. However, in the past five years, a wave of transformative
reforms and initiatives such as Goods and Services Tax (GST), Housing for
All by 2020 and the landmark Real Estate Regulation and Development Act
i.e. RERA (2016) have effectively revived sentiments of both - developers
and homebuyers. This is reflected in the pick-up of sales volumes and
launches in CY18 for the first time since CY13.
Exhibit 8: Residential real estate launches, sales volumes trend
420,105
319,659
244,065
175,882
103,570
182,207
329,238
279,822 267,957
244,686
228,072
242,328
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2013 2014 2015 2016 2017 2018
no. of units
Launches Sales
Source: Knight Frank, ICICI Direct Research
Bengaluru outperforms other micro markets
Of the top Indian real estate markets, Bengaluru has emerged as the best
performing with sales volumes jumping 27% YoY to 43,775 units in CY18.
Also, it showed the most improvement in average realisation, which grew,
albeit mildly, by 2% YoY to | 4,681 per sq ft in CY18. The Bengaluru market,
having the highest office space absorption trend (indicative of new job
creations intensifying), draws a higher working population, leading to
incremental residential demand and bodes well for Bengaluru’s residential
segment.
Green shoots of revival visible
ICICI Securities | Retail Research 8
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Exhibit 9: Region wise residential real estate trends
Parameter Region H2CY18 Change YoY CY17 CY18 Change YoY
India 118040 10% 228072 242328 6%
Bengaluru 17973 35% 34546 43775 27%
Mumbai 31481 4% 62256 63893 3%
NCR 22596 10% 37653 40643 8%
Pune 17070 4% 33966 33521 -1%
Chennai 7401 11% 15520 15986 3%
Ahmedabad 8101 4% 15741 16188 3%
India 89509 119% 103570 182207 76%
Bengaluru 11836 41% 22410 27382 22%
Mumbai 38389 413% 23253 74363 220%
NCR 6696 -3% 11726 15819 35%
Pune 18584 287% 12705 32684 157%
Chennai 3850 20% 9235 10373 12%
Ahmedabad 2844 -2% 4790 4167 -13%
India - - - - -
Bengaluru 4681 2% 4589 4681 2.0%
Mumbai 7192 -7% 7717 7192 -6.8%
NCR 4240 -1% 4165 4240 1.8%
Pune 4373 -3% 4508 4373 -3.0%
Chennai 4389 -3% 4525 4389 -3.0%
Ahmedabad 2840 1% 2820 2840 0.7%
Sales
(no. of units)
Launches
(no. of units)
Realization
(|/sq. ft.)
Source: Knight Frank, ICICI Direct Research
Affordable housing key to play pivotal role for improvement in affordability
Affordability is broadly represented as house price to household income
ratio. It is worth noting that the improvement in affordability across key
markets between 2010 and 2018 is rather on the back of a decline in the per
ticket price of units, resulting from lower unit size. Thus, with slower increase
in per capita income, affordable housing, which has smaller per unit size
and, hence, lower per ticket value, is poised to play a pivotal role in
revitalising the Indian residential real estate market.
Exhibit 10: Average unit size in 2018 (indexed to 2011 unit size)
75.82
92.01
82.2
75.82
94.32
103.5
82.56
106.9
0
20
40
60
80
100
120
Mumbai NCR Bengaluru Pune Chennai Hyderabad Kolkata Ahmedabad
2018 2011
Source: Knight Frank, ICICI Direct Research
ICICI Securities | Retail Research 9
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Real estate policy reforms to act as a catalyst
In the last of couple of years, the Indian real estate sector has seen some
transformative reforms such as Goods & Service Tax (GST) Act and the
landmark Real Estate Regulation and Development Act (2016) i.e. RERA. All
these reforms are expected to increase pie of organized players in the real
estate sector in the long run.
Real Estate Regulation & Development Act: RERA mandates that developers
need to keep 70% of the money collected from home buyers towards the
construction of the project in the separate escrow account. This will ensure
the timely delivery of the project. While, it has also increased the working
capital requirement of the sector, it is likely to benefit the organised players
in the long run. Beside this, RERA provision requires that developers need
to register the project with RERA before launching the project and maintain
book of accounts, records and documents, separately for each real estate
project. Failure to meet commitment within stipulated time attracts heavy
penalties for the developers. Thus, by bringing in accountability within the
system, RERA is considered to be a landmark reform that should play a vital
role in bringing back homebuyer’s sentiments back to market.
Goods & Service Tax: GST came into effect from July 1, 2017. The under-
construction housing projects (ex. Affordable housing) were put under the
12% GST rate slab, with input tax credit (ITC) benefits, while GST rates for
affordable housing were 8% with ITC benefits. However, recently the GST
Council slashed GST rates for under-construction housing projects (ex-
affordable housing) were reduced to 5% without ITC benefits, with a special
rate for affordable housing at 1% without ITC benefits for the new projects
launching from April 1, 2019. Later on, the council also clarified that under-
construction projects before April 1, 2019 will have an option to either follow
the earlier GST structure to avail ITC or shift to new GST rate regime (1%
GST for affordable housing and 5% GST for other projects without ITC).
Furthermore, developers will have to procure 80% of materials from
registered dealers. With this clarification, developers can get ITC on ongoing
projects and it would not impact their EBITDA margins.
Incentives for affordable housing: With a view to incentivise the affordable
housing sector as a part of larger objective of Housing for All, the
government has proposed to provide 100% tax exemption to developers
under Section 80 IBA of Income Tax Act for affordable housing projects if
the housing project gets approved by the competent authority before March
31, 2019. These tax benefits have further been extended by one year till
March, 2020 in the recent Union Budget.
ICICI Securities | Retail Research 10
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Investment Rationale
Surging lease portfolio – Stable cash flow business
BEL is a leading developer of Grade-A commercial assets in south India.
Currently, the company had eight operational rental assets (five office, three
retail assets) in its portfolio with gross leasable area of 2.6 msf. Its
commercial portfolio consists of office assets like WTC Bengaluru, retail
assets like Orion Mall. These marquee assets enjoy lease occupancy of
~100%. Its asset portfolio generated lease revenues of | 225 crore in FY18.
Currently, it has 6.3 msf (BEL’s share – 3.7 msf) under execution, which is
expected to be completed by FY20E. Beside this, it has planned
development of 2.0 msf, which could get completed by FY23E. Overall, it
enjoys leasing portfolio of 10.9 msf (BEL share – 8.3 msf), which should
provide its stable cash flow in the long term.
Exhibit 11: BEL's lease portfolio at a glance
Asset Name Location Type GLA (msf)
BEL's share
(msf)
Area leased
(as of Q3FY19)
Cost Incurred
(as of Q3FY19)
Balance
cost to be
incurred
Total
Estimated
Cost
Completed Projects
WTC Bangalore Bengaluru Office 0.6 0.6 100% - - -
WTC, Kochi - Phase I Cochin Office 0.4 0.4 94% - - -
Bhulwalaka Icon Bengaluru Office 0.2 0.2 100% - - -
GIFT City Tower 1 Gujarat Office & Retail 0.3 0.3 14% - - -
Brigade Vantage Chennai Office 0.1 0.1 100% - - -
Orion Mall at Brigade Gateway Bengaluru Retail 0.8 0.8 98% - - -
Orion East Mall Bengaluru Retail 0.1 0.1 87% - - -
Brigade Broadway Bengaluru Office & Retail 0.03 0.03 0% - - -
Others 0.03 0.03 100% - - -
Total Completed 2.6 2.6
Ongoing projects
WTC, Kochi - Phase II Cochin Office 0.4 0.4 - 96.0 7.0 103.0
Brigade Opus Bengaluru Office 0.3 0.3 - 198.9 1.1 200.0
Brigade Orion OMR# Bengaluru Retail 0.3 0.3 - 62.3 131.2 193.5
Brigade Tech Gardens Bengaluru Office 3.3 1.7 - 465.3 664.7 1130.0
WTC - Chennai Chennai Office & Retail 2.0 1.0 - 201.8 598.2 800.0
Total Ongoing 6.3 3.7 1024.3 1402.2 2426.5
Planned
Brigade Twin Tower Bengaluru Office 2.0 2.0* - 0 1230 1230
Gross Total 10.9 6.3
* BEL could dilute stake in this asset, going ahead. Also, since Brigade Twin Towers is currently in a very early stage of development, we have not considered this asset in our valuation
#Cost indicative of Brigade Orion OMR & Holiday Inn Express (134 keys)
Source: Company, ICICI Direct Research
Operational
T.A. - 2.6 msf
(BEL share -2.6 msf)
Ongoing
T.A. - 6.3 msf
(BEL share- 3.7 msf)
Planned
T.A. - 2.0 msf
(BEL share - 2.0 msf)
T.A. - 10.9 msf
BEL share: 6.3
msf
*T.A. = Total Area
ICICI Securities | Retail Research 11
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Bengaluru office market in sweet spot with better operational prospects
Bengaluru contributes 71.2% (by area) to the total leasing portfolio. We
highlight that BEL is in a sweet spot as Bengaluru’s commercial market is
globally one of the most sought-after spaces for domestic and global
institutions to set up their offices. Bengaluru market’s office absorption (56.7
msf between CY13 and Q1CY18) alone exceeded the total absorption of
China’s top markets viz. Shanghai, Beijing & Hong Kong during the same
period. This reinforces the fact that increasing demand amid lower vacancy
levels (low single digit) also makes a strong case for rental appreciation.
Consequently, Bengaluru witnessed rental appreciation at a CAGR of 10.3%
in 2013-Q12018, highest among the top seven office markets. The strong
absorption along with healthy lease rate appreciation augurs well for BEL’s
leasing portfolio.
Exhibit 12: BEL’s lease assets in Bengaluru market
33%
67%
ex Bangalore Bangalore
Source: Company, ICICI Direct Research, CBRE Research
Exhibit 13: Movement of lease rentals (CY13-Q1CY18)
10.30
8.4
7.5
9
10
-1.3
-0.4
-2 0 2 4 6 8 10 12
Bengaluru
Hyderabad
Pune
Chennai
NCR
MMR
Kolkata
(%)
Source: Company, ICICI Direct Research, CBRE Research
Exhibit 14: Office space absorption and rental trends
10.0
9.6
9.1
14.6
5.6
6.3
3.1
19.0
28.6 5.4
17.2
56.7
29.1
31.1
18.9
62
36
57
50
148
89
44
108
85
108
120
14
25
15 16
0
20
40
60
80
100
120
140
160
0.0
10.0
20.0
30.0
40.0
50.0
60.0
New
York
Los A
ngelo
s
San Fransis
co
Munich
London
Sin
gapore
Sydney
Tokyo
Shanghai
Hong Kong
Beijin
g
Bengalu
ru
Mum
bai (M
MR
)
NCR
Pune
(m
sf)
Absorption (CY13 to Q1CY18) Rent (as of March 31, 2018)
Source: CBRE Research, ICICI Direct Research
ICICI Securities | Retail Research 12
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
World Trade Center’s License – Sets stage for MNC tenants
The World Trade Centers Association (WTCA) stimulates trade and
investment opportunities for commercial property developers, economic
development agencies and international businesses looking to connect
globally and prosper locally. There are more than 300 World Trade Centers
(WTCs) in nearly 100 countries as well as more than 1.0 million companies
and individuals under the WTCA. This provides a portfolio of branded offices
and commercial real estate, alongside an extensive suite of trade services
for tenants.
Brigade holds the license to construct World Trade Centers (WTC) in South
India. As a WTC is constructed as per global standards and specifications, it
makes BEL’s WTC premise a preferred choice for global MNCs for their
commercial space. Consequently, WTC premises command better
occupancy rates compared to other Grade A properties. It has built WTC in
Bengaluru and Kochi (Tower-I), which are already operational and is further
constructing WTC, Kochi (Tower-II) and WTC, Chennai, which are expected
to be operational by FY20E.
World Trade Center, Bengaluru
WTC, Bengaluru (0.6 mn sq ft) has been operational since 2011. It has Grade
A++ specification, 32 floor levels, a grand triple height atrium, a helipad and
observation deck, 3716 square metre plates and a nine level car park, among
other features. Additionally, it is a part of the Brigade Gateway integrated
enclave. Thus, it enjoys close proximity to BEL’s residential, retail and
hospitality assets like Brigade Gateway, Sheraton Hotel and Orion Mall. It is
well connected to transport facilities with proximity to metro station. WTC,
Bengaluru is 100% leased out and enjoys 10-20% premium rentals over
other office assets in its micro market.
World Trade Center, Kochi (Tower-I)
World Trade Center, Kochi (0.4 mn sq ft), located at the heart of the booming
IT-hub of Kakkanad, has been developed with Kochi Infopark, one of the
most sought-after business destinations in Kochi. It has state-of-the-art
infrastructure, easy accessibility, Grade A specifications and LEED Gold Pre-
certification. It is close to leading hospitality service providers like Marriot
and Holiday Inn. WTC, Kochi’s (T-I) leased occupancy is at 93.8% as of
Q3FY19.
World Trade Center, Kochi (Tower-II)
BEL is also constructing WTC, Kochi (Tower-II) with development potential
of 0.4 mn sq ft. It is expected to commence in FY20E. Since it is the extension
of WTC, Kochi Phase-I, it already meets predefined global standards set by
WTC.
World Trade Center, Chennai
BEL, in a joint venture with GIC, is constructing the WTC Chennai project,
which will have a development potential of 2.0 msf across two towers. It will
be the tallest commercial establishment in the city and will be a complete
business eco-system with residences, hotel and retail space. WTC Chennai
is a Grade A++ commercial development strategically located in the
established IT hub on OMR pre-toll at Perungudi. This commercial asset is
under-construction and is expected to be operational by FY20E end.
Successful attributes of a World Trade Centre
WTC Bengaluru
Source: Company, ICICI Direct Research
WTC Kochi (Phase-I)
Source: Company, ICICI Direct Research
WTC Kochi
Source: Company, ICICI Direct Research
WTC Chennai
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 13
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
BEL’s lease revenues expected to grow at 20.0% CAGR by FY23E
We expect BEL’s leasing portfolio to expand from 2.2 msf in FY18 to 8.9 msf
(BEL share – 6.3 msf) in the next one to two years. The expansion is largely
to be led by Tech Garden - 3.3 msf (BEL’s share-1.7 msf) & Chennai WTC
Office space – 2.0 msf (BEL share – 1.0 msf). Both these assets are expected
to be developed in a JV with GIC in which BEL holds 51% stake. With these
additions along with rental escalation of 5% per annum, we expect BEL’s
lease revenues to grow at 21.1% CAGR to | 560.1 crore in FY18-23E).
Exhibit 15: Rental income to grow at 20.0% CAGR to | 560.1 crore in FY18-23E
192.42
224.7
233.0
361.2
499.6
642.4
752.8
192.42
224.7
233.0
316.9
406.8
496.7
560.1
0
300
600
900
FY17 FY18 FY19E FY20E FY21E FY22E FY23E
(| crore)
Lease Rental Income (ex. CAM) BEL's share
Source: Company, ICICI Direct Research
20.0% CAGR
ICICI Securities | Retail Research 14
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Real estate business – sales volume momentum to sustain
Brigade – Pioneer of concept of integrated enclaves
Brigade pioneered the concept of integrated enclaves in Bengaluru. The
company has a reputation of developing remarkable enclaves like Brigade
Gateway, Brigade Millennium, Brigade Gardenia, Brigade Metropolis, etc. It
has two more enclave projects in the making viz. Brigade Orchards and
Brigade Meadows, which are expected to be completed in the next two to
three years. Such integrated developments command better pricing than
other standalone developments.
Brigade Gateway: Iconic integrated enclave
Brigade Gateway is an iconic integrated enclave for BEL. It is a 40-acre
integrated enclave comprising a mix of residential (1,200 apartments),
commercial (World Trade Center), retail and hospitality (Sheraton
Bengaluru) assets along with a school (The Brigade School) etc. It also
comprises of other assets viz. Galaxy Club and Columbia Asia Hospital.
The integrated enclave also includes BEL’s marquee mall asset i.e. Brigade’s
Orion Mall. With a 0.82 msf leasable area, the mall has four floors of retail
space, which includes shopping zones, multiplex, F&B space, including
lakeside cafes and bowling & gaming zones. The mall also houses an 11-
screen PVR Cinemas multiplex and an 8000 sq. ft. gaming zone – Time Zone.
As of Q3FY19, the mall has 98% lease occupancy.
Exhibit 16: Brigade Gateway integrated enclave plan layout
Source: Google Maps, ICICI Direct Research
Brigade Orion Mall
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 15
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Ongoing projects lend visibility on cash flows
BEL’s real estate business mainly consist of residential project sales with a
small portion of sales from commercial projects. Its residential portfolio is a
mix of wide budget range of products viz. affordable housing, mid-premium,
premium and ultra-premium housing, along with retirement homes. BEL‘s
ongoing projects (including unsold inventory from completed projects) are
at 10.4 msf, which is expected to be developed and sold over the next four
to five years. Out of 10.4 msf, BEL has sold projects on 3.6 msf area worth
| 1936 crore (average realisation: | 5378 per sq ft) as on Q3FY19. Out of the
sold amount, it has already collected | 1140 crore while remaining | 769.3
crore is expected to be collected during the progress of different ongoing
projects. The remaining collection worth | 769.3 crore along with unsold
units worth | 3295.9 crore, are expected to provide total collection of | 4092
crore over the next four to five years.
In terms of investment outlay, BEL has incurred expenditure worth | 2075.3
crore and is expected to incur further expenditure of | 1773 crore to
complete its ongoing project portfolio over the next four to five years.
Hence, BEL’s ongoing project portfolio is expected to provide pre-tax cash
flow of | 2319 crore over the next four to five years or ~| 1553 crore on a
post-tax basis.
Exhibit 17: Ongoing projects status at a glance
Ongoing BEL Projects Ongoing SPV Projects Stock Sales Total
Total super built‐up area of projects on sale basis 10.1 1.6 1.0 12.7
Less: LO Share 2.3 - - 2.3
Co share of saleable area 7.8 1.6 1.0 10.4
Sold till date 3.1 0.6 - 3.6
To be sold 4.7 1.1 1.0 6.8
(in | crore)
From Sold units 1638.3 298.0 - 1936.3
From Unsold Units 2452.6 588.3 255.0 3295.9
Estimated Receipts 4090.9 886.3 255.0 5232.3
Collection Till Date on Sold Units 934.7 205.3 1140.0
Balance collection for the projects (Sold and Unsold units)-A 3156.2 681.0 255.0 4092.3
Balance collection for the projects (From Sold Units) 703.6 92.8 796.3
Estimated Total cost to be spent 3014.7 636.6 197.0 3848.3
Cost incurred till date 1434.1 444.2 197.0 2075.3
Balance Cost to be incurred to finish the project- B 1580.6 192.4 - 1773.0
Gross Operating Cash Flows (A-B) 1575.6 488.7 255.0 2319.2
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 16
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Residential sales volume to grow at 30.8% CAGR to 3.5 msf by FY21E
BEL’s sales volume declined from 2.2 msf to 1.6 msf in FY16-18 on the back
of very few launches during the same period. During the same period, the
sector was also grappling with the triple impact of demonetisation, GST &
RERA. However, BEL recouped its sales volume very well with a healthy
launch pipeline (so far launched 5.1 msf in FY19E, one of the highest in the
last four years). It clocked sales volume of 2.0 msf in 9MFY19 and could
close its FY19E sales volume with 2.8 msf with the launch of its big ticket
project Brigade Serene Utopia.
Going ahead, we expect BEL to sustain its sales momentum and expect its
sales volume to grow at CAGR of 30.8% at 3.5 msf in FY18-21E with a healthy
launch project pipeline and focus on affordable housing.
Exhibit 18: Launches grow drastically in 9MFY19
Source: Company, ICICI Direct Research
Exhibit 19: Sales volume expected at 3.5 msf in FY21E
1249.0
955.5
896.3
1533.8
1691.1
2087.6
2.2
1.6 1.6
2.8
3.1
3.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
500
900
1300
1700
2100
2500
FY16 FY17 FY18 FY19E FY20E FY21E
(m
sf)
(| crore)
Sales Value Sales volume
Source: Company, ICICI Direct Research
Even on a quarterly basis, BEL’s sales volume momentum has now jumped
to 7.7-8 lakh sq ft vs. quarterly average of 5.0 lakh sq ft after eight quarters.
The improvement in sales volume is on the back of healthy launches, revival
in the sector and more focus on affordable housing.
Exhibit 20: Quarterly movement of sales and average realisation trend
6.2
7.1
4.4
4.8
3.7
5.8
3.0
3.7
3.1
3.7
4.6
4.3
4.3
8.0
7.8
5.0
5415
55915485
5741 57155808
6210
5887 58655915
5667
5509
5122
5719 5741
3000
3500
4000
4500
5000
5500
6000
6500
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19
(| per sq. ft.)
(lakh sq. ft.)
Area Sold Average Area sold Average Realization (RHS)
Source: Company, ICICI Direct Research
Quarterly sales volumes have moved higher compared to its
long-term average of 5.0 msf. Also, average realisation has
shown improvement recently
ICICI Securities | Retail Research 17
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Affordable Housing: Align portfolio to cater to growing demand
BEL is looking to align its project portfolio towards affordable housing
segment (ticket size up to | 65 lakh) to cater to increasing demand in
segments. Currently, affordable housing contributes only ~14% of its
current ongoing project portfolio. Going ahead, the company is looking at
~45% of its new launch (aggregating 8.8 msf) coming from the affordable
housing segments. Hence, affordable housing is expected to contribute
~29% of the total residential project portfolio. BEL’s focus on affordable
housing also lends us comfort in sustained sales momentum, going ahead.
Exhibit 21: Share of affordable housing projects significantly higher
Source: Company, ICICI Direct Research
Bengaluru - BEL’s major market, comfortably placed in affordability index
Bengaluru, with ~90% of its ongoing projects in the real estate segment,
has shown a substantial improvement in affordability in 2011-18. With
stability in property prices and a reduction in unit size over the last few years,
the affordability index for the Bengaluru market has improved significantly.
The affordability index for Bengaluru has come down from 6x in 2011 to 4x
in 2018. Currently, it is one of the lowest in the top seven micro markets,
below the benchmark average of 4.5x. We believe the Bengaluru residential
market, which has already shown a pick-up in sales momentum and
realisation, is in a sweet spot with a comfortable position on the affordability
front.
Exhibit 22: Affordability index
Source: Knight Frank, ICICI Direct Research
Ongoing projects – 9.6 msf Planned new Launches – 8.9
msf
Total – 18.5 msf
ICICI Securities | Retail Research 18
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Brigade Utopia –Upcoming 5.9 msf mixed-use development project
Brigade Utopia project’s Phase-I is proposed on 47 acres of land and has a
total size of ~5.9 msf. It is expected to be a major landmark development in
the vicinity of Bengaluru Southeast (Whitefield Varthur area). It is an
integrated mixed use development project, with a combination of affordable
& luxury segments, along with office & retail assets and multiplex
entertainment zone. In phase I, BEL is planning to launch 3.0 mn sq ft (BEL
share - 2.0 mn sq ft) in Q4FY19E. The residential space is proposed to have
regular standard apartments, co-living spaces and some portion of senior
living space. The project is proposed to have 4000+ units in a configuration
of 2 & 3 BHK apartments (2 BHK units variants: 1240 sq ft & 1905 sq ft; 3 BHK
units: 1689 sq ft).
Exhibit 23: Brigade Utopia Master Plan
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 19
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Hospitality Portfolio – looking to almost double its keys
BEL has 976 keys across five operational assets in its hospitality portfolio,
which includes marquee assets viz. Sheraton Grand, Bengaluru and Grand
Mercure, Bengaluru. Other operational assets in this portfolio are Grand
Mercure, Mysore, Holiday Inn Chennai and Holiday Inn Bengaluru. The
hospitality business clocked revenues to the tune of | 237.1 crore and
contributed 12% to overall revenues in FY18.
The company is further expanding its hospitality portfolio with addition of
812 keys, which will take BEL’s total hospitality portfolio to 1788 keys. The
planned projects are expected to be operational in various stages by FY21E.
Of these, Holiday Inn Express, Golden Triangle in Bengaluru (134 keys) and
Ibis Style in Mysore (151 keys) are expected to be operational in Q1FY20E.
BEL is expected to incur an estimated cost of | 320 crore (excluding cost of
construction for Holiday Inn express) for construction of these planned
projects, of which it has already incurred | 203.9 crore and is yet to incur
| 116.1 crore.
Exhibit 24: Hospitality portfolio at a glance
Asset Name Location
No. of
KeysARR (|/night) Occupancy
Operational
Status
Cost Incurred
(| crore)
Balance
Cost
Total
Estimated
cost
Operational
Grand Mercure Bangalore 126 7010 66 Operational - - -
Sheraton Grand Bangalore 230 7698 79 Operational - - -
Grand Mercure Mysore 146 3714 54 Operational - - -
Holiday Inn Chennai 202 4360 70 Operational - - -
Holiday Inn Bangalore 272 4091 39 Operational - - -
Total Operational 976
Ongoing
Holiday Inn Express, Golden Triangle Bangalore 134 NA NA Q1FY20
Ibis Style Mysore 151 NA NA Q1FY20 9.8 63.2 73.0
Four Points by Sheraton Kochi 218 NA NA Q4FY19 131.5 1.5 133.0
Ibis Styles, Gift City Gujarat 159 NA NA Q3FY20 62.6 51.4 114.0
Ibis Bangalore Bangalore 150 NA NA FY21E
Total Ongoing 812 203.9 116.1 320.0
Gross Total 1788 203.9 116.1 320.0
Source: Company, ICICI Direct Research
Sheraton Grand
Sheraton Grand is the marquee hospitality asset in Brigade’s portfolio. This
flagship hotel features 25,649 sq ft of elegantly designed meeting spaces
with features like modern architecture & design. It hotel reported 79%
occupancy while average room rate (ARR) was at | 7698/night as of Q3FY19.
Furthermore, it clocked revenues worth | 111 crore in FY18. Going ahead,
with an improvement in ARR and stable occupancy levels, we expect
Sheraton Grand to clock revenues worth | 123.8 crore in FY21E.
Sheraton Hotel at Brigade Gateway
ICICI Securities | Retail Research 20
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Hospitality revenues to grow at 23.6% CAGR to | 447.7 crore in FY18-21E
In FY18, BEL clocked revenues worth | 237.2 crore from its operational
hospitality portfolio (916 keys). The company is developing five more
hospitality assets (total 812 keys), which will lead combined hospitality
portfolio to almost double to 1788 keys. These new assets, which will
become operational in various phases in the next three to four years, will
help BEL’s revenues to grow at 23.6% CAGR to | 447.7 crore in FY18-21E.
Furthermore, we also expect the EBITDA of the hospitality portfolio to grow
at 30.6% CAGR to | 131.4 crore in FY18-21E.
Exhibit 25: Revenues to grow at 23.6% CAGR in FY18-21E
193.0
237.2
291.6
374.7
447.7
100.0
200.0
300.0
400.0
500.0
FY17P FY18P FY19E FY20E FY21E
(| crore)
Source: Company, ICICI Direct Research
Exhibit 26: EBITDA to grow at 30.6% CAGR in FY18-21E
35.5
58.2
68.5
103.2
131.4
20
50
80
110
140
170
200
FY17P FY18P FY19E FY20E FY21E
(| crore)
Source: Company, ICICI Direct Research
BEL to sell minority stake to expand its hospitality portfolio
BEL demerged its hospitality business into a separate entity in FY18. Going
ahead, it plans to divest a minority stake in this entity to fund the planned
capex in hospitality. BEL is expected to incur an estimated cost of | 320 crore
(excluding cost of construction for Holiday Inn Express) for construction of
these planned projects, of which it has already incurred | 203.9 crore and is
yet to incur | 116.1 crore.
23.6% CAGR
30.6% CAGR
ICICI Securities | Retail Research 21
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
BEL’s leverage to peak out in FY20E
BEL has reported net debt of | 3247.0 crore and net debt-equity of 1.4x as
on FY18. These are Fully Convertible Debentures (| 257.5 crore), and other
investments including promoter loans (|179 crore), which are treated as
Debt as per Ind-As while the company treats them as the equity. Adjusting
these as equity, BEL net debt is at |2570.7 core and net debt to equity of
0.9x in FY18. Going ahead, with the completion & commencement of its
ongoing leasing portfolio in FY20E & Fy21E respectively, we believe BEL is
expected to peak out in FY20E and leverage to improve from FY21E
onwards. On adjusted basis, we believe BEL’s net debt to peak out at |4080.7
core and net debt to equity at 1.4x in FY20E. We also highlight that BEL’s
leasing business debt/EBITDA will halve from 12-13x currently to 5-6x post
commencement of the ongoing leasing portfolio.
Exhibit 27: Net debt to equity peaks out in FY20E
2,385.9
3,007.2
3,247.5
4,517.2
4,419.2
1.4
1.31.4
1.8
1.7
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY17 FY18 FY19E FY20E FY21E
(x
)
(| crore)
Reported Net Debt Net Debt / Equity (RHS)
Source: ICICI Direct Research, Company
Exhibit 28: Adjusted net D/E
2,570.7
2,811.0
4,080.7
3,982.7
0.91.0
1.41.3
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY18 FY19E FY20E FY21E
(x
)
(| crore)
Adjusted Net Debt Adjusted Net Debt/Equity
Source: ICICI Direct Research, Company
Exhibit 29: Residential & hospitality debt/EBITDA comfortable
Source: Company, ICICI Direct Research
Exhibit 30: Debt/EBITDA for leasing business to halve
Source: Company, ICICI Direct Research
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
FY19E FY20E FY21E FY22E FY23E
Debt to EBITDA (x)
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FY19E FY20E FY21E FY22E FY23E
Debt to EBITDA (x)
ICICI Securities | Retail Research 22
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Financials
Revenues expected to grow at 10.5% CAGR to | 2,167.1 crore in FY18-21E
BEL’s revenues are expected to grow at 10.5% CAGR to | 2,167.1 crore in
FY18-21E. The moderate pace of growth is attributable to revenue
recognition method under Ind-As 115. As per the new accounting method,
which came into effect from April 1, 2018, the company switched to project
completion method from percentage completion method earlier.
Consequently, it had to reverse revenues & PAT to the tune of ~| 2,300 crore
& ~| 400 crore, respectively. A major portion of these revenues is getting
booked in FY19E & FY20E. Hence, revenues from the residential business
showed an optical decline in FY21E. Nonetheless, lease revenues are
expected to grow at 31.5% CAGR to | 649.5 crore while hospitality revenues
are expected to grow at 23.6% CAGR to | 447.7 crore in FY18-21E.
Exhibit 31: Revenues to grow at 10.5% CAGR in FY18-21E
1320.8
1600
1422.5
2310.5
2248.7
1530.6
197.2
265.7
285.9
302.9
469.6
649.5
181.7
193.0
237.1
291.6
374.7
447.7
0 500 1000 1500 2000 2500 3000 3500
FY16
FY17
FY18
FY19E
FY20E
FY21E
Residential Leasing Hospitality
Source: Company, ICICI Direct Research
EBITDA margins to grow 440 bps to 33.6% in FY18-21E
EBITDA margins contracted 60 bps to 29.2% in FY16-18. However, with
revenue contribution from the lease portfolio expected to jump from 14.7%
in FY18 to 24.7% in FY21E and EBITDA margins of residential business
expected to expand 60 bps in FY 18-21E, we expect overall EBITDA margins
to expand 440 bps to 33.6% in FY18-21E.
Exhibit 32: EBITDA margin trends
24.1
24.9
24.4
23.0
24.0
25.0
71.3
65.3
69.0
64.9
59.4
63.3
35.3
19.0
24.8
23.5
27.5
29.3
29.828.4 29.2
26.128.5
33.6
10
20
30
40
50
60
70
80
FY16 FY17 FY18 FY19E FY20E FY21E
Residential Leasing Hospitality Overal l (Excluding other income)
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 23
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Cash profit to grow at 18.1% CAGR to | 456.0 crore in FY18-21E
We expect PAT to grow at 31.1% CAGR to | 239.2 crore in FY18-20E, before
declining in FY21E to | 138.4 crore. We highlight that the increase in PAT in
FY19E & FY20E is mainly on account of majority of revenues that were
reversed in FY18 that will get realised in FY19E & FY20E. Secondly, BEL is
aggressively expanding its lease portfolio, which will be operational over the
next four to five years. These under-construction assets will not generate
revenues to their full potential in FY21E. Hence, they do not contribute
meaningfully to the bottomline while depreciation gets fully realised in the
interim years, further bringing down PAT. Hence, we see an optical decline
in PAT in FY21E. However, in terms of cash profit, we expect BEL to clock
18.1% CAGR in cash profit to | 456.0 in FY18-21E.
Exhibit 33: Profit growth to remain flat in FY18-21E
Source: Company, ICICI Direct Research
Exhibit 34: Cash profit to growth at 18.1% CAGR in FY18-21E
Source: Company, ICICI Direct Research
Return ratios to remain stable in FY21E
BEL clocked RoE & RoCE of 6.1% & 8.1%, respectively in FY18. Going ahead,
we expect return ratios to improve in FY19E & FY20E but expect them to
remain broadly stable at 5.4% & 8.8%, respectively, in FY21E.
Exhibit 35: Return ratios to remain stable
10.311.2
8.1
11.0
10.2
8.8
8.9
9.9
6.1
10.9
9.7
5.4
4.0
6.0
8.0
10.0
12.0
FY16 FY17 FY18 FY19E FY20E FY21E
RoCE RoNW
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 24
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Risks & Concerns
SEZ benefits are available for units commencing up to March, 2020
BEL has two commercial properties – WTC Chennai and Brigade Tech
Gardens in SEZ. There are benefits for tenants such as 100% income tax
exemption on export income for SEZ units under Section 10AA of the
Income Tax Act for the first five years, 50% for the next five years, thereafter,
and 50% of the export profit ploughed back for the next five years. These
benefits for tenants are available to players who commence their operation
till March, 2020. Post that, these benefits are expected to be withdrawn.
Thus, if BEL is unable to lease out these assets before the sunset clause kicks
in, the company may find it difficult to lease the leftover area. Hence, it could
have to lower lease rate in such a scenario. Nonetheless, we have already
considered lower than expected lease rate in our valuation.
Need higher occupancy rates to service debt
BEL is expected to witness a sharp increase in its leasing portfolio from 2.2
msf to 7.4 msf (BEL – 6.0 msf). This includes some large asset expansion
such as Tech Garden (3.2 mn sq ft) and WTC Chennai (2.0 mn sq ft). Slower
than expected occupancy rates could impact its debt servicing in the interim.
Geographically concentrated in Bengaluru
BEL has ~70% of the commercial portfolio (operational & under-
development) & ~90% of the ongoing project in real estate business are
concentrated in Bengaluru. Any slowdown in Bengaluru property or
commercial market could have adverse impact on BEL’.
Slowdown in IT/ITeS sector
High proportion of the company’s leasing revenues comes from the IT/ITeS
sector. Any major slowdown in the overall IT/ITeS sector may slow down
office space leasing in Bengaluru. It could also impact its real estate in case
of slowdown in IT/ITeS sector.
Lack of clarity over fully convertible debentures
There are fully convertible debentures of | 257.6 crore in FY18 in Brigade’s
consolidated balance sheet. These debentures have been issued at the
special purpose vehicle (SPV) level. The instruments are long-tenured in
nature converted into equity at end of 20 years while the coupon and
principal payment have no scheduled due date. If these instrument are
converted into equity, it is possible that BEL’s equity stake in the SPV may
get diluted.
ICICI Securities | Retail Research 25
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Management Profiles
MR Jaishankar
Chairman & Managing Director
MR Jaishankar holds a Bachelor of Science degree in Agriculture and a
Master of Business Administration. His commitment to quality and passion
for innovation has seen Brigade Group grow from a single-building, small-
scale private enterprise to a diverse multi-domain company, which is into all
verticals of real estate. Under his leadership, the Brigade Group has scaled
new heights. This has been recognised by many awards that the Brigade
Group has received over the years.
Githa Shankar
Whole-time Director
Githa Shankar holds a Bachelor of Arts degree, Bachelors in Library Science
and a Masters in Business Administration. Ms Shankar has over 30 years of
experience in the fields of advertising, stock broking, insurance, education
and real estate. She is the Managing Trustee of Brigade Foundation, which
started and runs the Brigade Schools in Bengaluru.
Pavitra Shankar
Executive Director
Pavitra Shankar holds a Bachelor’s Degree in Economics and Mathematics
from the University of Virginia, US and a Masters in Business Administration
in Real Estate and Finance from Columbia Business School, US. She is a
relative of the Promoter Group and has over a decade of rich experience and
oversees Residential Sales & Marketing and IT departments at Brigade.
Nirupa Shankar
Executive Director
Nirupa Shankar holds a Bachelor’s Degree in Economics from the University
of Virginia, US and has done her Masters of Management in Hospitality in
2009 from Cornell University. She forms part of the Promoter Group and has
been associated with the group since 2009 with a rich and versatile
experience. She oversees the company’s hospitality, office & retail ventures,
Human Resources (HR), Public Relations (PR) and Innovation functions.
Amar Mysore
Executive Director
Amar Mysore holds a Masters in Engineering from Pennsylvania State
University US. He is a relative of the promoter group and has more than a
decade of diverse experience in the fields of supply chain management,
manufacturing, power sector and real estate. Mr Mysore has been
instrumental in tying up green power for the company’s commercial, retail
and hotel properties. He is actively involved in the company’s IT initiatives
in adopting tech in the business processes to bring in higher efficiency.
ICICI Securities | Retail Research 26
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Valuations
Surge in lease portfolio - Initiate coverage with BUY
At the CMP, Brigade is trading at 1.3x FY21E P/BV. We like BEL given its
focus on ramping up its lease portfolio. We anticipate a pick-up in sales
momentum in the residential portfolio. Furthermore, we expect the share of
lease income to grow 20.0% CAGR to | 560.1 crore during FY18-23E.
Secondly, a large part of the annuity portfolio has been formed on the asset
light model through the GIC platform. In the real estate business, we expect
BEL’s sales volume to grow at 30.8% CAGR to 3.5 msf in FY18-21E on the
back of a healthy launch project pipeline and the company’s focus on the
affordable housing segment. Hence, we initiate coverage on Brigade with a
BUY recommendation with an NAV based SoTP target price of | 330/share.
Exhibit 36: SoTP based valuation of BEL
Project Area (msf) Value NAV/share Contribution (%) Remarks
Residential/Commercial Sales
Completed 1.0 75 6 2
Ongoing 9.4 1136 83 25
New Launches 7.1 308 23 7
Land Bank 33.1 1016 75 23
Total 50.6 2534 186 57
Leasing Portfolio
Completed 2.6 2778 204 62
Ongoing 6.3 1672 123 37
Total 8.9 4450 327 99
No. of Keys
Hospitality Portfolio 1788 1341 99 30 12x FY20E EV/EBITDA
Total Gross Asset Valuation 8326 612 186
Less: FY20E Net Debt 3841 282 86 We have considered Brigade effective debt
Target Valuation 4485 330 100
We have considered cap rate of 9% and
discount rate of 13% for operational assets and
14% for under construction assets
We have discounted cash flow of Ongoing &
New launches residential assets at 14%
discount rate while land bank is valued at 1x
amount invested
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 27
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Lease business
We value BEL’s lease portfolio at | 327/share. We expect the company’s
share of lease income to grow 20.0% CAGR to | 560.1 crore in FY18-23E
with incremental rental contribution from the commencement of ongoing
asset portfolio. We also consider lease rental escalation of 5% per annum in
our valuations. We consider cap rate of 9% to value its commercial & retail
portfolio. Also, we consider discount rate of 13% for operational assets &
14% for under construction assets.
Exhibit 37: BEL’s lease portfolio valuation
Project Area (msf) Value NAV/share
Leasing Portfolio
Completed 2.6 2777.9 204.2
Bengaluru 1.8 2351.6 172.8
Cochin 0.4 215.5 15.8
Gujarat 0.3 162.7 12.0
Chennai 0.1 48.1 3.5
Ongoing 6.3 1672.2 122.9
Bengaluru 3.9 879.8 64.7
Cochin 0.4 190.0 14.0
Chennai 2.0 602.3 44.3
Total Annuity Portfolio 8.9 4450.1 327.0
Source: Company, ICICI Direct Research
We highlight that we see further upside potential to our valuation on account
of possibility of
Compression of cap rates & discount rate: We consider a higher cap rate
and would see the possibility of a compression of cap rate for BEL’s
portfolio as our assumed cap rate is 160 bps vs. G-sec yield and 170 bps
higher than the upcoming Embassy IPO’s implied cap rate of ~7.3% on
FY20E. We have shown sensitivity to our target price for compression in
cap rates and discount rate below
Brigade Twin Towers: BEL acquired SABMiller land at ~| 230 crore
wherein it is looking to develop leasable area 2.0 msf. The estimated
cost (including land cost) for the development is expected at ~| 1230
crore and could fetch lease income of ~| 200 crore on the
commencement of this asset. Since, currently it is at a very early stage
of development, we do not consider this asset in our valuation. The asset
could add another ~5% to our valuation
ICICI Securities | Retail Research 28
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Real estate business
We value BEL’s real estate portfolio at | 186/share. We incorporate project-
wise valuation for ongoing & new launches (aggregating over 16.5 msf). We
consider sales, completion and handing over of these projects over the next
five years and further discount the net cash inflows at discount rate of 13.0%.
The remaining land bank aggregating 465 acres (total development potential
of 33.1 msf) has been considered on total amount paid for acquiring this land
bank at worth | 1015.6 crore or | 75/share. The weighted average realisation
& construction cost for FY19E across ongoing & launch projects works out
to | 5415/sq ft & | 3178/sq ft, respectively. Going ahead, we build in 5%
escalation per annum in realisation and construction cost per sq ft.
Exhibit 38: BEL’s real estate portfolio valuation
Project Area (msf) Value NAV/share
Residential/Commercial - Sale
Completed 1.0 75.4 5.5
Ongoing 9.4 1135.9 83.5
Bengaluru 8.5 1001.4 73.6
Mysore 0.7 97.0 7.1
Chennai 0.2 37.5 2.8
New Launches 7.1 307.5 22.6
Bengaluru 4.6 259.3 19.1
Mysore 0.2 7.1 0.5
Chennai 1.4 22.4 1.6
Hyderabad 0.8 18.8 1.4
Land bank 33.1 1015.6 74.6
Total Residential 50.6 2534.4 186.3
Source: Company, ICICI Direct Research
Hospitality division
We value BEL’s hotel business at | 99/share (12x FY20E EV/EBITDA). Our
target valuation implies | 0.8 crore/room on its planned development of
1788 keys. The company is adding a total of 812 keys, which will lead
combined hospitality portfolio to almost double to 1788 keys. These new
assets, which will become operational in various phases in the next three to
four years, will help BEL’s revenues to grow at 23.6% CAGR to | 447.7 crore
in FY18-21E. Furthermore, we also expect the EBITDA of the hospitality
portfolio to grow at 30.6% CAGR to | 131.4 crore in FY18-21E.
ICICI Securities | Retail Research 29
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Sensitivity to cap rate & WACC assumptions
We consider a cap rate of 9% to value BEL’s annuity portfolio. Based on our
analysis, every 1% change in our cap rate will impact our target price by 5-
7% whereas, every 1% change in our WACC assumption will impact our
target price by 6-7% since WACC assumption is likely to impact both our
residential as well as leasing portfolio valuation. In the residential business,
we consider 5% escalation per annum in realisation and construction cost
per sq ft. Every 1% change to these assumptions is expected to change our
target price by ~4% & 3%, respectively.
Exhibit 39: Sensitivity to cap rate & WACC assumptions
Cap rate (%)
WA
CC
(%
)
7.0% 8.0% 9.0% 10.0% 11.0%
11.0% 434.1 404.3 381.1 362.6 347.5
12.0% 402.7 375.5 354.3 337.3 323.5
13.0%* 373.9 349.0 329.6 314.1 301.4
14.0% 347.4 324.6 306.8 292.6 281.0
15.0% 323.0 302.1 285.8 272.8 262.1
Source: Company, ICICI Direct Research
Exhibit 40: Sensitivity to realisation & construction growth pa
Realisation growth pa
Constructio
n c
ost
grow
th p
a
3.0% 4.0% 5% 6.0% 7.0%
3.0% 318.4 330.7 343.3 356.3 369.5
4.0% 311.6 323.9 336.5 349.5 362.7
5.0% 304.6 317.0 329.6 342.5 355.7
6.0% 297.5 309.8 322.5 335.4 348.6
7.0% 290.2 302.5 315.2 328.1 341.3
Source: Company, ICICI Direct Research
In terms of P/BV, BEL has traded at average P/BV of 1.3x in the last four
years. Currently, it is trading at 1.4x P/BV.
Exhibit 41: P/BV pattern for BEL
0
100
200
300
400
500
Nov-1
4
Mar-15
Jul-15
Nov-1
5
Mar-16
Jul-16
Nov-1
6
Mar-17
Jul-17
Nov-1
7
Mar-18
Jul-18
Nov-1
8
Mar-19
|
Price 2.5x 2x 1.5x 1x 0.5x
Source: Company, Bloomberg, ICICI Direct Research
Exhibit 42: P/BV average
0.8
1.2
1.6
2.0
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
Mar-18
Jul-18
Nov-18
Mar-19
(x)
P/BV Multiple Average P/BV 1+ STD 1- STD
Source: Company, Bloomberg, ICICI Direct Research
ICICI Securities | Retail Research 30
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Financial Summary
Exhibit 43: Profit & Loss Statement
| crore FY18 FY19E FY20E FY21E
Net Sales 1,897.2 2,905.0 3,093.0 2,627.9
Other Income 48.3 50.7 53.3 55.9
Total revenues 1,945.5 2,955.7 3,146.2 2,683.8
Cost of Materials Sold 844.8 1,573.7 1,604.0 1,191.7
Employee Cost 154.5 177.7 186.6 195.9
Other Expenditure 343.4 395.1 420.6 357.4
Total Operating Expenditure 1,342.7 2,146.5 2,211.2 1,744.9
EBITDA 554.5 758.5 881.8 882.9
Interest 259.4 273.3 321.6 401.1
Depreciation 137.7 140.5 213.0 317.6
PBT 205.7 395.5 400.5 220.1
Tax 62.8 130.5 132.1 72.6
Reported PAT 142.9 265.0 268.3 147.5
Minority Interests (80.1) (134.5) (136.2) (74.8)
Profit for the company 139.2 251.8 239.2 138.4
EPS (|) 10.2 18.5 17.6 10.2
Source: Company, ICICI Direct Research
Exhibit 44: Balance Sheet
| crore FY18 FY19E FY20E FY21E
Equity Capital 136.1 136.1 136.1 136.1
Reserves & Surplus 2,374.0 2,392.4 2,500.0 2,587.2
Networth 2,287.0 2,320.3 2,458.9 2,557.2
Total Debt 3,389.6 3,744.1 4,566.0 4,495.4
Deferred Tax Liability 38.1 38.1 38.1 38.1
Source of Funds 5,938 6,311 7,240 7,257
Gross Block 2,143.8 2,173.8 3,335.4 4,942.3
Less: Accumulated Dep 353.5 494.0 706.9 1,024.6
Net Block 1,790.3 1,679.8 2,628.5 3,917.7
Capital WIP 2,120.7 3,055.7 3,098.3 1,563.4
Total Fixed Assets 3,911.0 4,735.5 5,726.8 5,481.1
Investments 54.0 235.9 235.9 -
Inventories 2,179.5 2,209.7 2,111.6 1,868.0
Trade Receivables 177.0 185.7 180.7 175.7
Loans & Advances 290.0 474.8 449.7 437.3
Cash & Bank Balances 146.6 260.8 48.8 76.2
Other Current Assets 412.8 664.7 616.1 599.1
Total Current Assets 3,658.6 4,491.9 4,023.0 3,755.4
Trade Payable 526.5 589.2 573.5 557.7
Provisions 8.1 13.7 13.3 9.1
Other Current Liabilities 973.2 2,145.0 1,529.4 1,030.9
Total Current Liabilities 1,884.0 3,169.0 2,525.9 1,996.1
Net Current Assets 1,774.5 1,322.9 1,497.1 1,759.3
Application of Funds 5,938 6,311 7,240 7,257
Source: Company, ICICI Direct Research;
*Debt figure includes fully convertible debentures (| 257.5 crore), and other investments including promoter loans (|179 crore),
which are treated as Debt as per Ind-As,. It is an accounting entry and the company treats them as equity.
ICICI Securities | Retail Research 31
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
Exhibit 45: Cash Flow Statement
| crore FY18 FY19E FY20E FY21E
Profit before Tax 194.2 395.5 400.5 220.1
Depreciation 137.7 140.5 213.0 317.6
Interest paid 259.4 273.3 321.6 401.1
Cash Flow before wc changes 557.6 745.4 852.7 873.9
Net Increase in Current Assets (422.7) 397.0 564.6 278.0
Net Increase in Current Liabilities 8.7 229.3 (1,112.2) (529.8)
Net cash flow from op. activities 48.7 997.6 253.1 566.4
Purchase of Fixed Assets (915.7) (965.0) (1,204.2) (72.0)
(Purchase)/Sale of Investments (163.3) - 235.9 -
Net cash flow from inv. activities (1,084.2) (914.3) (915.1) (16.1)
Proceeds from Borrowing 2,120.3
Interest paid (223.2) (273.3) (321.6) (401.1)
Dividend Paid (40.8) (50.4) (50.2) (51.2)
Net cash flow from fin. activities 1,031.7 30.8 450.1 (522.9)
Net Cash flow (3.8) 114.2 (211.9) 27.4
Opening Cash 70.7 146.6 260.8 48.8
Closing Cash 146.6 260.8 48.8 76.2
Source: Company, ICICI Direct Research
Exhibit 46: Ratio Analysis
FY18 FY19E FY20E FY21E
Per Share Data
Reported EPS 10.2 18.5 17.6 10.2
Cash EPS 20.3 28.8 33.2 33.5
BVPS 168.1 170.5 180.7 187.9
Operating Ratios
EBITDA / Net Sales 29.2 26.1 28.5 33.6
PAT / Net Sales 7.3 8.7 7.7 5.3
Return Ratios
RoE 6.1 10.9 9.7 5.4
RoCE 8.1 11.0 10.2 8.8
RoIC 17.1 33.8 26.7 21.2
Valuation Ratios
EV / EBITDA 3.3 2.3 2.5 2.9
P/E 23.7 13.1 13.8 23.9
EV / Net Sales 3.5 2.3 2.5 2.9
Market Cap / Sales 1.7 1.1 1.1 1.3
Price to Book Value 1.4 1.4 1.3 1.3
Turnover Ratios
Asset turnover 0.3 0.5 0.4 0.4
Gross Block Turnover 2.0 2.9 2.2 1.9
Solvency Ratios
Net Debt / Equity 1.3 1.4 1.8 1.7
Current Ratio 1.6 1.1 1.3 1.5
Quick Ratio 0.5 0.4 0.5 0.6
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 32
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,
Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICI Direct Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com
ICICI Securities | Retail Research 33
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd
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the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned
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ICICI Securities | Retail Research 34
ICICI Direct Research
Initiating Coverage | Brigade Enterprises Ltd