Bangalore brigade

IPO REVIEW

Despite being highly concentrated in Bangalore, Brigade Enterprises has a robust business model with quality land reserves.

Indian real estate does not just cease to wow investors time and again. The more or less secular upward trend in both, realty prices and real estate stocks, with just a couple of minor glitches over the past two years has prompted a large number of builders to enter the capital markets.

What's more interesting is that a majority of realty issues have yielded phenomenal returns to investors, although there has been a fair amount of volatility. As the sector gets a facelift by organising itself, a number of local and regional players emerge as key contenders in the marketplace.

Therefore, the industry is likely to witness dominance of local pioneers in different markets, such as DLF, Unitech or Parsvnath in the north, or the likes of Sobha Developers, Puravankara Projects or IVR Prime in select cities in the south.

Brigade Enterprises is one such key player from the southern part of the country with its operations concentrated in Bangalore, with a small presence in Mysore, Chennai and Hyderabad. The company specialises in development of integrated enclaves comprising of residential apartments, commercial and retail space, recreational clubs, schools, parks and convention centres.

So far, Brigade has completed a development of 5.7 million sq ft of saleable area, and is currently developing 12.5 million sq ft of saleable area, to be completed by FY12. Development of another 23.1 million sq ft is being planned.

Brigade's offer
From its IPO, Brigade aims to aggregate Rs 583.5-648.4 crore without the greenshoe option and Rs 671.1-745.6 crore with the greenshoe option. The price band for the issue is fixed between Rs 351-390. Upon listing, the company is likely to garner a market capitalisation of Rs 3,890-4,420 crore, thus putting it in the league of the likes of Sobha Developers and Parsvnath Developers.

From the issue proceeds, Rs 512 crore will be utilised to fund the construction and development of Brigade's ongoing projects, while Rs 48 crore will be used to acquire land. Brigade owns over 400 acre of land in Bangalore, Chikmagalur, Mysore, Mangalore and Kochi at present, on which its current projects are under development. 
 

BRIGADE'S LAND RESERVES
Location	Land reserve (in acres)
Bangalore	228
Mysore	75.4
Hyderabad	1.4
Chennai	1.5
Kochi	18.2
Mangalore	30
Chikmagalur	49
Total	403.5

The business
Brigade Enterprises, a 17-year old developer has a number of prized developments in Bangalore to its credit. Projects like Brigade Regency, Brigade Millennium and Brigade Gateway are premium residential and commercial spaces in the city's coveted locations, which provide a gist to the business model.

"We intend to focus on high-growth locations within city limits in the regions that we operate, and not on accumulating land reserves on the outskirts of cities to develop after holding the land for several years," claims M R Jaishankar, chairman and managing director, Brigade Enterprises.

This strategy is well reflected from the company's ongoing projects in places like Bangalore and Mysore.

Brigade follows a build-and-sell model for the residential properties, while the commercial properties are leased out. So far, Brigade has about 3.5 lakh sq ft of leased commercial property.

It outsources all the development work to specialised contractors, such as Ahluwalia Contracts, B L Kashyap and Shapoorji Pallonji. This reduces the risk posed by potential delays in execution of projects, and the resulting cost overruns.

Besides residential and commercial real estate, Brigade is also into serviced apartments, hotels and resorts. The company's serviced apartment venture Brigade Homestead operates two properties at present.

Over the coming few years, the company plans to launch four serviced apartment properties, three hotels and two resorts. For these, it has tied up with leading hotel brands like Sheraton, Accor, Banyan Tree and InterContinental.

One-city wonder
While all of Brigade's land reserves are situated in high-end localities of the cities in which it is present, the company runs a risk of high concentration in Bangalore. Given the shorter turnaround time from land to property, Brigade Enterprises will be required to continually replenish its land bank and launch new projects rapidly to keep its cash flowing into the company.

Despite this, Brigade's business model of owning its commercial properties will provide it with annuity revenues with reasonable visibility, thus cushioning itself during downturns in the real estate market.

By FY12, Brigade is likely to have leased out over 4.5 million sq ft of commercial space in Bangalore. Its present tenant-base includes renowned clients such as GE, Unilever, Nokia, Cisco Systems and many more.

Valuation
Brigade plans to enter other cities, in order to curb the risk of concentrating too much on Bangalore. It manages to contain execution risk by outsourcing construction and other activities to contractors, which helps it to focus on the core activities of land acquisition and marketing. High quality land reserves, a well-balanced project mix and a good tenant mix for its commercial properties give the business a fair visibility of earnings for the future. 
 

STEADY MARCH
Rs crore	FY07	FY08E	FY09E
Revenues	411.2	460.0	600.0
Operating profit	105.2	132.2	174.0
OPM (%)	25.6	28.7	29.0
Net profit	71.5	89.0	117.0
NPM (%)	17.4	19.3	19.5

The company has maintained its operating margins at over 25 per cent, and net margins close to 20 per cent for the past three years. Barring any steep and prolonged downturn in the overall real estate market, there are hardly any hurdles for the company to cross. To sum up, Brigade appears an attractive investment for investors with all sorts of risk appetites.

Issue opens: December 10
Issue closes: December 13