Keynote Capitals has come out with research report on Brigade Enterprises IPO. The firm has recommended subscribing with a long term view.
Brigade Enterprises, a Bangalore-based real estate company focusing on the development of residential, commercial and hospitality properties, has opened for subscription with an initial public offering of 16,624,720 equity shares of Rs 10 each for cash, at a price to be decided through the 100% book building process.
The issue will close for subscription on December 13, 2007. The price band is between Rs 351 and Rs 390 per equity share.
Keynote Capitals report on Brigade Enterprises IPO
Recommendation - Subscribe with a long term view
* Brigade Enterprises (BEL), a Bangalore-based real estate company, is focused on development of residential, commercial and hospitality properties in South India.
* It is one of the early developers to introduce the innovative concept of lifestyle enclaves in Bangalore. Lifestyle enclaves provide all facilities along with basic accommodation. This segment is likely to contribute to major revenues, going forward.
* Its land bank of 403 acres, spread across 7 cities in South India, translates into a developable area of 44mn sq. ft. due to FSI benefit. The land bank will increase to 445.3 acres post-IPO, through acquisition of additional land in Bangalore and Kerala. However, it would still be much smaller vis-à-vis players like Puravankara Projects and Kolte-Patil Developers.
* Order book of ongoing projects of 12.5mn sq. ft. of developable area is likely to get completed by FY09. The breakup of its order book is as follows: 59% residential, 35% commercial and 6% hospitality projects.
* Going forward, the main concern would be the timely execution of the order book. In order to ensure timely execution, BEL has tied up with reputed contractors to whom the construction activities are outsourced.
* 91% of the IPO proceeds shall be utilized to construct and develop ongoing and forthcoming projects. Rest of the proceeds will be for acquiring additional land.
* BEL has managed to grow topline and bottomline at a CAGR of 70.2% and 88.1% respectively. EBITDA margin expansion from 18.4% in FY04 to 32.1% in FY07.
* It follows the strategy of selling residential property and leasing non-residential property. This in our view gives more visibility to the revenue streams, as the company will generate revenues from both selling and leasing properties. 40% of the developable area of ongoing projects will generate revenues from lease rentals.
* It plans to expand in other tier 1 and tier 2 cities in India which will help de-risk its business model. Going forward, it plans to develop an SEZ too.
* It has an accounting policy of recognizing revenues on percentage of completion method, as the aggregate of the profits earned on the projects completed/under completion and the value of construction work done during the period.
* We compared BEL with Kolte-Patil and Puravankara, the real estate companies which recently went public. Following are our comments
very low land bank compared to Kolte-Patil, Puravankara and other listed real estate players.
In spite of Bangalore being an IT city, BEL’s revenues from IT parks is too minimal.
higher tax provision of 32% compared with Kolte-Patil of 22.8% and Puravankara
of 11.8% in FY07.
very low PAT margins of 17.4% (Kolte-Patil 36.3% and Puravankara 31.3% in FY07), because of higher interest expenditure and tax provisions.
The debt equity ratio is on par; however, post-issue, the debt-equity ratio would be 2.06.
BEL has a price/NPV of 0.99x per share compared to peers – Puravankara 1.06x and Kolte-Patil 0.77x.
* IPO valuation at 41.5xFY08E and 20.2xFY09E is in line with peers (Sobha developers at 19.4xFY09E, Kolte-Patil at 6.9xFY09E and Parsvanth developers at 7xFY09E). NPV valuation is Rs 394 per share, translating into price/ NPV mutiple of 0.99x. We recommend subscribing with a long term view.
Concerns
* 74.6% of the land bank located in Bangalore which exposes them to single city risk.
* Compared to other real estate players, it has got a very small land bank. Going forward, if it plans to increase the same, it will have to incur high costs to acquire quality space.
* Timely execution of the ongoing and forthcoming projects is a concern.
* It has a mixed strategy of selling residential real estate properties as well as leasing commercial properties. A decision to lease rather than sell any property would reduce cash flows in the short term and increase the number of periods over which cash would be recovered from such properties.
* Increasing cost of construction materials like steel, cement, etc is likely to affect margins.
Source: Moneycontrol.com
Tuesday, December 11, 2007
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