Tuesday, February 14, 2012

>BRIGADE ENTERPRISES: 3Q earnings disappoint, office demand strong; Reiterate Buy

 3Q earnings below expectation; Reiterate Buy
Brigade reported disappointing 3Q earnings at Rs104mn (against our expectation of Rs170mn) primarily due to higher interest costs and lower revenue recognition. Positively EBIDTA margin saw sharp rebound. We reiterate our Buy rating with a lower PO of Rs100 (-9%) with potential upside of 40% from current levels. We have cut our PO to factor in a delay in residential launches and six month delay in completion of its retail mall project. We continue to like the stock given strong rental growth visibility and good pipeline of residential launches in FY13.

■ Aggressive residential launches ahead
Brigade continues to aggressively look at new residential launches with another 5mn sq ft lined up over the next 6 months. It has seen strong response to its launches in last 18months with 60% of the inventory pre sold. But the benefit of these launches will start reflecting in revenues only from 2HFY13. We have cut our earnings estimate for FY12-14 by 4-25% to factor in higher interest cost and have also pushed the revenue recognition from new residential projects by 6 months to reflect the delay in launches.

■ Solid demand for its commercial assets
Brigade’s commercial projects in Bangalore have seen strong traction on leasing with its Summit project 95% leased and vacancy in WTC reducing to 35%. The benefit of the strong leasing should reflect in earnings from FY13. It has managed to sell 30% of its inventory in WTC with the latest transaction at Rs7000/sq ft against our estimate of Rs6000/sq ft. The retail mall (pre leased 85%) is expected to start operations from 4Q with rental accrual expected from 2QFY13.

■ Debt remains under control
The debt has remained flat in FY12 at Rs8bn given strong inflow from residential and commercial sale. Brigade expects to reduce debt by over 25% in FY13.