Brigade Enterprises is entering the capital market on 10th December 07, with a public issue of 1.66 crore equity shares of Rs.10 each in the band of Rs.351 to Rs.390 per share. At the upper band, issue size would be close to Rs.650 crores. Green Shoe option of 24.94 lakh equity shares would raise issue size to Rs.750 crores.
The present equity of the company is at Rs.94.21 crores, which would rise to Rs.113.33 crores of which promoters stake would be about 83%. This expanded equity, post green-shoe option, would give a market capitalization of Rs.4,420 crores at the upper band of Rs.390 per share. This definitely looks quite expensive for the company, looking to its projects and quality of land bank. This would thus be leaving very low scope of appreciation for the prospective investors.
The company has developed about 5.67 million sq. ft. of saleable area till date and various projects, aggregating 12.53 million sq. ft., are under development. The forthcoming projects to be launched by June 08 are of 23.14 million sq. ft. of saleable area. The past performance of the company has been very low and if we consider the future plans coupled with the projects in hand, a radical jump in volume, puts a question mark on the capability of the promoters. One would definitely be having cautious approach, inspite of the fact that, construction contracts have been given to the reputed contractors like Billimoria, Simplex and Ahluwalia. Since major construction materials are procured by the company directly, coupled with supervision, it could take a hit in view of multiple projects or lack of experience. Though the company has developed expertise in developing lifestyle complexes, but now, integrated complexes, where over 40% developable area is intended for leasing, could put financial pressure on the company.
Of the total saleable area of 12.53 million sq. ft. under development, about 10.83 million sq. ft.is by two projects- Brigade Gateway and Brigade Metropolis. Brigade Gateway is an integrated complex with 30 storey commercial complex, residential, 5 star hotel, hospital, shopping mall & multiplexes etc. Brigade Metropolis is a residential cum commercial complexes. The policy of the company is to lease the non-residential area while sell residential. This would result in 40% of the saleable area being leased out. In this way, anchor tenant for hospital, hotel and multiplexes, pay lower than prevailing rent and about 50% of such lease area goes into this. So, company would only be able to earn a decent yield of about 10% to 12% by letting off, remaining 50% of such leased area. Obviously, since this area is leased out by the company, the same remains in the books at cost and no profits gets earned, accrued and booked by the company. Additionally, cost of construction and land cost is financed by availing bank finance, at about 12% per annum. This results in a revenue neutral model, except of enjoying benefit of appreciation on such leased premises, which could be respectable and quite high. But leasing is not the business model of the company and that too, to the extent of 40% of saleable area, this ratio is indeed quite low.
If the company continues with this model, then huge borrowing would appear in the books, thus leveraging it against realty stock to have a revenue neutral model. Afterall, appreciation in realty or leased stock won't get booked, year on year by the company.
For FY 07, the company posted total income of Rs.417 crores with PAT of Rs.71.50 crores, resulting in an EPS of Rs.7.60. Even PAT of 17.15% is lower than industry average. For six months ending 30th September 07, the total income was Rs.230 crores with PAT of Rs.44 crores, resulting in a margin of 19.10%.
Even on land holding, the market capitalization of close to Rs.5,000 crores (considering 12% listing premium) is quite high, considering total saleable area of 35.67 million sq. ft. of projects under development and forthcoming projects.
Parsvanath Developers, having saleable area of over 150 million sq. ft. and over 7 SEZ, has market capitalization of close to Rs.7,500 crores. This is inspite of the fact that land bank of Parsvanath is spread over 30 locations, with major presence in Delhi and NCR region. SEZ area of development is over and above the saleable area of 150 million sq. ft. On the other hand, this company has concentration in Bangalore, with as high as 90%. Any recession in that market could depress the working of the company.
Comparing the expected valuation of the company, with the other listed peers share at upper band, looks definitely stretched and investment can only be considered at the lower band of Rs.351 per share.