Originally set up as a partnership firm (Brigade Enterprises) between M R Jaishankar and Gita Shankar in 1990, Brigade Enterprises (BEL) was converted into a private company in 1995 and a public company in July 2007. It develops residential, commercial and retail properties primarily in Bangalore and Mysore, and has also developed and is managing around 115 serviced apartments under the brand, Brigade Homestead.

Since 1990 BEL has completed and delivered around 67 projects aggregating about 6.7 million square feet (sq ft) of space comprising residential (71% of the total developed area), commercial (IT parks/office buildings constituting 26% of the total developed area), and hospitality ventures (3%).

Land reserves stood at 403.45 acres with an estimated developable area of 44.16 million square feet on 23 November 2007. The reserves consist of land owned directly/indirectly: 112.13 acres (27.8% of the total land reserves)/14.2 million sq ft (32.2% of the developable area), land with sole development rights: 102.91 acres (25.5%)/4.83 million sq ft, land for which memoranda of understanding (MoU) for acquisition has been inked: 133.10 acres (33%)/ 16.38 million sq ft (37.1%), and land under joint development: 55.31 acre (13.7%)/8.75 million sq ft (19.8%). Of the total land reserves, about 56.5% is in Bangalore, 18.7% in Mangalore, 12.2% in Chickmagalur, and the balance in Mangalore, Chennai, Hyderabad and Kottayam.

On the land reserves, BEL is developing two integrated lifestyle enclaves (Brigade Gateway and Brigade Millennium), 12 residential properties, and two hospitality properties aggregating 13.84 million sq ft of developable area with a saleable area of 12.53 million sq ft on 23 November 2007. Brigade Gateway Hospital, the hospital project, is part of the integrated lifestyle enclave of Brigade Gateway and will become operational in another two-three months (interior, electrical and hospital equipment installation work is pending). The 200-bed hospital will be managed by Columbia Asia Hospitals and bring diversity to the revenue stream. Moreover, 18 projects are in the initial stage of development and necessary regulatory approvals are being obtained.

BEL engages external professionals for designing and construction of the projects in addition to its in-house competency developed over the years at every stage of the property lifecycle: land identification, project conceptualisation, and construction management, marketing and delivery. Leveraging the external expertise to specific tasks allows the company to focus on identifying appropriate land, project conceptualisation and marketing. Currently, majority of aggregate developable area is subcontracted to BE Billimoria & Company, Simplex Infrastructure, and Ahluwalia Contracts India.

Currently, BEL is constructing five hospitality properties in Bangalore including two service apartments and one hotel. In addition, the company is also about to start work on two hotels: one each at Mysore and Devanahalli (Bangalore), and two resorts: one each at Kottayam and Chickmagalur. The operation and management of these hospitality properties will be through arrangement with international hotel operators such as Starwood, Intercontinental, Banyan Tree and Accor. The company has signed agreement/ letter of intent (LoI) with these international hotel chains. Subsequent to the completion of these projects, BEL is expected to directly/ indirectly own or manage over 1,500 keys. The income from hospitality was just 2.2% of the income from operation in the financial year ending March 2007 (FY 2007) and 2.6% in the first half year ended September 2007. The rental income from commercial and retail properties was 3% and 3.2%, respectively.

Besides Bangalore, BEL has taken up a few projects in Mysore and recently initiated some development activities in other parts of south India including Mangalore, Hyderabad, Chennai.

BEL is tapping the capital markets to fund the Rs 47.97-crore acquisition of 41.85 acres of land in Bangalore and Kottayam, the Rs 512.04-crore construction and development cost of ongoing and forthcoming projects, and gemeral corporate expenses.

Strengths

An established player in the Bangalore realty market. Has successfully executed and delivered around 67 projects aggregating around 6.7 million sq ft of space comprising residential, commercial and hospitality properties.

Though revenue from management of serviced apartments is minimal currently, the development of five hospitality properties will significantly diversify the revenue base in the medium term.

The integrated lifestyle projects will fetch the company a 5%-10% premium over normal residential properties.

Weakness

The two integrated lifestyle projects, Brigade Gateway at Malleshwaram and Brigade Millennium at Whitefield in Bangalore, account for about 10.84 million sq ft of saleable area of the 12.53 million sq ft under construction and spread over 6 projects. Of late prices at Whitefield are stagnating due to glut in available properties. Also, just about 67% of the total space at the Whitefield property has been sold and hence vulnerable to fall in realty prices in these micro markets.

Interest cost has spiked from 6.9% in FY 2007 (on loans end March 2007) to 11.2% (annualised on loans end September 2007) in the six months ended September 2007. In the process, the interest cost has zoomed to Rs 17.25 crore in the six months ended September 2007. This is even higher than Rs 16.56 crore incurred in the entire FY 2007. The spike in interest cost can hurt, specially during a downtrend.

Current land reserves of 403 acres comprise acquisitions in the last one or two years, which was a period of hot realty prices. Thus, profitability is at risk if property prices cool down.

About 100.69 acres amounting to 24.96% of the total reserves is agriculture land. Realty development here is subject to conversion of that land.

Valuation

Consolidated revenue excluding other income recorded a growth of 103% to Rs 409.99 crore and net profit after accounting for share of profit from associates 70% to Rs 71.50 crore in FY 2007. EPS after adjusting for EO works out to Rs 6.3 on post-IPO equity. On the offer price band of Rs 351-Rs 390, the P/E is 56.7-61.9 times. Comparatively, Sobha Developers quotes at a P/E of 40.5 times and Puravankara Projects at 83.4 times.

Spike in interest cost, relatively low land bank compared with peers, relatively high cost of existing land bank, high concentration on a couple of projects, more of a regional play with focus on Bangalore seeing a glut of late are key concerns.