| Brigade Enterprises Limited | ||||
| Rating reaffirmed at 'CRISIL AA- / Stable' | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its rating on the long-term bank facility of Brigade Enterprises Ltd (BEL; a part of the Brigade group) at 'CRISIL AA-/Stable'.
CRISIL Ratings on August 3, 2023 had upgraded its rating on the long-term bank facility of BEL to ‘CRISIL AA-/Stable’ from ‘CRISIL A+/Positive’.
The rating upgrade reflects expected improvement in business and financial risk profile of BEL. Driven by BEL’s established market position and healthy launch pipeline, the performance of the residential segment is expected to remain healthy with sales expected to be in the range of 6.5-7.5 msf in FY2024, similar to FY2023.
Rental income from commercial segment is also expected to increase with 2 under construction commercial assets becoming operational in a phased manner from next fiscal onwards. Additionally, there is 1 under construction asset in hospitality segment which is also expected to contribute to incremental growth post its operationalization. Diversity and stability of business risk profile of BEL is expected to strengthen further with increase in rental and hospitality revenues, backed by expected increase in occupancies and sustenance of demand in hospitality segment.
BEL had achieved all time high real estate sales and collections of 6.3 million sq ft (msf) and Rs 3884 crore respectively in real estate segment in FY2023, which is a healthy 35% and 21% growth in sales area and collections over FY2022. Launch pipeline for FY2024 stands at healthy levels of 7-8 msf.
Further, performance of commercial and retail segments has also improved with an increase in rental income by 29% in FY2023 to Rs 625 crore. This was supported by occupancy for the leased portfolio increasing to 85% from 71% and overall leased area increasing to 7.39 msf from 6.22 msf in FY2023 from FY2022. This includes 1.31 msf of area from retail assets, for which occupancy has already reached to 95% as of March 2023.
Financial risk profile has improved in fiscal 2023 and should remain healthy in the medium term, with overall gross debt likely to remain at in the range of Rs 4000-4500 crore. Composition of debt has changed, with around 76% of total debt backed by stable lease generating assets as of March 31, 2023, as against 58% on March 31, 2022. Share of LRD debt is expected to remain at around 70% of overall debt in the medium term. Lease rental discounting (LRD) loans are expected to be maintained at 6 times or lower of lease rentals. Debt protection metrics should remain strong over the medium term, with debt-to-total assets ratio (for the development business) below 10.0% and average debt service coverage ratio (for lease business) at above 1.5 times.
The rating continues to reflect the strong track record of the group in the real estate market in Bengaluru, sound saleability of projects and the diverse revenue profile. Financial flexibility is supported by the demonstrated refinancing ability and steady progress in construction of ongoing projects. These strengths are partially offset by exposure to risks inherent in the real estate segment, intense competition and cyclicality in the hospitality sector. |
Analytical Approach For arriving at the rating, CRISIL has fully combined the business and financial risk profiles of all ongoing and planned projects in BEL and those in its subsidiaries and associate companies. All these entities, collectively referred to as the Brigade group, are in the same business, have common promoters, and share significant operational, managerial, and financial linkages.
The fully convertible debentures of Rs 250 crore (as on March 31, 2023) from GIC, have been treated as neither debt nor equity. These are long-tenured instruments (converted into equity at the end of 20 years; March 9, 2036, for Rs 231 crore and April 6, 2037, for Rs 19 crore), and the coupon and principal payment ave no scheduled due date. GIC and BEL have jointly invested in three land parcels till date.
Also, unsecured loans (Rs 119 crore as on March 31, 2023) from promoters have been treated as neither debt nor equity as these are interest-free with no fixed repayment schedule.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Strong track record and established position in Bengaluru market The Brigade group is a prominent developer in Bengaluru, with a healthy track record of over three decades in the real estate business. It has developed over 76+ Mn sq ft, mostly in the residential segment. Strong position is evident from its established brand, and the healthy market share of 6-7% in Bengaluru, considering the high fragmentation in the real estate industry.
It has ongoing projects of around 197 lakh sq ft of saleable area in the real estate development. These projects witnessed healthy sales (basis value) and construction progress of 77% and 55%, respectively, as on March 31, 2023. Sales and collections are expected to sustain at 6.5-7.5 msf and over Rs 4000 crore, respectively, over the medium term, supported by new launches, healthy sales of ongoing projects and liquidation of completed projects.
Moderately diversified revenue profile The Brigade group derives its income mainly from three segments: real estate development, leasing assets and hospitality. Real estate development contributed 72% of the total cash inflow of Rs 3,884 crore in FY2023. The group also has a leased asset portfolio of 8.7 msf and eight operational hotels (four in Bengaluru and one each in Mysuru, Chennai, Kochi and Gujarat International Finance Tec-City), with total of 1,474 keys as on March 31, 2023. Diversification both in terms of geography and revenue is expected to improve with share of new development increasing in Hyderabad and Chennai and increase in lease rental income respectively.
Strong financial flexibility Financial risk profile is characterised by healthy collections from the real estate segment, which is likely to generate annual customer advances of over Rs 4000 crore over the medium term. Financial flexibility is further supplemented by the demonstrated refinancing ability of the group, its access to an unutilised bank limit of about Rs.1,500 crore as on March 31, 2023, and cash and equivalents of Rs 1,690 crore as on March 31, 2023. The group also has room to raise an additional lease rental discounting loan against the expected lease income of over Rs 800 crore per annum. LRD loans formed 76% of the total debt as on March 31, 2023 (vis-a-vis 58% as on March 31, 2022) and their share may sustain at around 70% over the medium term. The group had also raised Rs 500 crores through QIP in fiscal 2022, which is fully deployed towards land acquisition, repayment of debt & other business purpose of the group. The group is unlikely to raise further equity to acquire any new large land parcel in the medium term. Any sharp increase in debt due to aggressive land acquisition, or construction debt due to subdued sales or substantial vacancy in commercial and retail portfolio will remain key rating sensitivity factors.
Weakness: Exposure to risks inherent in the real estate sector Cyclicality in the domestic real estate sector leads to volatility in saleability and realisations and thus, fluctuations in cash inflow. However, outflows such as construction cost and debt repayment are relatively fixed. Muted demand could also reduce collections and cash flow. Nevertheless, the strong track record of the Brigade group in the real estate space in Bengaluru mitigates the implementation and demand risk.
The rental collection from commercial segment is also susceptible to economic downturns, which constrains the tenant’s business risk profile and, therefore, occupancy and rental rates. Leasing occupancy has improved to 85% as of March 2023 from 71% as of March 2022. While majority of the tenants are established corporates and may continue to occupy the property, any industry shock leading to vacancies may make it difficult to find alternate lessees within the stipulated time. Emergence of competing facilities in the vicinity could also have the potential to cannibalise tenants or rental rates. These could adversely impact cash flow, and hence, will be key rating sensitivity factors.
Susceptibility to intense competition and cyclicality in the hospitality sector Competition in the hotel industry in India is increasing due to the growing presence of international chains and expansion by domestic players. The hospitality industry is susceptible to downturns in the domestic and international economies, and typically follows a six-year cycle. In fiscals 2021 and 2022, the industry has been highly impacted by the pandemic and the ensuing lockdowns and travel restrictions. However, the segment has seen a revival in demand. Occupancies have surpassed pre-covid levels in FY2023 at 69% as against 62% pre-covid. Though post pandemic, there has been revival of demand in the hospitality segment, sustenance of the demand remains a key monitorable over the medium term. |
Liquidity: Strong Liquidity remains strong, supported by good saleability and collections in ongoing projects and expected even for fresh launches. Financial flexibility is supported by strong refinancing ability. The Brigade group has unsold finished inventory of over Rs 505 crore as on March 31, 2023 and a land bank with development potential of around 46.0 million sq. ft against which additional debt can be raised, if required. Furthermore, undrawn bank lines of over Rs 1,500 crore and cash and equivalents of Rs 1,690 crore as of March 31, 2023 supports the liquidity. Liquidity is further supplemented by steady cash flow from lease business and the ability to raise additional lease rental discounting loans, if required.
Environment, Social and Governance (ESG) profile CRISIL Ratings believes that Brigade Enterprises Limited’s (BEL) Environment, Social and Governance (ESG) profile supports its already strong credit risk profile.
The real estate sector has a significant impact on the environment owing to high emissions, waste generation and impact on land and biodiversity. The impact on social factors consists of labour-intensive operations and safety issues on account of construction related activities.
BEL has an ongoing focus on strengthening the various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. BEL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high foreign portfolio investor shareholding and access to capital markets. |
Outlook Stable CRISIL Ratings believes the credit profile of Brigade group will remain healthy over the medium term, driven by its established market position. Financial risk profile is also likely to remain healthy, aided by low leverage of the residential business, limited commercial capex and cap on leveraging the leasing business. |
Rating Sensitivity factors Upward factors
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About the Company BEL is the flagship company of the Brigade group, which was established by Mr MR Jaishankar in 1986, and is one of the largest real estate players in South India. Till date, it has developed over 76+ Mn sq. ft, 80% of which has been in the residential segment. Though it mainly focuses on the Bengaluru market, Chennai is emerging as the second large market for the entity. The group has developed projects in Mysuru, Cochin, Chennai, Hyderabad, and Ahmedabad. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated*
*Details as on March 31, 2023 |
| Annexure - Details of Bank Lenders & Facilities | ||||||||
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Criteria Details
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