| Brigade Enterprises Limited | ||||
| Rating outlook revised to 'Positive'; Rating Reaffirmed | ||||
| 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 revised its outlook on the long-term bank facilities of Brigade Enterprises Limited (BEL; a part of the Brigade group) to ‘Positive’ from ‘Stable’; while reaffirming the rating at ‘CRISIL A+’.
The revision in outlook reflects CRISIL Ratings belief that the credit profile of the Brigade group may benefit from improved performance of the residential segment, reduction in debt and capital employed towards the under-construction leasing business and increasing contribution from steady lease rentals. This is supported by healthy financial profile with strong financial flexibility with cash and equivalents of Rs 1789 crore and undrawn bank lines of over Rs 1,500 crore as on Sep 30, 2022, further enhancing flexibility.
The strong brand and established market position of the Brigade group led to an all-time high sales and collection of 4.7 million square feet (msf) and Rs 3,214 crore, respectively, in fiscal 2022, reflecting a healthy 2% and 45% growth, respectively, over fiscal 2021. The momentum is expected to continue over the medium term. The group has achieved sales of 2.42 msf with sales value of Rs 1608 crs and collection of Rs.1916 crs in first half of fiscal 2023. With the revival of demand in residential segment, well-established players with stronger balance sheets are enjoying better demand prospects as compared to smaller and financially weaker entities. CRISIL Ratings believes the group should sustain its improved performance in the residential segment with sales of 5-6.5 msf per annum, supported by its established market position and healthy launch pipeline of 13 msf for the next rolling 4 quarters.
Operational office assets are performing well with leasing occupancy improving to 83% (including hard option) as on Sep-22 from 60% as on Sep-21. Leased area (including hard option) thus increased to 7.18 msf as on Sep 30, 2022, from 6.09 msf as on Sep 30, 2021. Rental income grew by 60% in fiscal 2022 from Rs.371 crore to Rs.596 crore. This includes 1.31 msf of area from retail assets., for which occupancy has already reached to 91% as on Sep-22 from 87% as on Sep-21 and consequently revenue expected to surpass pre-pandemic levels in fiscal 2023, led by strong consumption recovery of 138% in Sep-22 in malls over pre-pandemic period of Sep-20. With capital expenditure (capex) in the commercial and hospitality segments nearing completion, the group is likely to focus mainly on residential projects. Hospitality segment, which suffered the most, with a 65% decline in revenue in FY21, has revived with occupancy and ARRs bouncing back to pre-covid levels i.e. 68% and ~Rs.5500.
Financial risk profile should remain healthy, with overall debt likely to remain at current levels. Composition of debt has changed, with around 58% of total debt backed by stable lease generating assets as on March 31, 2022, as against 49% in March 31, 2021. Share of this debt may further increase to 60-65% over the medium term. Lease rental discounting (LRD) loans are expected to be maintained at 6 times or lower of lease rentals.
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 Ratings 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 258 crore (as on March 31, 2022) 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 238 crore and April 6, 2037, for Rs 20 crore), and the coupon and principal payment have no scheduled due date. GIC and BEL have jointly invested in three land parcels till date. The two companies have entered into a memorandum of understanding to jointly invest Rs 1,500 crore in land purchase.
Also, unsecured loans (Rs 128 crore as on March 31, 2022) 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:
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 300 lakh 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 174 lakh sq ft of saleable area in the real estate development. These projects witnessed healthy sales and construction progress of 68% and 55%, respectively, as on March 31, 2022. Sales and collections are expected to improve to 5-6.5 msf and over Rs 3000 crore, respectively, over the medium term, supported by new launches, healthy sales of ongoing projects and liquidation of completed projects.
The Brigade group derives its income mainly from three segments: real estate development, leasing assets and hospitality. Real estate development contributed 80% of the total cash inflow of 4,046 crore in fiscal 2022. The group also has a leased asset portfolio of 7.18 million sq. ft (increased from 6.09 msf as on Sep-21) 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 Sep 30, 2022. 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.
Financial risk profile is characterised by healthy collections from the real estate segment, which is likely to generate customer advances of over Rs 3000 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, 2022, and cash and equivalents of Rs 1,789 crore as on Sep 30, 2022. The group also has room to raise an additional lease rental discounting loan against the expected lease income of over Rs 700 crore per annum. LRD loans formed 58% of the total debt as on March 31, 2022 (vis-a-vis 49% as on March 31, 2021) and their share may further increase to almost 60-65% over the medium term. The group had also raised Rs 500 crores through QIP in fiscal 2022, of which around 50% is only deployed towards land acquisition. 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 subdues sales or substantial delay in leasing will remain key rating sensitivity factors.
Weaknesses:
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 83% (including hard option) as on Sep-22 from 60% as on Sep-21. 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.
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. Occupancy which dropped to 25% for the group’s portfolio in fiscal 2021, has increased to 65-70% as on Sep-22, with average room rates also increasing to pre-pandemic levels. Though post pandemic, there has been revival of demand now 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 576 crore as on March 31, 2022 and a land bank with development potential of around 47.0 million sq. ft against which additional debt can be raised, if required. Furthermore, undrawn bank lines of over Rs 1,500 crore as on August 31, 2022, and cash and equivalents of Rs 1,789 crore as on Sep 30, 2022 support liquidity. Liquidity is further supplemented by steady cash flow from lease business and the ability to raise additional lease rental discounting loans, if required. |
Outlook: Positive CRISIL Ratings believes the Brigade group may improve its business risk profile over the medium term, driven by its established market position. Financial risk profile is 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
Downward 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 300 lakh 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, 2022 |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||
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This Annexure has been updated on 21-Nov-22 in line with the lender-wise facility details as on 17-Aug-21 received from the rated entity.
Criteria Details
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