Rating Rationale
April 30, 2018 | Mumbai
Brigade Enterprises Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.350 Crore
Long Term Rating CRISIL A/Negative (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the long-term bank facility of Brigade Enterprises Ltd (BEL; part of the Brigade group) at 'CRISIL A/Negative'.

The reaffirmation reflects Brigade group's ability to generate steady cash inflows, supported by steady revenue from the commercial and hospitality businesses. While demand for residential real estate faced headwinds because of weak consumer sentiment and implementation of RERA and GST, sales momentum has picked-up since the last few quarters and momentum is expected to continue over the medium term supported by planned launches of around 60 lakh square feet (sq. ft; Brigade group's share) in fiscal 2019; around half of these projects will cater to the affordable housing segment. Furthermore, collections from existing projects is expected to remain healthy as these projects are at an advanced construction stage providing better sales visibility. However, delays in launching new projects and/or lower-than-expected pick-up in sales will impact the rating adversely and will remain key sensitivity factors.

Continued focus on project completion and expenditure towards commercial and hospitality segment, resulted in increase in debt. Nevertheless, close to 75% of the total debt is towards commercial and hospitality segments wherein the cash flows are relatively predictable and stable. These business are expected to drive growth over the medium term. The group has healthy land bank of over 500 acres and no large acquisitions are planned over the next 12-18 months, thereby restricting any sharp increase in debt. However, higher-than-expected increase in debt level will impact the rating and remain a key rating sensitivity factor.   

The rating continues to reflect the Brigade group's strong track record in the real estate market in Bengaluru and moderately diverse revenue profile. The rating also factors in the group's adequate financial flexibility supported by healthy refinancing ability and steady construction progress in ongoing projects. These strengths are partially offset by high debt levels stemming from past land acquisition and capital expenditure (capex) outlays, and exposure to cyclicality inherent in the real estate segment.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of BEL and its subsidiaries. This is because all the entities, together referred to as the Brigade group, are managed by the same promoters and have fungible cash flow.
 
CRISIL has treated fully convertible debentures of (FCDs) Rs 243 crore (as on March 31, 2017) from GIC as neither debt nor equity. The instruments are long-tenured in nature (converted to equity at end of 20 years; Mar 09, 2036 for Rs 238 crore and March Jan 27, 2037 for Rs 5 crore) and, the coupon and principal payment have no scheduled due date.  GIC and Brigade have jointly invested in three land parcels till date. The two companies have entered into an MOU to jointly invest Rs 1,500 crore in land purchase.
 
CRISIL has also treated unsecured loans from promoters of Rs 94 crore (as on March 31, 2017) as neither debt nor equity as these are from promoters and are interest-free and do not have fixed repayment schedule.

Key Rating Drivers & Detailed Description
Strengths
* Strong track record of real estate development and established position in Bengaluru market: The Brigade group is a prominent developer in Bengaluru. The group has a healthy track record of over 30 years in the real estate business and has developed close to 300 lakh sq. ft, mostly in the residential segment in Bengaluru. Its strong market position is evident from Brigade's established brand which has helped the group maintain its market share between 3% and 5%; a healthy share for the highly fragmented real estate industry.
 
* Moderately diversified revenue profile The Brigade group's revenue profile is moderately diverse comprising of three main businesses: real estate development, lease assets, and hospitality. The group will generate over Rs 1,600 crore of cash inflows in fiscal 2018, with real estate development contributing to 70% of the inflow.
 
In addition to the ongoing real estate development portfolio of 123 lakh sq. ft, the group has a healthy lease asset portfolio of around 23 lakh sq. ft and five operational hotels, three in Bengaluru and one each in Mysuru and Chennai as on December 31, 2017. Customer advances of Rs 940 crore were received in nine months ended December 31, 2017 supported by the healthy collections from already booked sales, which helped cushion decline in new sales in fiscal 2018. Slowdown in demand was on account of weak market scenario and implementation of RERA and GST. However, sales velocity saw improvement over the past two quarters through December 2017 and momentum is expected to continue going forward. Sales velocity is also expected to be supported by planned launch of around 60 lakh sq. ft of new projects. This will help the group sustain its pace of cash inflows over the next two fiscals.
 
The group's cash flows will be further supported by stabilization of operations in commercial and hospitality business, which are currently undergoing capex cycle. The group is expected to add around 40 lakh sq. ft of leasable commercial/retail area and expand its hospitality business to about 2000 keys over the next 24-36 months. The resulting increased diversification will help offset the higher volatility in the residential segment.
 
CRISIL believes the group will generate steady cash flow over the medium term supported by its diversified revenue profile.
 
* Adequate financial flexibility: The group's financial risk profile is characterised by moderate collections from the real estate segment; customer advance inflow of upwards of Rs 1,200 crore will be generated from this segment over the medium term. Furthermore, the group's financial flexibility is supplemented by the group's strong refinancing ability, access to unutilised bank limit of Rs 1,600 crore, and flexibility to raise additional lease rental discounting (LRD) loan against its expected lease income of Rs 300 crore per annum.
 
Weakness
* High debt level due to large land acquisition and development plans: The group's financial risk profile is constrained by its aggressive capital structure with adjusted gearing of 1.18 times as on March 31, 2017 which is expected to be around 1.40 times as on March 31, 2018. Aggressive land acquisition and heighted capital expenditure in the commercial and hospitality segments resulted in high debt levels.
 
The group does not have an immediate plan to acquire any large land parcels in this fiscal year. This coupled with slower pace of new project launches resulted in the group's debt at Rs 2,858 crore as on December 31, 2017 as against Rs 2,240 crore (CRISIL adjusted) as on March 31, 2017. CRISIL believes the group's cash flow position could be adversely impacted in case of sharp increase in debt for aggressive land acquisition or funding project construction work in case of subdued sales; and these will remain key rating sensitivity factors.
 
* Exposure to cyclicality inherent in the real estate sector: Cyclicality in the real estate segment could lead to fluctuations in cash inflow because of volatility in realisations and saleability. In contrast, cash outflow, such as debt repayment, are relatively fixed.
Outlook: Negative

CRISIL believes the Brigade group's business risk profile will remain susceptible to ongoing slowdown in the residential real estate market.
 
Downside scenario
* Continued pressure on saleability of ongoing projects and slow pace of new launches
* Substantial debt is contracted because of increase in project development or land acquisition
 
Upside scenario
* Substantially higher-than-expected cash inflow, supported by significant saleability and progress of projects

About the Group

BEL is the flagship company of the Brigade group, which was established in 1986 by Mr. M R Jaishankar, and is one of the largest players in the real estate market of South India. Till date, it has developed around 300 lakh sq. ft, 90% of which has been in the residential segment. Though it mainly focuses on the Bengaluru market, the group has developed projects in Mysuru, Cochin, Chennai, Mengaluru, Hyderabad and Ahmedabad.
 
In the nine months ended December 31, 2017, BEL had a consolidated net profit was Rs 117 crore on an operating income of Rs 1,463 crore, against a net profit of Rs 85 crore on an operating income of Rs 1,470 crore for the corresponding period of the previous year.

Key Financial Indicators
As on/for the period ended March 31,   2017* 2016*
Operating income Rs crore 2,024 1,676
Profit after tax (PAT) Rs crore 167 148
PAT margin % 8.3 8.8
Adjusted debt/adjusted net worth Times 1.18 1.35
Interest coverage Times 2.47 2.80
* Actual

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)
Rating assigned
with outlook
NA Proposed Long Term
Bank Loan Facility
NA NA NA 350 CRISIL A/Negative
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  350.00  CRISIL A/Negative      24-04-17  CRISIL A/Negative  22-09-16  CRISIL A/Negative      CRISIL A/Stable 
                10-02-16  CRISIL A/Stable       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 350 CRISIL A/Negative Proposed Long Term Bank Loan Facility 350 CRISIL A/Negative
Total 350 -- Total 350 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Rating criteria for Real Estate Developers
CRISILs Criteria for Consolidation

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