Brigade Enterprises Limited (532929) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q2 FY '20 Earnings Conference Call of Brigade Enterprise, Limited. We have with us on the call the management of Brigade Enterprises Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. M. R. Jaishankar, Chairman and Managing Director of the company. And over to you, sir.

Thank you. Good afternoon, and compliments of the season, ladies and gentlemen. We hope all of you and your loved ones are doing well. On behalf of the company, Brigade Enterprises Limited and Brigade Group, I would like to welcome you to the earnings call for the second quarter of financial year '22. I'm joined by our executive directors, Ms. Pavitra Shankar, Ms. Nirupa Shankar, Mr. Amar Mysore. Our senior management team is also present, Mr. Atul Goyal, CFO; Mr. Rajendra Joshi, CEO of Residential; Mr. Vineet Verma, CEO of Hospitality; Mr. Subrata Sharma, CEO of Office; Mr. Om Prakash, Company Secretary; and Mr. Pradyumna Krishnakumar, Senior VP. Last month, October 2021 marked the 35th anniversary of the Brigade Group, having launched Brigade Towers on Brigade Road, Bangalore in October 1986 in a partnership company. Brigade Towers is a Bangalore's tallest private building at that point of time. Since then, we have come a long way from a single-project firm to a multi-product, multi-city developer with more than 250 buildings and 71 million square feet of road construction. As we celebrate our 35th anniversary, we would like to thank all our customers, investors and well-wishers for the trust they have placed in our group over the years. We stand committed to our mission, vision and values that have brought us to where we are today. For your information, the Brigade Enterprises Limited itself got listed on the 31st of December 2007, and it was -- as a private limited company, it came into being more in 2008 -- I mean, sorry, 1997, 1998. Coming back to our results update, the second quarter for financial year 2022, we saw a sharp recovery coming out of the pandemic. The bounce back in economic activity, post the devastating second wave of COVID, has driven the momentum across all our businesses. The residential business continues to drive our strong performance, registering significant growth on a quarter-on-quarter and year-on-year basis. We ended the quarter with net new bookings of 1.30 million square feet, having a value of INR 814 crores, which is a growth of 73% by area and 34% by volume based on quarter-on-quarter. Hyderabad and Chennai continue to be important markets for us, contributing 28% by area and 37% by value. In Bangalore, our key projects, Brigade Cornerstone Utopia and Brigade El Dorado are the primary contributors. We have also seen a sharp increase in demand for our premium projects. Completed ones: Brigade Exotica and Signature Villas at Brigade Orchards. Trend of customer preference for larger units post COVID continues. Larger established players have further consolidated and strengthened their position in the market as customers increasingly choose Grade A developers. We would also like you to note the conservative approach followed in terms of reporting our operational numbers. That is our presales numbers are always shown net of cancellations of bookings done in current as well as prior year period. We also do not consider bookings towards presale numbers unless a minimum of 5% or 10% of the agreement value has been collected along with all the required documentation. Our average realization is based on RERA agreement value of the customer and do not include any other expenses or transaction costs. On the revenue recognition front, we only report units where the customer has completed the entire registration process and not just taken possession of the unit. We have mentioned this just as a matter of clarity. On the collection front, we registered our second best quarter so far at INR 744 crores from the residential business driven by continued strong sales performance and good construction progress at all projects. The leasing segment of the commercial business of Brigade remains stable with around 99% collections. The outlook is positive with the need for additional office space as companies have started enhancing employee strength in their respective offices and embarking on major hiring drives. We are already seeing genuine intent and urgency among the small and midsized company to acquire new spaces. Inquiries for large office spaces are gaining in pace as well. We have a strong positive -- we have a strong pipeline, I won't say positive, of 1 million square feet. And we expect 0.4 million to 0.5 million square feet closure in the ongoing quarter. I'm happy to inform you that the retail segment is almost back to its pre-COVID levels after being severely impacted during the 2 COVID waves and lockdowns. Occupancy across all 3 malls is over 85% with a multiplex format back to being operational with 100% of occupancy level permitted. Overall, retail sales consumption recovered to over 90% of pre-COVID level primarily across categories like consumer electronics, at leisure, key fashion anchor stores, eyewear, travel gear and F&B. We welcomed 2 new hypermarkets, Simpli Namdhari at Orion Gateway and All Market at Orion Uptown. We also added 2 new anchors, Home Centre and Max Fashion at Orion Gateway and the tap room format, Geist Brewery. Furthermore, we have around 1.15 lakh square feet under -- across our 3 malls, which will be operational in quarter 3 of financial year '22. Finally, we are encouraged to see a noticeable improvement in our hospitality business during quarter 2 as compared to quarter 1. With some amount of domestic corporate travel also commencing, we have seen an uptick in hotel occupancies across our hotels. Around 15% to 17% of our room occupancies today are from corporate travelers and this august well for the industry as travel restrictions and RT-PCR requirements continue to be relaxed. At the same time, average room rates continue to remain at around 60% of the pre-COVID level, which is pulling down the gross operating profit of the hotels. But all our hotels have turned GOP positive, I would say, all 8 hotels. Our F&B business, especially after the removal of 10 p.m. curfew in Karnataka has also ticked up with increased number of inquiries for banquet and life events for early next year. International business, however, remains subdued and will continue to be so until international travel restrictions are rolled back. We expect our hospitality business to show a consistent improvement from here on. With this, I conclude my remarks for the last quarter. Thank you for listening. Now Mr. Atul Goyal, our CFO, will present the financial business in detail. Thank you.

Thank you, sir. Good afternoon, everybody. On behalf of the company, we would like to welcome you on the earnings call for Q2 FY 2022. To give you a brief business update, as we all know, this quarter has been better than the last quarter in terms of business performance. To give you some highlights of our performance in the last quarter, we recorded real estate sales of 1.3 million square feet during this quarter vis-a-vis 0.7 million square feet during last quarter. Collection in residential improved by 40% from Q1 FY '21, totaling up to INR 744 crores in Q2 FY '22. On the leasing side, we achieved a growth of 22% in revenues in Q2 FY '22 versus Q1 FY '22 due to additional rental income coming from new leasing in Tech Gardens, WTC Chennai and Southfield. We have started seeing significant uptick in the hospitality performance with increased ARR and occupancy levels. We have achieved overall positive GOP of INR 9 crores during Q2 FY '22. On consolidated level, we achieved overall collections of INR 937 crores, an increase of 30% as compared to Q1 FY '22. There was an increase in cash flow from operating activity by 37% to INR 413 crores as compared to Q1 FY '22. We continue to have adequate liquidity and credit lines from the banks. Our average cost of debt has been coming down consistently over the last few quarters and is at the low time -- is at all-time low of 7.92% as on September 21. Our real estate debt has reduced by INR 122 crores within the quarter due to improved sales and collections. Coming to the consolidated financial performance for Q2 FY '22. The consolidated revenue for Q2 FY '22 stood at INR 776 crores versus INR 391 crores in the Q1 FY '22, which is a 98% increase. The real estate segment clocked a turnover of INR 598 crores and an EBITDA of 19% in Q2 FY '22. The hospitality segment clocked a turnover of INR 41 crores and EBITDA of 18% in Q2 FY '22. We expect consistent improvement of hospitality performance given that there are no further COVID risk. The leasing segment clocked a turnover of INR 136 crores and EBITDA of 71% in Q2 FY '22. The consolidated EBITDA for Q2 FY '22 stood at INR 215 crores versus INR 120 crores in Q1 FY '22. EBITDA margin stood at 28%. The interest and finance charges for Q2 FY '22 stood at INR 113 crores. PAT after MI stood at INR 12 crores for Q2 FY '22. With respect to consolidated performance, that is H1 FY 2022, the consolidated revenue for H1 FY '22 stood at INR 1,168 crores versus INR 536 crores in the same half year ending in the last financial year. The real estate clocked a turnover of [ INR 58 crores ] and EBITDA of 17% in H1 FY '22 versus a turnover of INR 342 crores and an EBITDA of 16% in H1 FY '21. The hospitality segment clocked a turnover of INR 61 crores and an EBITDA of 7% in H1 FY '22 versus turnover of INR 28 crores and a negative EBITDA of 65% in H1 FY '21. The leasing segment clocked a turnover of INR 248 crores and EBITDA of 73% in H1 FY '22 versus a turnover of INR 165 crores and an EBITDA of 73% in H1 FY '21. The consolidated EBITDA, including other income for H1 FY '22, stood at INR 336 crores versus INR 156 crores in H1 FY '21. EBITDA margin, including other income, stood at 29%. The interest and finance charges for half year stood at INR 226 crores. PAT after MI was negative INR 28 crores in H1 FY '22. Coming to the debt position and its breakup. INR 345 crores in real estate segment that is there. INR 610 crores in the hospitality segment, in which INR 502 crores is GOP. Securitized loans and INR 108 crores is CapEx loan and INR 3,172 crores is the leasing segment in debt, in which INR 2,356 crores is securitized leased rental loans and INR 816 crores is CapEx loans. The cash and cash equivalents stood at INR 1,167 crores as on September 30, 2021. Consequently, the company's net debt outstanding as on September 30, 2021, was INR 2,961 crores, out of which BEL share was INR 2,029 crores. As mentioned earlier, the company's effective cost of debt stands reduced as on 30 September 2021 to 7.92% per annum versus 9.23% at the end of Q2 FY '21. We have been given rating of A plus with stable outlook, which has been assigned by both CRISIL and ICRA, which will increase our lenders and investors confidence. I also want to share some leverage ratios that we track on a trailing basis. Interest coverage ratio stood at 1.5x in H1 FY '22 due to improved EBITDA and our net equity ratio stood at 0.83 as on September 2021. The company has a strong balance sheet and sufficient liquidity to meet operation and expansion plans. Thank you. I'll now hand over back to the moderator for the questions.

[Operator Instructions] The first question is from the line of Adhidev Chattopadhyay from ICICI Securities.

The first question is on the leasing business. You mentioned out of the 1 million square feet of leasing pipeline, around -- you're expecting closures of around 0.4 to 0.5 within this quarter itself. So on that, could you tell us the closure when would the rental income start from these properties in which assets? And going forward now, what is the revised target to fully lease out both Tech Gardens and WTC Chennai? That was the first question.

Yes. Adhidev, this is Subrata. So as far as leasing is concerned, we are expecting around, as we said, 0.4 million to 0.5 million in this quarter. And we are -- we have a positive outlook based upon the recent pipeline that we have gathered. Suppose we close on entirety by the December, from then onwards, approximately, on an average, 5 to 6 months would be their entry period. So 2 quarters from December would be the real start.

Okay, by June around, right? That is the understanding, yes. And the second part of the question, when do we -- what is our overall time line target for both Tech Gardens and WTC Chennai?

Yes. As far as Tech Gardens is concerned, we are hopeful that in next 4 quarters, we should be able to exhaust the entire inventory. But again, like as I said, now that companies are actually coming back to offices, the momentum is increasing, okay? And gradually, from the small and midsize inquiries, large-size inquiries are also coming by. Okay. So as we progress, maybe in the next quarter, the other view in terms of like the intensity and the frequency of the transactions. But as on that, we have outlook of, say, 4 quarters from now.

And similarly for Chennai, what is the cost?

Chennai, generally, we are hoping it will be sooner because the percentage of vacancy is quite less. And plus, we have -- we already have existing tenants, which are market tenants and all of which are actually on the growth phase, okay? So a kind of requirement would come from the existing tenants as well.

Okay. So you mean the hard option? Okay, fine. And -- yes?

Hard option, yes.

Yes. And just another question is for Atul. So for the quarter, could you just give the office and mall rental income breakup and how much the Tech Gardens and WTC Chennai contribute to the rental income for this quarter?

So Tech Gardens contributed around INR 45 crores for first half and Chennai contributed around INR 55 crores. If you want a revenue breakup, for retail, it was -- for half year, it was INR 31 crores and for office lease was -- we are INR 177 crores.

Okay. So all numbers are for the first half for the year?

Yes, this is for first half. You want quarter?

No, it's fine. No, I will get the breakup. Yes, that was from the [indiscernible]

Okay.

[Operator Instructions] The next question is from the line of Parikshit Kandpal from HDFC Securities.

So my first question is on the residential business. So now at the current run rate, we are almost annualizing at 5 million to 6 million square feet. We have a balance to be sold from existing projects, about 7 million square feet. And we have about 35 million square feet of land bank and 2 million square feet of new launches planned. So I just wanted a sense on the business development side given the demand is a huge demand out there in the southern market...

You're not quite clear. The question was previously answered.

Yes. Given the momentum in the southern market on the residential side, I just wanted to get your sense from the management team that how are you looking to ramp up our efforts on the business development given just about a year's inventory in the ongoing projects left to be sold.

Okay. So Parikshit, first of all, yes, the business sale momentum has definitely picked up. Last year, we did about 4.4 million. We do expect that we'll do better -- similar or better. But the point is that what we pay, which is 6 million is in our current project with approvals, okay? In the current projects, there are -- there is an additional inventory of about 4 million to 5 million square feet, which is available, where we need to get approval. Plus, we have a pipeline of a few more projects, which will add probably around 2 million to 3 million. So our pipeline continues to be strong, while we will focus on business development in terms of acquiring new land for our future pipeline.

Just to add, the process of acquiring new lands is a continuous process. And we have finalized the new lands. There is some -- for some, we have signed a term sheet. For some, we are in the process of signing term sheets. We are also hopeful some of them would happen before the Q2 results. But it is -- due to various reasons, it is slightly pushed by a week or 2. But it is a continuous process of replenishing the sold stock [indiscernible] stock.

Further on [indiscernible], I have this issue that -- when I see your land bank, why don't have much visibility on how the growth of the company will come given the kind of 3 to 4 years land bank which we have. Out of this 25 million square feet, which we have in Bengaluru, how much of that really has a developable potential in the next 3 to 4 years? So I would assume that not everything can come in. So that would imply that your other land in Chennai and other places like Thiruvananthapuram and other smaller cities, there's not much of inventory land. Inventory left, I think, about 4 million to 5 million square feet. So largely, predominantly the sales contribution will come from Bengaluru. So out of this 25 million square feet of land bank, how much does really have a developable potential over the next 2, 3 years and can be added to the launch pipeline? So that is the second question.

You can say other than the Thiruvananthapuram, of the 14 acres or so, where the visibility of development is a bit less because both market conditions and the government has allotted but still not handed over the land. Rest of the things, there is -- they are all developable lands. They're all developable lands. There are no sticky -- the situations are not there. They're all developable lands. But the process of approval, et cetera, is there. So if we have 34 million, 35 million square feet or so and if we are selling 6 million, 7 million going forward also, so we have sufficient stock to take us forward. And naturally every year, we will also be adding maybe 5 million, 7 million, if not more, of developable stock, right? No. And we have always run on this principle of having about 5 to 6 years of developable stock. Otherwise, the impact on interest cost is going to be as substantial. That will also have its negative side in tough times.

Okay. My second question is on the office business. So now the office recovery -- everyone is talking about a big office recovery and the re-occupancy signing out and demand -- pent-up demand over the last 2 years hitting the market. So do you really see the trend where in first of all our own hard options? So do you think hard options will get exercised first? Or your unused area will get leased out first?

Sir, if I want to catch up correctly, so you -- hard option?

No. No, whether which one will get leased the first, whether hard option will get accepted?

So again, this is the kind of question which again depends upon the recent business model of the company is -- okay. Like if we were to talk about hard options like Mercedes, they recently took 1 lakh square feet from their hard option and converted, okay, because they have hired over the last 2 years. But there are also companies which are actually seeking spaces which are small and midsized or given like in the range of 1 lakh to 2 lakh square feet. So they have not taken space over the last 2 years, okay? So it's very difficult to say which one will be converted earlier. But what we can say confidently, looking at the market and the kind of site inspections and the closures that are happening, the companies which are now actually scouting for premises, they really need space, okay? And they are converting very fast. Like even in this quarter, we have already converted approximately 50,000 square feet. And we have a very positive outlook.

Okay. So just the last question, if I may, on the rental business again. So Q4, I think, third quarter FY '20, we had given in the presentation of exit rentals and all the properties at least or about INR 510-odd crores. So if I see your current central debt is about INR 1,300 crores and if I ascribed by LRD of about 8 to 9x of rentals, so if you're INR 500, it should be close to about INR 4,500 crores potential that which can be taken. So is there a possibility that is the growth capital required? So we can load the LRDs once all these properties get leased out, and we have a buffer of about INR 1,400 crores, INR 1,500 crores for acquiring land parcels given the land bank of about 6 to 7 years?

Yes, you're totally right. There is an LRD potential in the company. And definitely, we will use that for the growth capital in the future. And we will see as and when the leasing happens, and we are able to take LRD. And of course LRDs are at very, very low rates, sort of at very competitive rates, so it makes sense.

The next question is from the line of Girish Choudhary from Spark Capital.

Many congrats on the 35th anniversary. A couple of questions. Firstly, what would be your pricing outlook in your projects considering the good offtake and also the cost inflation? And then I see leverage realization growth was 9% last quarter [indiscernible] change and how much...

Sir, your voice is breaking. I would request you to please use the handset and also network area, please.

Is this better?

Yes.

Yes. The question was on the pricing outlook in your key projects. So considering the offtake which we saw, which was pretty good, and then the cost inflation and then I see the leverage ratio was up 9% Y-o-Y, what was this in terms of the midstream and the price change?

So the increase due to mix change would have been substantial. Also it's actually, I would say, it would be 50-50 because the price increase that has happened is both in Bangalore projects and Hyderabad and Chennai, though a larger percentage came from Hyderabad and Chennai, where we were able to take up prices substantially. So therefore, I would say it is both mix and price increase, almost in equal proportion. On your question on cost inflation, yes, there has been a substantial cost inflation close to about 5% to 6% of the construction cost. And we are therefore looking at taking up prices in absolute immediate future. That's today's business requirement.

Second question is on the residential EBITDA margins. We are seeing this trending down for around 18%, 19% revenues for the last 3 quarters. And if I look at your FY '19, FY '20 EBITDA margin, they were in the range of 23%, 25%. So any reason why these are trending down versus historical levels? And then also, I just wanted to understand what the view going ahead in terms of margins.

Yes. See, again, it depends upon the mix of projects, which has gone -- which we have delivered. You see the revenue recognition is based on AS 115. So there some older projects and new projects maybe with a lower rate have got -- have gone -- the revenue has been -- that's why there has been some reduction in the EBITDA margins. But going forward, we should see that EBITDA margin should be in the range of 22% to 24% going in, in residential.

I have just one more, if I may. This is on the retail portfolio. So that was mentioned that the -- in consumption was strong. So correspondingly, how are the rentals shaping up? And are the rents back to pre-COVID leverage? So what's the outlook here because pre-COVID, we saw rentals in excess of INR 100 crores. So are we in target to achieve those numbers?

Yes. So with regards to the lease rentals that we are looking to get, I think this year, we will probably touch around 65% of FY '20 figures. And that's because Q1 was primarily under lockdown and Q2 was more of a recovery, slow reopening of the stores. So I think we can expect to get at least 65% of the pre-COVID rentals. But that said, all the new leases that we are able to rent out to various tenants, we are actually being able to charge at least a 30% increase in the pre-COVID rentals. And also, the weighted average of the rentals in all the malls are -- should increase by at least 12% to 15%. So while FY '22, we'll see only 65% pre-COVID rentals overall, at least the new leases that we're able to do are showing very positive trends. It's on, an average, as I mentioned, 30%.

Got it. So in terms of the exit trends in the fourth quarter [indiscernible] considering the inflation rates you mentioned?

Sorry, in terms of the average rentals that we can collect?

Yes. Yes.

See, basically, we've given COVID reliefs to all the tenants. So in Q2, about 75% of the brand had some sort of COVID relief. In Q3, about 50% of the brands will have COVID relief. And in Q4, about 15%, will have some sort of COVID relief. So that's the reason why there is -- and when I say COVID relief, it is some relaxation in the rentals based on their sales performance. So if the sales performance is above 88% to 90%, then we'll receive 100% of the rentals.

[Operator Instructions] The next question is from the line of Pritesh Sheth from Motilal Oswal.

Just firstly on the residential demand, fourth quarter end, what was the momentum? And how was the strategic reason, if you can highlight? Was the momentum strong, picked up from where we left in last quarter?

So the sales momentum there continue to be good. That's what we are seeing, particularly as I've been saying. That this wave of COVID, the demand has been much more robust compared to last time. The economic impact of the second wave was much lower. And therefore, the demand continues to decrease.

So did we see improvement month-on-month from September to October to November, just traditionally?

So traditionally, October actually is not a very strong month in Bangalore specifically because of the Diwali holidays. But this October was much better compared to our usual October.

Okay. Got it. And secondly on -- you have -- in your statement of deviation, you have mentioned INR 136 crores out of the QIP money has been spent. So for what was it spent for? I mean is it for working capital? Or there were some land payments that you had to do that with?

So mainly, we had repaid the INR 67 crores of loan for GIFT City, Gujarat project, office project. So that was one. And we had induced INR 50 crores of input into the GIC company that is BPPL. So that is what the -- in the news in the new projects.

Okay. Got it. And lastly, just a bookkeeping one. In terms of collections, what is the breakup between residential, commercial, retail and hospitality?

So for Q2, it is around INR 744 crores is residential, INR 80 crores is commercial sales, INR 67 crores is commercial lien, INR 24 crores is retail, INR 51 crores is hospitality and maintenance is around INR 33 crores.

The next question is from the line of Biplab Debbarma from Antique Stockbroking.

Sir, just 2 questions, one on in leasing. The incremental leasing in office that you are seeing, is the rental above the average rentals of that building or near around the average of rental? Or how is the rental you are getting in the incremental leasing in the last, say, 5 to 6 months?

Yes. So in terms of the rentals, again, it is a function of the property on the micro market. But in terms of our property and the micro markets that are very strategic, in fact, we are achieving around 10% of the weighted average that we achieved pre-COVID in one of the major properties, that is, Brigade Tech Gardens. And as far as North Bangalore is concerned, we are actually matching the rentals that were pre-COVID. So overall, we haven't actually gone down on the rentals. It's slightly above. In fact, on an average, it is 5% above.

Okay. Okay. That's good. And the second question is on your business development transactions that you are seeing. Just trying to understand because there is not much information nowadays. Everything can be derived from social media and various news channels. So looking at the positive billing of real estate, are you seeing heightened expectation from JDA partners or landowners? Are you seeing such kind of heightened expectations from the -- in business development in the Bangalore, Chennai or Hyderabad market compared to what it was, say, 2 years ago or so, 1.5 to 2 years ago?

Basically, I must -- frankly, I must say, recession, no recession, landowners' expectations are always high. There is, in fact -- that is -- ultimately, it is only what we can afford to give, based on the feasibilities of projects is how it is. But I think if the market improves, which is happening now, the expectations can go a bit high. But lesser and lesser -- if I'm right, lesser and lesser number of people are still in a position to buy a large patch of land. Many developers are not fully out of woods. It is -- the situation is not all that rosy for many. It is recognized developers who have given value to the customer over a period of time. And those who have shown -- demonstrated ability to complete projects even in tough times have been rewarded. So many others are not in a position to buy land. So that way, it is the only select group are in a position to acquire new lands. So that way, the number of buyers are reduced considerably, whereas the number of sellers may be increasing.

So sir, basically, you are saying there is not much change in expectation. It was always there and this...

Yes. So far, not much change in expectations, but we have to see on a quarter-on-quarter how it changes.

The next question is from the line of Amit Agarwal from Nirmal Bang.