Stock To Buy: Real Estate Stock With Potential To Surge 28%

Motilal Oswal has suggested buying the stock of Brigade Enterprise and sees the stock surging as much as 28% from the current market price.

Large real estate developer in the south

Brigade Enterprise is a leading Real Estate developer based in South India, with exposure across Residential, Office, Retail, and Hospitality segments. Though it's key market remains Bengaluru (which contributes 70-80% of total revenue), it is expanding its presence in Chennai and Hyderabad.

Aggressive land acquisitions

According to Motilal Oswal, since FY18, the company has scaled-up each of its business segments through aggressive land acquisition/capex strategy, which led to a fourfold rise in its Commercial and Hospitality portfolio, and revamped its Residential product offerings, with a focus on Affordable and Mid-Income housing.

Residential pre-sales double

Its Residential pre-sales run-rate has more than doubled to 4.6msf in FY21 from an average 2msf over FY12-18. "We expect the run-rate to scale-up further to 7msf by FY25, with increased launches from existing, higher sales velocity projects and balance from its land pipeline," Motilal Oswal has said in its report.

Launches to remain healthy

Motilal Oswal expects launches to remain healthy at 6-7msf over the next three years, including phase launches in high sales velocity projects. "The company has added 8msf of projects in 1HCY22. The management aims to add 8msf to its pipeline over the course of FY23," the brokerage has said in its report.

Views and reasons to buy the stock

According to Motilal Oswal as the company makes progress on building its project pipeline further, on account of strong cash flows, it will provide growth visibility in the Residential segment, which will be one of the key re-rating triggers. A recovery in leasing will help the company monetize the full potential of its Commercial assets.

Valuations

"We value Brigade Enterprise using the SoTP approach, wherein: i) its Residential business is valued using DCF of expected cash flows over the next four years using WACC of 11.3% and a terminal growth rate of 3%; ii) Its operational Commercial assets are valued at an 8.5% cap rate on a Sep'24E EBITDA basis and ongoing and upcoming projects using DCF; and iii) its Hospitality business is valued at 17.5x EV/EBITDA on a Sep'24E basis," Motilal Oswal has said in its report.

Potential returns

"Excluding a net debt of INR18b (at BRGD's share) in FY24E, we arrive at a NAV of INR166b. Applying a zero discount to its NAV, we arrive at our target price of Rs 720, indicating a potential upside of 27%. We resumed coverage with a Buy rating," Motilal Oswal has said.