Rationale

The rating upgrade factors in the sustained improvement in pre-sales and cash flows in the residential segment of Brigade Enterprises Limited (BEL), which has translated into reduction in leverage in the segment, along with healthy cash flow adequacy ratios. The rating upgrade also factors in the equity capital of Rs. 500 crore raised in Q1 FY2022, which will support the Group's investments in upcoming projects, while maintaining BEL's comfortable leverage position. BEL's residential real estate operations were underpinned by healthy sales in the projects launched in FY2021. The company achieved an all-time high sales of 4.61 million square feet (msft) in FY2021, a growth of 16% over FY2020, despite the impact of Covid-19 pandemic in the first quarter. Notwithstanding the impact of the second wave of the pandemic in Q1FY2022, BEL's sales from real estate projects is estimated to be nearly double of that achieved in Q1FY2021. The receivables from the sold area in the completed and ongoing projects cover 53% of the pending cost and the debt outstanding in this segment as on March 31, 2021. Though pandemic related lockdowns have resulted in temporary disruptions in operations, the large and organised residential real estate developers such as BEL have benefited from improving market share during this period. The trend of market consolidation and planned project pipeline is expected to translate into healthy sales in the Group's ongoing and upcoming projects in the near to medium term, further strengthening the cash flows. Besides, the ratings continue to factor in BEL's established position in the Bangalore real estate market and its diversified presence across residential, commercial and hospitality segments. The ratings, however, are constrained by the near-term challenges in the leasing and hospitality segments owing to the impact of second wave of Covid-19 pandemic. Though the company derived steady rental income from its stabilized leasing assets, the retail mall operations and hospitality segments recorded de-growth in its revenues in FY2021 due to covid-related disruptions. The second wave of the pandemic is likely to constrain recovery in these segments in FY2022 as well. The leverage and debt service coverage ratios in the leasing segment are impacted by the sub-optimal leasing tie-up in 3.4 msf of properties completed in FY2021. Leasing in these projects has been slow owing to subdued economic activity and extended period of work-from-home adopted by the corporates. Nonetheless, ICRA notes that the debt associated with most of these properties have been refinanced into longer tenure loans to a large extent, which reduces the cash flow mismatches in the near to medium term. The ratings are also constrained by the cyclicality risk inherent in the real estate business.