October 10, 2017 / 6:21 AM / a month ago

Fitch Affirms Indiabulls Real Estate at 'B+'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, October 10 (Fitch) Fitch Ratings has affirmed property developer Indiabulls Real Estate Limited's (IBREL) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. The agency also affirmed the rating on Century Limited's USD175 million 10.25% senior notes due 2019 at 'B+ ' and Recovery Rating of 'RR4'. Century Limited is a Jersey-based subsidiary of IBREL. IBREL's rating reflects its position as one of India's largest property developers and the high-quality investment properties held under its 55%-owned subsidiary Indiabulls Properties Investment Trust (IPIT), which adds stability to its inherently cyclical business model. The Stable Outlook reflects the recovery in IBREL's contracted sales following India's currency demonetisation last year. The rating headroom is limited because Fitch expects IBREL's leverage to be high in the next few years as the company uses improving collections in its property development business to fund expansion in its investment-property portfolio. KEY RATING DRIVERS Investment-Property Acquisitions Raise Leverage: IBREL's leverage, measured as net adjusted debt/adjusted inventory, increased to 66% in financial year ended 31 March 2017 (FY17). Leverage rose after IBREL raised its stake in IPIT to 55% from 47.5% and consolidated the financial results of the subsidiary from 1Q FY17. In addition, contracted sales and collections decreased following the demonetisation and the company made certain investment-property acquisitions. Leverage in FY17 remained above 60%, the level where Fitch would consider negative rating action, but reduced to 58% in 1Q FY18 as the company liquidated a portion of its treasury stock. Limited Rating Headroom: Fitch expects IBREL's leverage to remain high until FYE19 because the company is likely to use the improving cash flows from its property-development business to expand its investment-property portfolio. We expect significant collections from Blu, a luxury residential project in Central Mumbai, and Greens, a mass-market project in Panvel, Navi Mumbai. The two projects had pending collections net of remaining development costs of about INR28 billion at 30 June 2017. Recovering Property-Development Business: IBREL's presales decreased by nearly 13% to INR25.4 billion in FY17 due to weak property demand after India's currency demonetisation in November 2016. However, quarterly sales have recovered, with contracted sales reaching INR8.8 billion in 1Q FY18, compared with INR2.6 billion in 3Q FY17 and INR7.0 billion in 4Q FY17. IBREL sold about a third of the homes in the Blu project in the six months to June 2017 because road connectivity improved and buyer interest increased as the project neared completion. IBREL's land bank, which comprises 2,588 acres (1,047 hectares) at the Nashik Special Economic Zone and 1,046 acres at the National Capital Region (NCR), Mumbai and Chennai, can support six to seven years of development. In Fitch's view, this should limit the company's capital-intensive land replenishing activities. Expansion of Investment-Property Portfolio: Fitch expects IBREL's strategy to expand its investment-property portfolio to add some stability to the company's cash flows, which are subject to cyclicality in its property-development business. With the larger stake in IPIT, IBREL controls two high-quality office properties with 3.3 million square feet of leasable area and INR6 billion in annual rental income. The properties benefit from sustained high occupancy (in excess of 90%), long-term leases with institutional tenants, and built-in annual rental increase of about 5%. In addition, IBREL acquired 1.9 million square feet of office space in Chennai in March 2017 and intends to develop additional investment properties in Mumbai and NCR, which will increase its leasing portfolio to about 9 million square feet and INR14 billion in annual rental income over the next four to five years. London Project on Track: IBREL soft launched its mixed-use project in the Mayfair district in London in 1Q FY18 and sold four of the 79 units, which Fitch believes is a good response that tapped Asian investor interest amid a weaker sterling. A formal launch is due in 3Q FY18. Fitch expects the project, which has all the requisite approvals in place, to generate significant cash flows upon its completion by 2020 or 2021. Fitch does not see any material funding requirements for the project as IBREL reduced the debt borrowed in London by almost 50% after March 2017 and construction cost of GBP158 million is manageable relative to sales potential of GBP572 million. Limited Impact from New Regulation: Fitch believes that the implementation of India's Real Estate Regulation Act of 2016 (RERA), which came into full effect on 1 May 2017, would restrict property developers' ability to move cash freely out of construction projects. Nonetheless, we expect IBREL's financial flexibility to remain good because many of the company's key cash-contributing projects are in advanced stages of construction. DERIVATION SUMMARY IBREL's 'B+' rating compares well against peers Lodha Developers Private Limited's (B/Rating Watch Negative), PT Alam Sutera Realty Tbk (ASRI, B/Rating Watch Negative) and Times Property Holdings Limited (B+/Positive). Lodha has a larger operating scale and a better track record of sales over the last few years, but these are partly offset by IBREL's more stable investment-property portfolio. IBREL's leverage is lower and its deleveraging profile is better than Lodha's over the medium term, which supports a higher rating for IBREL. IBREL has a stronger business risk profile than ASRI given its larger scale, more diversified projects and more stable leasing assets. However, IBREL's leverage is higher. Times Property has a larger scale but a smaller land bank than IBREL, which necessitates land acquisitions that may raise its leverage. Times Property's lower leverage and robust execution track record underpins its rating and Positive Outlook. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Presales of around INR37 billion in FY18 and INR45 billion in FY19 - Cash collections of at least INR20 billion in FY18 and INR30 billion in FY19 Key Recovery Rating Assumptions: - The recovery analysis assumes IBREL would be liquidated in a bankruptcy rather than continue as a going-concern because it is an asset trading company - In our calculations of IBREL's liquidation value, we have taken IBREL's share in residual equity at IPIT after repaying debt at IPIT. In Fitch's opinion, the IPIT assets would sufficiently cover its debt without any further liability to IBREL. - Accounts receivable includes unbilled revenue, which stems from the completion of construction milestones of property projects. We have assumed a 75% advance rate against receivables and unbilled revenue. - Fitch has assumed a 100% advance rate against the book value of IBREL's consolidated adjusted inventory (excluding IPIT assets). We estimate that the market value of IBREL's inventory is at least 2.0x that of its book value. This is because IBREL has posted a gross profit margin of around 50% over the last few years. - All of IBREL's pro forma consolidated debt at FYE17, apart from the USD47 million of outstanding senior notes, have been treated as prior-ranking or secured debt. - Fitch estimates IBREL's liquidation value to be able to cover 91%-100% of its secured and unsecured debt, corresponding to a 'RR1' Recovery Rating for the senior notes after adjusting for administrative claims. Nevertheless, Fitch has rated the senior notes at 'B+' with a Recovery Ratings of 'RR4' because under Fitch's Country-Specific Treatment of Recovery Ratings criteria, India falls into 'Group D' of creditor friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR. RATING SENSITIVITIES Fitch does not anticipate any positive rating action in the near term given IBREL's high leverage. Developments that may, individually or collectively, lead to negative rating action include: - EBITDA margin sustained below 25% (FY17: 32%) - Net debt/adjusted-inventory sustained above 60% (1Q FY18: 58%) LIQUIDITY Adequate Liquidity: IBREL's high-quality property portfolio and its position as one of the leading developers in India support its refinancing ability in the domestic market. In addition, the company's unrestricted cash balance and listed mutual fund investments of INR9.3 billion and availability of INR3 billion under committed credit facilities provide some financial flexibility in meeting debt maturities of INR20.6 billion in FY18. Fitch believes the company's improving free cash generation from projects that are due to be completed in the near to medium term will strengthen its liquidity profile. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Snehdeep Bohra Associate Director +91 22 4000 1732 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com. 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