Detailed Rationale

CRISIL Ratings has upgraded its rating on non-convertible debentures (NCDs) of DLF Cyber City Developers Ltd (DCCDL; a joint venture between DLF Ltd, rated ‘CRISIL AA/Stable/CRISIL A1+’ and Reco Diamond Private Ltd (subsidiary of GIC (Realty) Private Ltd) to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Positive’. CRISIL Ratings has also assigned its ‘CRISIL AA+/Stable rating to the Rs 1,500 crore NCDs.

 

The upgrade reflects an improvement in rental income, aided by steady ramp-up in occupancy and increase in rentals from operational assets and commencement of rentals from ew assets. Sustained growth in rentals, along with reduction in gross debt to Rs 18,869 crore as on December 31, 2023, from Rs 20,817 crore as on March 31, 2023, has strengthened the debt protection metrics, as characterised by debt to EBDITA to below 4.5 times in fiscal 2024, from around 5.0 times in March 2023. Improvement in leverage should sustain with debt to EBDITA below 4 times in the medium term.

 

Operating income is expected to grow by around 10% to Rs 5,800 crore in fiscal 2024,, driven by rentals from new assets (DLF Downtown Gurgaon spread over nearly 1.7 million square feet or msf for the full year) and ramp-up in occupancy levels to 92% as of December 2023 (90% as of March 2023). Operating income is likely to cross Rs 6,000 crore by fiscal 2025, with addition of new assets (DLF Downtown, Chennai spread over nearly 2 msf), better occupancy and rentals. CRISIL Ratings expects revenue to grow by 8-10% in the medium term, driven by planned addition in operational area, higher occupancy and contractual escalation in rentals.

 

Financial risk profile is also likely to sustain, driven by strong debt protection metrics and refinancing ability. Maintenance of gross debt at levels around Rs 20,000 crore, despite construction of new assets and dividend outflow, will augur well for the credit profile of DCCDL.

 

The rating continues to take comfort from the vast commercial office portfolio (35.6 msf operational and 5.4 msf under-construction) of the DCCDL group, with good quality assets in prime locations and steady cash flow from lease rentals, backed by a strong and diversified tenant profile. These strengths are partially offset by exposure to risks related to significant expansion plans and susceptibility to volatility in the commercial real estate segment, causing occupancy levels to fluctuate. Any further debt-funded capital expenditure (capex) or acquisition, leading to material weakening in debt metrics, will remain a key rating sensitivity factor.

 

Total debt of DCCDL is unlikely to exceed Rs 20,000 crore and should reduce gradually over the long term. Loan-to-value (LTV) ratio is also expected to remain comfortable below 35%, which will shield the company from any decline in property prices and its consequent impact on the refinancing ability,

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of DCCDL with that of its subsidiaries, together referred to as the DCCDL group. This is because DCCDL and its subsidiaries have high degree of linkages at the business, managerial and operational levels, and financial fungibility. DCCDL has direct control over its subsidiaries, oversees their daily operations and will support them in the event of any exigency.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Sustained growth in rentals, aided by ramp up in occupancy and increase in new assets: Operating income is expected to grow by around 10% to Rs 5,800 crore in fiscal 2024,, driven by rentals from new assets (DLF Downtown Gurgaon spread over nearly 1.7 million square feet or msf for the full year) and ramp-up in occupancy levels to 92% as of December 2023 (90% as of March 2023). Operating income is likely to cross Rs 6,000 crore by fiscal 2025, with addition of new assets (DLF Downtown, Chennai spread over nearly 2 msf), better occupancy and rentals. CRISIL Ratings expects revenue to grow by 8-10% in the medium term, driven by planned addition in operational area, higher occupancy and contractual escalation in rentals.

 

Gross rentals in fiscal 2025 are expected to benefit from addition of full-year lease rentals of 2.3 msf from phase-I of the Downtown Chennai and further addition of 1.1 msf in Downtown Chennai and 2 msf under phase II of the Downtown Gurgaon project in later half of the fiscal year. CRISIL Ratings believes that occupancy levels will improve over the medium term, with amendment in the SEZ Act, permitting floor-wise denotification. The company has achieved healthy pre-leasing of 91% (as against 61% as on March 31, 2023) on its under-construction portfolio. Majority of assets have been operational for over a decade, with annual lease rental income recording a compound annual growth rate (CAGR) of over 10% between fiscals 2019 and 2024. Rental rates are high, duly supported by superior asset quality and favourable location in prime areas in the respective micro-markets.

 

• Strong debt protection metrics and refinancing ability: Strong operational performance during the first nine months of fiscal 2024, has enhanced debt protection metrics, as characterised by debt to EBDITA of below 4.5 times in fiscal 2024 (around 5.0 times a year before). Improvement in leverage should sustain with debt to EBDITA seen below 4 times in the medium term. The company has a sustained track record of debt refinancing, which has led to a healthy debt service coverage ratio (DSCR) in the past. CRISIL Ratings expects healthy average DSCR of around 3 times over the tenure of the existing debt, duly supported by sustained debt refinancing and healthy cash accrual. Going forward, DCCDL is expected to maintain consolidated gross debt at around Rs 20,000 crore despite planned capex and dividend outflow. LTV ratio should also remain comfortable below 35%, providing a shield against any decline in property prices and its consequent impact on refinancing ability.

 

• Vast commercial office portfolio of 35.6 msf with good quality assets at attractive locations: DCCDL operates one of the largest operational commercial office portfolio of 35.6 msf and retail portfolio of 4.1 msf as on December 31, 2023, spread across Gurugram, Chennai, Delhi, Noida, Chandigarh, Kolkata and Hyderabad. Occupancy was healthy at 92% as on December 31, 2023, up from 90% as on March 31, 2023. The company is further developing office space of 5.4 msf. Favourable locations and superior quality of operational assets has helped the company establish a tenant base, comprising marquee players such as Cognizant, American Express, IBM, EY, Concentrix, KPMG, TCS, BCG, etc. The office portfolio is well diversified with the top 10 tenants contributing only about 25% of revenue.

 

Weaknesses:

• Exposure to execution risk associated with expansion plans: As on December 31, 2023, projects of 5.4 msf are under construction in Chennai and Gurugram, of which 91% is pre-leased. Balance cost of over Rs 800 crore will be incurred by fiscal 2025. The group also has the potential to develop another 25 msf, which will be undertaken in a phased manner over the medium-to-long term. Although it has sound experience in developing and managing office and retail assets, ability to execute, market and scale-up these projects over time, will remain critical. Any significant delay in project execution, leasing or cost overruns may weaken the financial risk profile.

 

Additionally, new construction is only expected to be undertaken in phases and after a significant part of ongoing projects is leased out. All these factors mitigate market risk to some extent.

 

• Volatility in occupancy due to sectoral and geographical concentration risk:  The group faces sectoral and geographical concentration risk, with around 50% of rentals coming from the information technology sector and around 58% of revenue concentrated in Gurugram, as on December 31, 2023. Dependence on a single location exposes the company to any adverse change in the demand-supply situation and event risk. Furthermore, 7% of leasable office areas are due for renewal in fiscal 2025, although many of these have auto renewal options. While most tenants are established corporates and may continue to occupy the property, any unanticipated vacancies may make it difficult to find alternate lessees within the stipulated time. This could adversely impact cash flow, and hence, will be a key rating sensitivity factor. Rental collection is also susceptible to economic downturns, which constrains the business risk profile of tenants, and this affects occupancy and rental rates.

Liquidity: Strong

Expected cash accrual should adequately cover interest obligations of Rs 1,500 -2,000 crore per annum (majority of the scheduled repayment are expected to be refinanced) and capex of Rs 1,500-1,800 crore in fiscals 2025 and 2026 (excluding land purchases). The group has liquidity of around Rs 750 crore in the form of cash and bank balances, including a DSRA of Rs 322 crore as on December 31, 2023. It also has access to unutilised bank lines of around Rs 340 crore as on December 31, 2023.

Outlook: Stable

CRISIL Ratings believes DCCDL will continue to benefit from its robust business risk profile, driven by its established market position, strong revenue visibility and healthy profitability. Financial risk profile should also remain comfortable, led by adequate financial flexibility.

Rating Sensitivity factors

Upward factors:

• Improvement in debt to EBITDA ratio to 3.0 times on a sustained basis.
• Sustenance of healthy occupancy levels.
• Timely commission and ramp-up in rentals in under-development assets.

 

Downward factors:

• Sustained weakening of debt to EBITDA ratio to above 5.0 times.
• Steady decline in overall committed occupancy, leading to material reduction in rental income.
• Higher-than-expected dividend outflow weakening debt protection metrics.

About the Company

DCCDL, the flagship company of the DCCDL group, was incorporated in March 2006. DLF Ltd owns a 66.67% stake in the company, and Reco Diamond Pvt Ltd (subsidiary of GIC (Realty) Pvt Ltd) holds the balance. The DCCDL group has 35.6 msf and 4.1 msf of operational commercial and retail areas, respectively, spread across seven cities of Gurugram, Chennai, Noida, Delhi, Hyderabad, Kolkata and Chandigarh. 

 

Commercial and retail assets were occupied to the extent of 91% and 98%, respectively, as on December 31, 2023. Apart from this, it also has 5.3 msf of projects under-development in Chennai and Gurugram as on December 31, 2023, likely to be completed by next fiscal. For the first nine months of fiscal 2024, the company has registered operating income of Rs 4,301 crore and profit after tax of Rs 1,281 crore.

Key Financial Indicators - DCCDL consolidated*

Particulars	Unit	2023	2022
Revenue	Rs crore	5269	4373
Profit after tax (PAT)	Rs crore	1396	1015
PAT margin	%	26.5	23.2
Adjusted debt/adjusted networth	Times	3.28	3.17
Adjusted interest coverage	Times	2.65	2.32

*CRISIL adjusted financials

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
INE186K07049	Non-convertible debentures	22-Nov-2021	6.70%	30-Sept-2024	1000.0	Complex	CRISIL AA+/Stable
INE186K07064	Non-convertible debentures	21-Sept-2022	7.80%	20-Sept-2024	500.0	Complex	CRISIL AA+/Stable
NA	Non-convertible debentures*	NA	NA	NA	1,500.0	Complex	CRISIL AA+/Stable

*Yet to be placed