Detailed Rationale

CRISIL Ratings reaffirms its ‘CRISIL AA/Stable’ rating to the 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).

 

The rating reflects the vast commercial office portfolio of the DCCDL group, with good quality assets in attractive locations and steady cash flows from lease rentals, backed by a strong and diversified tenant profile. The rating also factors in the healthy financial risk profile, driven by strong debt protection metrics and refinancing ability. These strengths are partially offset by exposure to risks related to significant expansion plans and susceptibility to volatility in the real estate sector, resulting in fluctuations in occupancy.

 

Occupancy remained stable at 89% as on March 31, 2022, compared with 88.9% as on March 31, 2021, supported by strong retail occupancy and stable office occupancy. With the reopening of offices given a decline in Covid-19 cases and pick-up in hiring activities, the leasing is expected to pick up this fiscal and occupancy should improve over the near term. The addition of 1.7 million square feet (msf) this fiscal, benefit of mark to market retail rate upside and strong growth in retail segment will support growth of over 10% in rentals in fiscal 2023 in key sectors, namely, information technology (IT)/IT-enabled services (ITeS).

 

Healthy cash accruals, refinancing of debt repayments, construction of phase-II of downtown Gurgaon and dividend outflow will keep total debt at around Rs 20,000 crore in fiscal 2023. As a result, loan-to-value (LTV) is expected to be at 32%.

 

Any further debt-funded capital expenditure (capex) or acquisition will remain a key rating sensitivity factor. CRISIL Ratings does not expect the total debt to increase beyond the current level and come down gradually over the medium term

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 the 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

• Vast commercial office portfolio with good quality assets in attractive locations: The DLF group has a track record of over 75 years and its robust market position, underpinned by the prime location of its assets and their steady performance. It has one of the largest operational commercial office portfolios, at 34.0 msf and a retail portfolio of 3.9 msf as on March 31, 2022, spread across 7 cities of Gurugram, Chennai, Delhi, Noida, Chandigarh, Kolkata and Hyderabad. Occupancy was adequate at 89% for the overall operational area as on March 31, 2022, though a temporary dip due to the pandemic, but traditionally it has been healthy at 94-95%. CRISIL Ratings believes that that the occupancy levels are likely to improve over the medium term. DCCDL gross rentals are also expected to be benefitted by addition of 1.7 msf from phase-I of downtown Gurgaon project in current fiscal and additional 2.0 msf from phase-II in fiscal 2024. The company has already received OC for phase-I in June 2023 and has pre-leasing of 1.1 msf for the new space.

 

• Steady cash flows from lease rentals, backed by a strong and diversified tenant profile: The DCCDL group had annual lease rental income of Rs 3,349 crore as on March 31, 2022, of which 86% was from its nine office parks and the balance from six malls.  Majority of assets have been operational for over a decade with annual lease rental income recording a compound annual growth rate of over 9% between fiscals 2018 and 2022. Rental rates are high, given the superior asset and service quality, favourable location in prime areas in the respective micro-markets and good demand. Collections from office tenants was robust at nearly 100% in fiscal 2022 and fiscal 2021 respectively despite pandemic. The tenant base includes marquee players such as Cognizant, American Express, Hindustan Unilever, KPMG, IBM, Apple, etc. The office portfolio is well diversified with the top 10 tenants contributing only about 26% of revenue.

 

Though the rental income from malls improved by 67% in fiscal 2022 vis-à-vis fiscal 2021, the impact on overall revenue was limited as the retail segment only contributed to 14% of the rentals. The performance is expected to further improve with strong retail demand and given that the malls are marquee assets in prime locations. The gross rentals in fiscal 2023 and 2024 are expected to grow by over 10% yoy driven by increase in occupancy and addition of new space.

  

• Strong debt protection metrics and refinancing ability: Consolidated gross debt was Rs 20,459 crore as on March 31, 2022, up from Rs 20,267 crore as of March 31, 2021. CRISIL Ratings believes DCCDL will have a healthy average debt service coverage ratio (DSCR) over the tenure of its existing debt, which should cover incremental financing requirements for under-construction projects and assuming refinancing of bullet payments. Net debt is expected to be maintained at Rs 20,000 crore over the medium term and the loan-to-value (LTV) ratio should also remain comfortable below 35% which shields it from the risk of any decline in property prices and its consequent impact on refinancing ability.

 

Weaknesses

• Exposure to risks related to significant expansion plans: As of June 30, 2022, projects of 5.3 msf are under construction in Chennai and Gurugram, with pending cost of over Rs 500 crore to be incurred over the medium term. The occupancy certificate (OC) for 1.7 msf was received in June 2022. Apart from this, the group has developmental potential of over 12.2 msf which will be undertaken in phases over the medium-to-long term. Although the group has sound experience in developing and managing office and retail assets, the 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.

 

The group had completed over 3.0 msf of office area in fiscal 2021 and 2022, of which over 90% has been leased out. Additionally, new construction is only expected to be undertaken after a significant part of ongoing projects is leased out. All these factors mitigate project risk to some extent.

 

• Volatility in occupancy due to sectoral and geographical concentration risk:  50% and 60% of rentals are contributed from the information technology sector and Gurugram market, respectively, as on March 31, 2022, which exposes the group to sectoral and geographical concentration risk. Furthermore, any change in government policy related to the nationwide lockdown, can impact income. Rental income from the retail segment showed a strong improvement in fiscal 2022 to Rs 461 crore from Rs 261 crore in fiscal 2021 despite the pandemic. Thus, rental collection remains susceptible to economic downturns, which may constrain the tenant’s business risk profile, and therefore, limit occupancy and rental rates. Also, dependence on a single location exposes the company to any adverse change in demand-supply situation and event risk. Furthermore, 11% of the leasable office areas are due for renewal (ultimate lease expiry) between fiscals 2023 and 2024, although majority 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.

Liquidity: Strong

Cash accrual is expected to adequately cover debt repayment obligations of Rs 1,250-1,400 crore per annum in fiscals 2023 and 2024 and partly cover the capex of around Rs 2,000 crore over the medium term (excluding land purchases). The group has liquidity of around Rs 1,000 crore in the form of cash and bank balances, including a DSRA of Rs 400-450 crore as on March 31, 2022. It also has access to unutilised bank lines of around Rs 2000 crore as on March 31, 2022 which are expected to remain at similar levels. Liquidity is supplemented by the ability to raise additional lease rental discounting loans, if required, or refinance the debt given healthy LTV of less than 40%.

Outlook Stable

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

Rating Sensitivity factors

Upward factors:

• Improvement in rentals resulting in improved near term debt protection metrics
• Occupancy remaining 90% or above on a sustained basis
• Faster-than-expected completion and leasing of under construction assets

 

Downward factors:

• Higher than expected debt leading to elevated leverage metrics
• Occupancy remaining below 80% on a sustained basis or material reduction in rental income or higher than expected dividend outflow impacting debt protection metrics
• Significant delay in the completion and leasing of under-construction assets

About the Company

DCCDL, the flagship company of the DCCDL group, was incorporated in March 2006. DLF Ltd owns a 66.67% stake and the balance is held by Reco Diamond Private Limited (subsidiary of GIC (Realty) Private Limited). The DCCDL group has 34.0 msf and 3.9 msf of operational commercial and retail area, respectively, spread across seven cities of Gurugram, Chennai, Noida, Delhi, Hyderabad, Kolkata and Chandigarh.  The commercial and retail assets were occupied to the extent of 88% and 97%, respectively, as on March 31, 2022. Apart from this, it also has 5.3 msf of projects under-development in Chennai and Gurugram as on June 30, 2022, likely to be completed over the next 18-24 months.

Key Financial Indicators-DCCDL consolidated*

Revenue	Rs crore	4373	4011
Profit after tax (PAT)	Rs crore	1015	922
PAT margin	%	23.2	23.0
Adjusted debt/adjusted networth	Times	3.17	3.51
Adjusted interest coverage	Times	2.32	1.91

*CRISIL adjusted financials

Any other information: Not applicable