Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Haraparvati Realtors Pvt Ltd (HRPL) to ‘CRISIL A+ (CE) / Stable’ from ‘CRISIL A/Stable’.

 

The rating upgrade is based on the strength of the irrevocable and unconditional guarantee from Salarpuria Properties Pvt Ltd (SPPL; rated 'CRISIL A+/Stable/CRISIL A1' flagship company of the Salarpuria-Sattva group), and an additional undertaking by Salarpuria Properties securing the principal repayments and interest obligations related to the loan. The payment structure is designed to ensure full and timely payment to the lender. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan.

 

The overall rating on HRPL has been upgraded due to the upward revision in the rating of SPPL to ‘CRISIL A+/Stable/CRISIL A1’ on account of improved market position of the group along with lower-than-expected incremental debt leading to improvement in the financial risk profile. However, the unsupported rating has been downgraded to ‘CRISIL A-/Stable’ from ‘CRISIL A/Stable’ on account of decline in occupancy of the asset to 39% as of March 2022 (committed occupancy of 53%) from 72% as on January 31, 2021 due to tenants moving out on lease expiry. Thus, a shortfall in debt-servicing is expected for fiscals 2022 to 2024, which is expected to be met by the group. Occupancy is expected to improve with pickup in leasing seen in the current quarter.

 

The rating continues to factor in the strong operational, financial and managerial support from the Salarpuria Sattva group. These strengths are partially offset by the low occupancy leading to weakened debt protection metrics and high customer concentration risk and inherent risk in the real estate sector.

Analytical Approach

The rating is based on the standalone business and financial risk profiles of HRPL and factors in benefits of strong support from the parent, the Salarpuria-Sattva group. CRISIL Ratings has also applied its criteria on rating instruments backed by guarantees. The (CE) suffix reflects the payment structure that is designated to ensure full and time-bound payment to lenders.

Key Rating Drivers & Detailed Description

Strength:

Strong operational, financial and managerial support from the Salarpuria Sattva group

HRPL benefits from the strong parentage of the Salarpuria-Sattva group, which has an established track record of over three decades, with a strong brand presence in the real estate market. The group has developed around 657 lakh square feet (sq ft) of space, mostly in Bengaluru and Hyderabad, with about 144.4 lakh sq ft of operational commercial assets. The company benefits from the sponsor group’s extensive experience and proper asset maintenance, which has ensured healthy occupancy, and tenant stickiness and quality. Group also has strong financial risk profile and financial flexibility which will help HRPL service its debt in a timely manner. Additionally, SPPL, has provided an irrevocable and unconditional guarantee and an undertaking securing the principal and interest obligations on HRPL's loan. As per the payment mechanism, the guarantor, SPPL, will pay, not later than 10 business days from the due date, any amount due and payable to the lender in relation to the instruments in case of any default on, or shortfall in, payment by HRPL.

 

Weaknesses:

Low occupancy leading to weakened debt protection metrics and high customer concentration risk

Occupancy has reduced drastically to 39% as of March 2022 from 72% as on January 31, 2021 due to tenants moving out on expiry of leases (renewal cycle) and consolidation of tenants in other properties. Lease rentals will be impacted due to lower occupancy and a shortfall in debt-servicing is expected for fiscals 2022 to 2024. Occupancy should improve with pick-up in leasing seen in the current quarter and committed occupancy of March 2022 is estimated at 53%. Also, the entire leased area is occupied by seven tenants currently, thus leading to high revenue concentration and contract renewal risks. However, these tenants are established corporates, who are likely to continue to occupy the property, having borne the large fit-out cost. However, if any of them vacates the premises, and new agreements are not signed on time, debt protection metrics will weaken further.

 

Exposure to inherent risks in the real estate sector

Rental collection (key source of revenue) is susceptible to economic downturns, which may constrain the tenants' business risk profile and, therefore, occupancy and rental rates. Emergence of competing facilities in the vicinity could also cannibalise tenants or exert pressure on rental rates.

Liquidity: Strong

Liquidity is supported by the guarantee structure (unconditional and irrevocable guarantee from Salarpuria Properties), which ensures timely repayment of debt. Any shortfall in funding is expected to be covered by the Salarpuria Sattva group, which has strong liquidity.

Outlook Stable

The outlook is based on the 'Stable' outlook on the rating of the guarantor, Salarpuria Properties.

Rating Sensitivity factors

Upward factors

•          Upgrade in the rating of guarantor, Salarpuria Properties Pvt Ltd by 1 or more notches

•          Substantial increase in occupancy rate to 80% in the next two years or reduction in debt through prepayments, thereby strengthening surplus generation and debt protection metrics

 

Downward factors

•          Downgrade in the rating of guarantor, Salarpuria Properties Pvt Ltd by 1 or more notches

•          Non adherence of payment structure

•       Weakening of debt protection metrics owing to lower-than-expected cash flow, driven by continuity of the current vacancy rate of 61%, lower-than-expected lease rental rates or drawdown of any incremental debt

Adequacy of credit enhancement structure

The corporate guarantee provided by Salarpuria Properties is unconditional, irrevocable, and covers the entire rated amount. A lender-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligations on the rated debt. The payment mechanism provides an adequate timeline for the guarantor to make full and timely payments in case of a default by the borrower.

 

CRISIL Ratings has combined the business and financial risk profiles of HRPL with those of the Salarpuria Sattva group. CRISIL Ratings has also considered multiple scenarios to test the adequacy of the credit enhancement structure, including stress scenarios where the performance of the borrower deteriorates. CRISIL Ratings believes that the instrument will have an adequate degree of safety regarding timely servicing of financial obligations even in the most likely stress scenario.

Unsupported ratings : CRISIL A-

CRISIL Ratings has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with the Security Exchange Board of India's circular dated June 13, 2019.

Key drivers for unsupported ratings

• Moderate debt protection metrics
• Exposure to vacancy risk due to high customer concentration

About the Company

HRPL, held equally by the Salarpuria-Sattva group and the Kothari group, is a special-purpose vehicle formed to develop Aura, a commercial real estate project with 4.5 lakh sq ft of leasable area at Sarjapur in Bengaluru. HRPL has completed the project and has been generating lease rental income since the first half of fiscal 2016.

 

About the parent group

The Salarpuria-Sattva group was founded by the late Mr G D Salarpuria in 1986 in Kolkata. Mr Bijay Agarwal, managing director, manages the operations of the group. The group has been involved in the construction and development of real estate for 36 years. SPPL and Sattva Developers Pvt Ltd are the two flagship companies of the group. The other group entities are mainly involved in individual projects. It has ISO 9001:2008, 14001:2004, and 18001:2007 certifications. Till date, 657 lsf of built up area has been developed, of which, around 56% comprises commercial development (in Bengaluru and Hyderabad). The group also has presence in Pune (Maharashtra), Coimbatore (Tamil Nadu), and Goa.

List of covenants

The material covenants of the instruments are as follows:

* If there is 10% or more reduction in rentals, the company should take suitable corrective measures.
* The bank reserves the right to alter/cancel and/or modify the credit limit/loans sanction and/or terms and conditions stipulated without notice and without assigning any reasons.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Term loan	NA	NA	July 2025	118.0	NA	CRISIL A+ (CE) / Stable
NA	Overdraft Facility	NA	NA	Dec 2025	77.0	NA	CRISIL A+ (CE) /Stable