Rating Rationale
August 22, 2023 | Mumbai
Nirlon Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.1230 Crore
Long Term RatingCRISIL AA+/Stable (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating on the long-term bank facilities of Nirlon Limited (Nirlon).

 

Operating income of Nirlon has grown 46% to Rs 576 crore in fiscal 2023 from Rs 395 crore in fiscal 2022, driven by commencement of rentals from leasable area of 11.6 lakh square feet (sq. ft) of phase V of the Nirlon Knowledge Park (NKP) in Goregaon (Mumbai) from May 2022. Occupancy of the park has also improved marginally from 98% in June 2022 to 99.4% as of June 2023; out of the vacant area of around 14,000 sq. ft., around 6,000 sq. ft. is at Nirlon House. While the premises are fully occupied as of now, one of the top five tenants, contributing to around 14% gross rentals (as of June 2023), is in the process of vacating the space. The impact on rental income is expected from fiscal 2025 with expiry of notice period. Further, the tenant is expected to vacate in a phased manner, thereby allowing the company sufficient time to re-lease the space. However, timely re-leasing of the vacant space at better or similar terms as existing agreements will remain a key rating sensitivity factor.

 

Debt service coverage ratio (DSCR) for fiscal 2023 was strong at 3.07 times and debt-to-lease rental ratio was low at 2.39 times. Debt protection metrics are expected to remain healthy over the medium term.

 

The rating continues to reflect the company’s steady cash flow supported by the advantageous location of NKP, its healthy occupancy and marquee clientele. The rating also factors in strong debt protection metrics and established track record of the asset. These strengths are partially offset by exposure to geographical and tenant concentration risks and susceptibility to volatility in occupancy and interest rates.

Analytical Approach

CRISIL Ratings has taken a standalone view of the business and financial risk profiles of Nirlon as it has only two assets, NKP and Nirlon House, and nil financial linkages with group companies.

Key Rating Drivers & Detailed Description

Strengths

  • Stable cash flow: NKP is located in Goregaon East in Mumbai, and is close to the Western Express Highway, one of Mumbai’s arterial highways, the Jogeshwari-Vikhroli Link Road, two railway stations on the western railway line and a metro station. This has made the park an attractive destination for leading global banking and financial services companies such as JP Morgan, Morgan Stanley, Citicorp, Deutsche and BNP Paribas. Occupancy of the park has remained above 90% from March 2018 and was healthy at 99.4% as on June 30, 2023. The company received occupation certificate for phase V, with leasable area of 11.6 lakh sq. ft, in fiscal 2022 and the entire space has been leased with rentals commencing from May 15, 2022.

 

The rating also factors in the secure leave-and-license agreements with lock-in and lease periods of 3-5 years and 4-10 years, respectively, and in-built escalations of 15% every 3-5 years for most licensees.

 

  • Strong debt protection metrics: DSCR for fiscal 2023 was strong at 3.07 times. Average DSCR should be comfortably above one time throughout the tenure of the debt, backed by low debt, with the debt-to-lease rental ratio at 2.39 times as on March 31, 2023. Additionally, liquidity is supported by presence of a debt service reserve account (DSRA) equivalent to one month of debt servicing obligation and an overdraft limit of Rs 80 crore. Cash and equivalents were healthy at Rs 61 crore (excluding DSRA) as on May 31, 2023.

 

The lease rental discounting loan (Rs 1,150 crore as on June 30, 2023) has a tenure of 10 years, with a moratorium on principal repayment for the first five years and part debt repayment during the remaining tenure, thus exposing the company to refinancing risk. Nevertheless, the loan-to-value (LTV) ratio is expected to be low under 30%, protecting investors from a sudden decline in the value of the property. The company has no capital expenditure plans in the near future, and hence, is unlikely to contract incremental debt. However, increase in debt in the absence of an additional revenue stream could impact the financial risk profile and hence, remains a key rating sensitivity factor.

 

  • Established track record: Nirlon benefits from its track record of over 10 years of managing, leasing and marketing the property, which has resulted in healthy occupancy, even during the Covid-19 pandemic. Nirlon has a professional management team with vast experience looking after the administrative and daily operations. The company has strong relationships with all stakeholders―lenders, tenants and creditors. Additionally, the management follows a proactive approach towards asset maintenance to ensure tenant retention and quality.

 

Weaknesses

  • Exposure to geographical and tenant concentration risk: As the company has a single asset (NKP), it faces high geographical concentration risk. The top five licenses contribute to 86% of gross lease rentals (as of June 2023), also exposing the company to tenant concentration risk; the largest licensee contributes to 39% of gross lease rentals (as of June 2023). While these risks are mitigated by longstanding relationships with tenants and secured leave-and-license agreement terms, with presence of a notice period and security deposit of 6-9 months, if any of these tenants vacate the premises, it may be difficult to find an alternative within the stipulated time for the entire office space. One of the top five tenants, contributing to around 14% gross rentals (as of June 2023), is in the process of vacating the space. Though the tenant is expected to vacate in a phased manner with impact on rental income expected from fiscal 2025 allowing the company sufficient time to re-lease the space, timely re-leasing of the vacant space at better or similar terms as existing agreements will remain a key rating sensitivity factor.

 

  • Susceptibility to volatility in occupancy and interest rates: Cash inflow is susceptible to volatility in occupancy or realisations (a function of rentals per sq. ft), while cash outflow is fixed, except fluctuations in interest rates (as they are floating). Around 32% of the area will be up for renewal over the three fiscals through 2026. Timely renewal or leasing of this area at similar or better terms will be critical. Although cash flow could partially absorb the impact of fluctuations in interest rates and occupancy levels, these will remain key rating sensitivity factors.

Liquidity: Strong

DSCR was strong at 3.07 times and debt-to-lease rental ratio was low at 2.39 times in fiscal 2023. Average DSCR should be comfortably above one time throughout the tenure of the debt. Cash flow will be sufficient to cover interest obligation and regular maintenance over the three fiscals through 2026; the company has received a moratorium on principal repayment during this period. Liquidity is further supported by a DSRA equivalent to one month of debt servicing obligation, presence of an overdraft facility of Rs 80 crore and cash and equivalent of Rs 61 crore (excluding DSRA) as on May 31, 2023. Current debt of Rs 1,230 crore has a bullet repayment at the end of the 10-year tenure, which exposes the company to refinancing risk. Nevertheless, LTV ratio is expected to be low at less than 30%, protecting investors from a sudden decline in the value of the property.

Outlook: Stable

CRISIL Ratings believes the debt protection metrics of Nirlon will remain robust, backed by steady cash flow from lease rentals and low debt.

Rating Sensitivity factors

Upward factor:

  • Substantial geographic diversification while maintaining financial risk profile

 

Downward factors:

  • Decline in cash flow owing to fall in occupancy below 85% or renewals at lower rental rates
  • Depreciation in the value of the underlying assets or incremental debt leading to LTV ratio of over 40%

About the Company

Nirlon owns and operates NKP. The park has total leasable area of 30.6 lakh sq. ft and has been developed in a phase-wise manner with the final phase (phase V), comprising of 11.6 lakh sq. ft, receiving the occupation certificate in fiscal 2022. The company has track record of collecting rentals for over ten years. It also owns undivided interest of 75% in Nirlon House, located in Worli (leasable area of 0.5 lakh sq. ft).

 

The company is majority owned by Government of Singapore Investment Corporation (GIC) with 63.9% shareholding through its affiliate, Reco Berry Pvt. Ltd (as on March 31, 2023).

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on / for the period ended March 31   2023* 2022
Operating income Rs crore 576 395
Profit after tax (PAT) Rs crore 158 111
PAT margin % 27.4 28.1
Adjusted debt / adjusted networth Times 2.85 2.47
Interest coverage Times 3.67 9.12

*based on short format financials

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

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Annexure - Details of Instrument(s)

ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Complexity 
levels		 Rating assigned
with outlook
NA Lease Rental Discounting Loan NA NA Apr-32 1,150 NA CRISIL AA+/Stable
NA Overdraft Facility NA NA Apr-32 80 NA CRISIL AA+/Stable
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 1230.0 CRISIL AA+/Stable   -- 16-06-22 CRISIL AA+/Stable   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Lease Rental Discounting Loan 1150 Hongkong & Shanghai Banking Co CRISIL AA+/Stable
Overdraft Facility 80 Hongkong & Shanghai Banking Co CRISIL AA+/Stable
Criteria Details
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties

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