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 at steady pace of 5% in fiscal 2024 to Rs 535 crore, due to escalation in rent as per scheduled agreement and stable occupancy levels ranging 99.5-100% in Nirlon Knowledge Park (NKP) during the fiscal. One tenant occupying 14% of total leasable area and contributing to ~14% gross rentals (as of June 2024), has given termination of notice and is expected to vacate by the fourth quarter of the current fiscal. As per the management, the company has already received enquiries from existing as well as new clients for more than half of the area and vacancy is expected to be absorbed. Occupancy is expected to remain healthy over the medium term. However, timely re-leasing of the vacant space at better or similar terms as existing agreements will remain a key rating sensitivity factor.

 

The financial risk profile also remains comfortable, driven by strong operating performance and moderate leverage. Debt stood at Rs 1,145 crore and the debt to lease rental ratio stood at ~2.14 times as of March 2024 (~2.24 times as of March 2023). Debt service coverage ratio (DSCR) for fiscal 2024 was strong at 3.12 times (2.23 times during previous fiscal) and is expected to remain strong over major part of the debt tenure. However, there is bullet repayment for ~75% of the total debt in fiscal 2033, which exposes the company to refinancing risk.

 

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, Citicorp, Deutsche and BNP Paribas. Occupancy of the park has remained above 90% from March 2018 and was healthy at 100% as on June 30, 2024. The company received occupation certificate for Phase V, with leasable area of 11.6 lakh square feet (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

Backed by low debt, the debt-to-lease rental ratio stood at 2.14 times as on March 31, 2024 (2.23 times a year ago). DSCR for fiscal 2024 was strong at 3.12 times and the average DSCR should remain strong throughout the tenure of the debt except in fiscal 2033 in which there is a bullet repayment of ~ 75% of the total outstanding debt. The lease rental discounting loan (Rs 1,150 crore as on June 30, 2024) 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 seven licenses contribute to ~90% of gross lease rentals (as of June 2024), also exposing the company to tenant concentration risk; the largest licensee contributes to 39% of gross lease rentals (as of June 2024). 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 tenant occupying 14% of total leasable area and contributing to ~14% gross rentals (as of June 2024), has given termination of notice and is expected to vacate by the fourth quarter of fiscal 2025. As per the management, the company has already been received enquiries from existing as well as new clients for more than half of the area and vacancy is expected to be absorbed. Though the tenant is expected to vacate in a phased manner with impact on rental income expected from fiscal 2026 as the area gets leased gradually. 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 34% of the area will be up for renewal over the three fiscals through 2028. Timely renewal or leasing of this area at similar or better terms will be crucial. 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 is expected to remain strong throughout the tenure of debt except during fiscal 2033 wherein there is bullet repayment for ~ 75% of the facility exposing the company to refinancing risk. Nevertheless, LTV ratio is expected to be low at less than 30%, reducing the refinancing risk. Liquidity is further supported by a debt service reserve account (DSRA) equivalent to one month of debt servicing obligation, fully undrawn overdraft facility of Rs 80 crore and cash and equivalent of Rs 15 crore (excluding DSRA) as on May 31, 2024. The company has been providing dividend in the range of Rs 207-234 over the past three fiscals and is expected to continue going forward as well in the absence of any major capex.

Outlook: Stable

CRISIL Ratings believes Nirlon will continue to benefit from stable cash flow, backed by long-term leases with reputed clients and strong financial risk profile.

Rating Sensitivity Factors

Upward Factors

• Significant increase in geographical and tenant diversification with occupancy remaining above 90-95% on a sustained basis
• Sustenance of robust financial risk profile

 

Downward Factors

• Lower-than-expected cash flow due to occupancy falling below 85% or renewals at lower-than-expected rental rates
• Depreciation in value of the underlying assets or incremental debt, leading to LTV ratio 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 11.6 lakh sq ft, receiving the occupation certificate in fiscal 2022. The company has track record of collecting rentals for over 10 years. It also owns undivided interest of 75% in Nirlon House, located in Worli, Mumbai (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, 2024).

Key Financial Indicators*

As on/for the period ended March 31	Unit	2024	2023
Operating income	Rs crore	603	572
Profit after tax (PAT)	Rs crore	205	158
PAT margin	%	33.9	27.4
Adjusted debt/adjusted networth	Times	3.07	2.85
Adjusted Interest coverage	Times	3.89	3.67

*CRISIL Ratings-adjusted numbers

Any other information: Not Applicable