Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Pallazzio Hotels and Leisure Limited (PHLL; part of the Phoenix Mills group) to ‘CRISIL A/Stable’ from ‘CRISIL A-/Stable’.

 

The upgrade in the rating factors in strong recovery in hotel operations and upgrade in the rating of parent The Phoenix Mills Ltd (TPML).

 

Strong recovery in hotel operations was witnessed in Q1 2023. Average occupancy in Jan 2022 declined to 46% for St Regis due to the restrictions on mobility on account of the third wave. Significant recovery was witnessed from Feb-22 onwards, given reducing number of cases and waning impact of the pandemic. Occupancy had gradually improved to 90% by March 2022 and remained at 80-90% in Q1 2023. Average room rental (ARR) recovered to around Rs 12,000 in Jul 2022, which is better than pre-pandemic levels.

 

Strong recovery was witnessed in the group performance, especially post the third wave. Revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) for retail segment was strong in Q1 of fiscal 2023. Performance of office and residential segment remained resilient, while hospitality segment also saw strong recovery. Operating performance is expected to remain strong in fiscal 2023 as can be seen from consumption at retail malls significantly above pre-pandemic level (i.e. corresponding months of fiscal 2020) in Q1 2023.

 

Better operating performance leading to healthier accruals have resulted in improved debt service coverage ratio (DSCR). The near-term DSCR has also seen improvement due to refinancing of debt at several special purpose vehicles (SPVs) with longer tenure and better repayment schedules. Liquidity position continues to remain healthy with cash and equivalents at Rs 1,140 crore as on June 30, 2022 (for the PML-only platform) given stake dilution in assets and equity fund raising through qualified institutional placement (QIP) undertaken during the pandemic.

 

The rating continues to reflect strong operational, managerial, and financial support from parent, The Phoenix Mills Ltd (TPML; rated ‘CRISIL AA-/Stable’), the favourable location of PHLL’s hotel, healthy operating performance, and established track record of operations and management (O&M) partner, Starwood Hotels (subsidiary of Marriott International), in the hospitality industry. These strengths are partially offset by company’s moderate financial risk profile, and susceptibility to intense competition and cyclicality in the hospitality industry.

Analytical Approach

CRISIL Ratings has applied its criteria for notching up standalone ratings of companies based on parent support, on the expectation of strong managerial and financial support from the parent, TPML, both on an ongoing basis and in the event of distress.

 

This is in addition to considering PHLL’s standalone operational performance, including achievement of ARR higher than pre-pandemic levels and sustained occupancy above 80%. Further, as per the  business and financial risk profiles of PHLL, as St Regis, Mumbai, is the only asset on the company's books, its cash flow will be used to service debt.

 

CRISIL Ratings has treated funds from the promoters (other than equity share capital) of Rs 421 crore as on March 31, 2022, as equity as these do not have scheduled interest payment and redemption dates and are not expected to be redeemed over the medium term.

Key Rating Drivers & Detailed Description

Strengths:

• Strong operational, managerial, and financial support from parent: PHLL will continue to benefit from the parent’s established market position in the real estate industry and will derive considerable operating synergies from being part of The Phoenix Mills group. PML along with it’s co-owner, have infused Rs 695 crore in various tranches in PHLL till March 31, 2022, and is expected to continue to provide need-based support in a timely manner. Though, during the pandemic, no additional liquidity infusion/support was required from the parent. PHLL was self-sustaining in its debt servicing obligations as well as working capital requirements. However, additional funding in the form ECLGS facility and an Overdraft facility of Rs.118 crores and Rs.25 crores, respectively was availed from its existing external lenders

 

• Favourable location and healthy operating performance: There was a severe impact on operations in fiscal 2022 with occupancy and average room rent (ARR) for the fiscal at 59% and Rs 7,306 respectively, as compared to 78% and Rs 12,441, respectively, pre-pandemic (for fiscal 2020). Consequently, EBITDA (earnings before interest, taxes, depreciation and amortisation) margin for fiscal 2022 was around 6% as compared to over 35% for pre-pandemic levels. However, occupancy and ARR has bounced back to 80-90% level and Rs.12000 respectively in Q1 2023. Strong recovery in ARR and occupancy is expected to lead to improvement in operating performance for fiscal 2023.

 

Furthermore, the hotel is expected to benefit from its central location in the business district of Lower Parel, Mumbai, being surrounded by marquee business complexes such as One Indiabulls, Indiabulls Finance Centre, Piramal Corporate Park and Piramal Business Centre. The company also benefits from revenue diversification with nearly 50% of total income coming from food and beverage, banquet, and other services, which are also expected to witness recovery with the upcoming festive and wedding seasons. With improvement in occupancy, ARR is also expected to improve gradually. Pace of recovery, however, will remain a key rating sensitivity factor.

 

• Established track record of O&M partner in the hospitality industry: PHLL has tied up with the Marriott for it’s "The St Regis” brand. PHLL has the only hotel under this brand in India. The St Regis is the key luxury brand of Marriott that owns, operates and manages more than 6,000 properties and 11 brands in around 120 countries. Marriott’s expertise and brand will be vital for PHLL to attract customers.

 

Weaknesses:

• Moderate financial risk profile: Profit after tax (PAT) and accretions to reserves for fiscal 2022 were negative at Rs 70 crore each, leading to deterioration in net worth and capital structure. Consequently, net worth further deteriorated to Rs 174 crore as on March 31, 2022 as compared to Rs 243 crore as on March 31, 2021. Adjusted gearing and total outside liabilities-to-adjusted net worth (TOL/ANW) ratio increased to 3.24 times and 4.46 times respectively as on March 31, 2022, as compared to below 2.11 times and 2.93 times respectively as on March 31, 2021, due to deterioration in networth. Debt protection metrics have also weakened, with adjusted interest coverage and net cash accrual to total debt ratios deteriorating to 0.22 time and negative 5.8%, respectively, in fiscal 2022. With expectation of improvement in revenue and profitability from fiscal 2023 onwards, the metrics are expected to strengthen. Additionally, any shortfall in meeting debt servicing obligation is expected to be supported by the group.

 

• Susceptibility to intense competition and cyclicality: The hospitality industry is susceptible to downturns in the domestic and international economies. During a downturn, premium hotels are affected more as their revenue per available room declines more sharply than that for mid-sized or economy hotels, while operating cost remains high. Thus, cash flow from premium properties is more susceptible to downturns. Furthermore, the Indian hotel industry is witnessing intense competition due to the increasing presence of foreign players and expansion by domestic players. While St Regis is conveniently located with easy access to a large catchment area of wealthy Mumbai customers for social gatherings and surrounded by multiple business parks, it is susceptible to competition from any new hotel coming up in the area and from other premium luxury hotels such as Taj Palace and The Oberoi in South Mumbai.

Liquidity: Strong

PHLL maintains a debt service reserve account (DSRA) equivalent to three months of interest obligation and undrawn bank limit of Rs. 46 cores as on 31st Aug, 2022. In H1 2023, the company has prepaid due principal obligation for outstanding debt of Saraswat bank till fiscal 2028 amounting to Rs. 48.30 crore,. However, the company availed additional debt of Rs. 70 crore during fiscal 2022 in the form of Emergency Credit Line Guarantee Scheme (ECLGS) in equal proportions from its existing lenders, as an additional liquidity cushion, to sustain operational/planned capex requirements in case of any contingencies. Principal repayments for the same will only commence from fiscal 24. For the existing debt obligations Rs. 36.55 crores is to be repaid over the next 2 fiscals. The liquidity and cash flow position derives comfort from expected support from the parent, in case of any exigency or requirement. Overall liquidity for the Phoenix Only platform is strong, with around Rs 1140 crore in the form of cash, cash equivalents, and DSRA, as on March 31, 2022, which should be available to support cash flow mismatches at PHLL, if any.

Outlook: Stable

CRISIL Ratings believes PHLL will continue to benefit from its association with “The St Regis” brand and favourable location in south Mumbai. Any change in CRISIL Ratings' rating on TPML may also result in a change in the rating on PHLL.

Rating Sensitivity factors

Upward factors:

• Upward change in the credit risk profile of TPML
• Stabilisation of operations, leading to material improvement in EBITDA

 

Downward factors:

• Downward change in the credit risk profile of TPML
• Lower-than-expected revenue or profitability resulting in low cash accrual
• Draw down of any incremental debt weakening financial risk profile

About the Company

PHLL is jointly promoted by TPML and co-owner. TPML’s effective shareholding stands at 73%, while the balance 27% is being held by co-owner.

 

PHLL owns and operates “The St Regis”, a five-star uber-luxury hotel in Mumbai with 395 rooms and 3 office suites. The hotel also has 9 restaurants and banquet space of 42,500 square feet (sq. ft) along with a banquet terrace, apart from other services such as spa, gym, salon, business club, night club, and outdoor swimming pool. It is favourably located in Lower Parel and is right next to the group’s flagship retail asset called “Phoenix Palladium”. Hotel operations commenced in fiscal 2012, while O&M agreement was signed with Starwood/Marriott Hotels in September 2015.

 

About the Platform

The PML Only platform has 5 retail assets namely Phoenix Palladium, Mumbai, Phoenix Marketcity, Chennai, Phoenix United, Bareilly, Phoenix United, Lucknow and Phoenix Palassio, Lucknow, one office asset: Fountainhead, Pune, two hotel assets: The St Regis, Mumbai and Courtyard by Marriott (Agra) and two residential projects. The platform has limited construction risk with only part of one asset under development in the residential space., which is nearing completion

About the Group

PML is a leading retail mall developer and operator in India. It is the pioneer of retail-led, mixed-use developments with completed development of over 17.5 million square feet spread across retail, hospitality, commercial, and residential asset classes. The company has an operational retail portfolio of approximately 7.0 million square feet of retail space spread across 9 operational malls in 6 cities of India. The company is further developing 5 malls with over 6.0 million square feet of retail space in 5 cities of India. Besides retail, the company has an operating commercial office portfolio with gross leasable area of 1.5 million square feet and plans to add approximately 5.0 million sq. feet of commercial office across existing retail properties going forward.

 

Over the past few fiscals PML has diluted its stake in some of its operational assets to two strong private equity partners, CPPIB and GIC, forming separate platforms for future development. While PML still has majority stake in all of its SPVs, limited cash flow fungibility is expected between the entities which are controlled by PML (includes fully-controlled entities and certain joint ventures (JVs)) and the ones belonging to either of the PML-CPPIB or PML-GIC platforms. No cash flow fungibility is expected prior to debt servicing. While surplus may be distributed to each partner, it will only happen once the under-development assets stabilise. Consequently, CRISIL Ratings is now looking at the credit risk profiles of all the three platforms, referred to as the PML-only platform (includes certain JVs), PML- CPPIB platform and PML-GIC platform, separately with only outflows from PML-only platform towards equity and support requirements for the PML-CPPIB and PML-GIC platforms.

Key Financial Indicators

Particulars	Unit	2022	2021
		Actual	Actual
Revenue	Rs crore	146	65
Profit after tax (PAT)	Rs crore	-70	-79
PAT margin	%	-47.7	-121.2
Adjusted gearing	Times	3.24	2.11
Interest coverage	Times	0.22	0.20

*CRISIL Ratings 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
NA	Term Loan	NA	NA	31-Mar-31	214.68	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	31-Mar-31	263.44	NA	CRISIL A/Stable
NA	Overdraft Facility	NA	NA	NA	25.00	NA	CRISIL A/Stable