Detailed Rationale

CRISIL Ratings has reaffirmed at ‘CRISIL A-/Positive’ rating on the bank loan facilities of Shriram Properties Limited (SPL)

 

The rating reflects the expected improvement in the financial risk profile of the company driven by healthy operating performance and debt metrics. Operating performance is expected to improve with expected sales volume of ~5 million sq ft (msf), sales value of over Rs 2,500 crore and collection of ~Rs 1,800 crore in fiscal 2025, as against sales volume of 4.6 msf, sales value of Rs 2,362 crore and collection of Rs 1,391 crore in fiscal 2024. The company registered improvement of 12% and 28% in volumes and value sold, respectively, in fiscal 2024 owing to improved sales of ongoing projects and launch of new projects.

 

The financial risk profile was comfortable, supported by strong operating performance and low leverage. Debt for residential projects remained range-bound at Rs 724 crore as on March 31, 2024 (including joint ventures [JVs]), as against Rs 757 crore as on March 31, 2023, primarily due to healthy sales and collection.

 

Debt protection metrics as characterised by gross debt to cash flow from operations (CFO) and CFO to interest remain healthy. Gross debt to CFO ratio is expected to improve to below 1.5 times from 2.3 times in fiscal 2024, and CFO to interest ratio is expected to improve above 6 times in fiscal 2025 from 3.7 times in fiscal 2024 supported by sustained healthy collection and expected land monetisation of Rs 100-120 crore. Land monetisation inflow will be credit monitorable. Moreover, the debt to CFO ratio is expected to improve to below 2 times and CFO to interest ratio to remain above 4.5 times over the medium term. The cost of debt was high at 11.6% in fiscal 2024; though the company has demonstrated ability to bring down cost of debt from 13.7% in fiscal 2021, further reduction in cost of borrowing will be monitorable. 

 

Overall bank debt is expected at Rs 650-750 crore (including JVs) over the medium term. Financial flexibility is supported by the company’s refinancing ability and steady construction progress in ongoing projects. The rating duly factors in the established development track record of the SPL group, supporting healthy saleability of its projects in Bengaluru and Chennai, along with comfortable cash flow and adequate financial flexibility.

 

These strengths are partially offset by susceptibility to risks inherent in the real estate sector, intense competition and cyclicality in the real estate sector.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SPL and its subsidiaries, associates (based on consolidated financials of SPL) and JVs. This is because these entities, collectively referred to as SPL group, have common promoters and are in the same business.

Key Rating Drivers & Detailed Description

Strengths:

Established brand and market position in the real estate segment in Bengaluru, Chennai and Kolkata

With a track record of over two decades, the group has an established position in the real estate markets of Bengaluru, Chennai and Kolkata. It has developed over 25 msf of residential area (built-up), mainly focused on mid-market and affordable housing categories, and has 29 msf in the pipeline, of which 13 msf will be launched in the next three fiscals. Projects are diversified with less than 50% in Bengaluru, below 20% in Chennai and around 40% in Kolkata. Asset-light JV model, joint development agreements (JDA) and development management (DM) will account for more than 80% of the portfolio. The group aims to leverage its leadership position to become a partner of choice for landowners through JV/JDA and DM projects.

 

Steady demand for affordable and middle-income projects will likely ensure healthy collection and sales over the medium term. The business risk profile will continue to be supported by the company’s long track record of execution and delivery. Its ongoing projects had healthy sales, collection and construction progress of 52%, 63% and 39%, respectively, as on March 31, 2024. In fiscal 2024, sales and collection improved to Rs 2,362 crore and Rs 1,391 crore, respectively, from Rs 1,846 crore and Rs 1,194 crore in the previous fiscal. Slowdown in sales and collection and delay in launches due to macroeconomic factors may constrain cash flow, and hence, will be key monitorables.

 

Comfortable financial risk profile

The financial risk profile was comfortable driven by strong operating performance and sustained leverage. Gross debt in the residential projects remained range-bound at Rs 724 crore as on March 31, 2024 (including JVs), as against Rs 757 crore as on March 31, 2024, owing to debt undertaken for reacquisition of 100% stake in its JV, Shriprop Properties Pvt Ltd, and on DM project, Shriram 122 West. The gross debt to CFO and CFO to interest ratios will likely remain healthy over the medium term. Gross debt to CFO ratio is expected to improve to below 1.5 times and CFO to interest ratio to above 6 times in fiscal 2025, supported by sustained healthy collection and expected land monetisation of Rs 100-120 crore. Also, debt to CFO ratio is expected to improve to below 2 times and CFO to interest to remain above 4.5 times over the medium term.

 

The cost of debt was high at 11.6% in fiscal 2024, despite declining from 13.7% in fiscal 2021, and is expected to reduce further, which will be credit monitorable. Networth was sizeable at Rs 1,264 crore as on March 31, 2024. SPL has issued corporate guarantees for debt raised by its subsidiaries. The financial risk profile will likely be strong over the medium term supported by steady improvement in collection and no major debt planned for construction or land acquisition.

 

Improving cash flow visibility

Cash flow visibility is healthy supported by improving operating performance of the core business as well as cash inflow from sale of land parcels and asset monetisation. The cash flow is expected to improve over the medium term supported by healthy launch pipeline and a good mix of projects in various stages of development at the group level.

 

Weaknesses: 

Susceptibility to cyclicality in the real estate industry: Cyclicality causes fluctuations in cash inflow. Against this, cash outflow towards projects and debt obligation is relatively fixed, resulting in substantial cash flow mismatch. Decline in sales may lead to lower collection over the medium term.  

 

Exposure to geographic and project concentration risks: Revenue is concentrated in Bengaluru. However, the company has expanded into Chennai and Kolkata, and has around 4.82 and 12.33 msf of projects, both ongoing and under approval, and plans to launch in the Pune micro market. Bengaluru may continue to account for as high as 42% of sales over the medium term. As the entire revenue comes from the real estate development business, operations will remain highly susceptible to economic cycles. Furthermore, the company has significant dependence on one project, Shriram Grand city - I (accounted for 13% of total saleable area as of March 2024).

Liquidity: Strong

Liquidity will remain strong over the medium term, supported by healthy saleability and collection in ongoing projects as well as in new launches. It will be further aided by monetisation of the land bank in Kolkata and receipt of pending DM fees from Xander group. Financial flexibility is supported by strong refinancing ability and healthy relationships with investors. The group had unsold inventory of over Rs 4,134 crore as on March 31, 2024, and land bank of 318 acres in Kolkata and Chennai against which additional debt can be raised, if required. Furthermore, cash and equivalent of Rs 184 crore as on March 31, 2024, support liquidity.

Outlook: Positive

CRISIL Ratings believes SPL will continue to benefit from its established position in the real estate markets of Bengaluru, Chennai and Kolkata, and expected improvement in performance. The financial risk profile will likely strengthen, aided by continued focus on deleveraging.

Rating Sensitivity factors

Upward factors

• Steady improvement in scale of operations leading to increase in collection and CFO
• Strengthening of the financial risk profile with debt to CFO ratio below 2.5 times on sustained basis

 

Downward factors

• Sharp decline in operating cash flow, triggered by slackened project saleability or delays in project execution
• Weakening of the financial risk profile with debt to CFO ratio remaining above 3 times on sustained basis

About the Company

SPL is a real estate development company based in south India. It has been engaged in the real estate industry for over two decades and is focused on mid-market and affordable housing categories. It is a part of the Shriram group, which has experience of four decades in retail financial services and various other industries.

 

For the first half of fiscal 2024, the group reported profit after tax of Rs 36.78 crore on total income of Rs 341 crore, as against Rs 30.07 crore and Rs 380 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable