Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A-/Stable' rating on the long-term bank facility of Shriram Properties Ltd (SPL).

 

CRISIL Ratings has taken note of SPL acquiring 100% stake in one of its joint venture entities -Shriram Properties Pvt Ltd (SPPL). SPPL was initially formed as a 70:30 joint venture (JV) between Mitsubishi Corporation (MC) and SPL. SPL signed a memorandum of understanding to re-acquire MC’s stake for a consideration value of Rs 240 crore, payable in three tranches between September 2023 and December 2024. Post the agreement, SPPL became a wholly owned subsidiary of SPL with effect from August 2023.

 

The credit risk profile of SPL remains strong, given the healthy saleability and collections in SPPL. CRISIL Ratings expects that cashflows of SPPL will suffice to cover the entire project expenses and debt (including the obligation towards MC). No additional funding support will be required from SPL towards SPPL. Moreover, SPPL is likely to generate around Rs 110 crore as net surplus at the end of the project.

 

SPL has an established brand in the real estate segments of Bengaluru, Chennai and Kolkata, along with a comfortable cash flow and adequate financial flexibility. Sale value and collections were strong at Rs 1,066 crore and Rs 721 crore, respectively, for the first half of fiscal 2024, as against Rs 747 crore and Rs 639 crore, respectively, in the corresponding period of the previous fiscal. Projects aggregating 0.88 million square feet (msf) were launched during this period, and 2.8 msf are likely to be launched in the second half of fiscal 2024. Realisation per square foot has improved by around 14% in the first half of fiscal 2024, as against the last quarter of fiscal 2023. Consequently, revenue is expected to grow at a compound annual rate of around 20% over the next three fiscals. Timely launches, along with sustained demand, would be key monitorables.

 

Financial risk profile of the parent (SPL) is supported by an adequate operating cash flow. With healthy saleability across projects and rising collections, dependence on debt has been rangebound at Rs 653 crore during the first half of fiscal 2024 vis-à-vis fiscal 2023. The debt-to-total-assets should sustain below 20% in the medium term. Capital structure is comfortable, with consolidated gearing below 0.55 time as on September 30, 2023. Overall bank debt is likely to range from Rs 700 crore to Rs 800 crore (including JVs) over the medium term.

 

These strengths are partially offset by susceptibility to volatility in the real estate sector, causing fluctuations in rental rates and occupancy levels.

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, have common promoters and are engaged in the same business.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established brand and strong market position in the real estate segment in Bengaluru, Chennai and Kolkata: SPL has been engaged in real estate development for over two decades, mainly focused on the mid-market and affordable housing categories. The company has developed and delivered over 33 projects spanning 19.5 msf and has another 43 msf in the pipeline, of which 24 msf is ongoing and the balance in various stages of planning. Projects are diversified with less than 50% in Bengaluru, around 30% in Chennai, and around 23% in Kolkata. The asset-light JV model, joint development agreements (JDA) and development management (DM) will account for more than 75% 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 should ensure healthy collections and sales over the medium term. The company has planned launches of 5-6 msf in fiscal 2024 and 7-7.5 msf in fiscal 2025 in its portfolio. The business risk profile will continue to be supported by SPL’s long track record of execution and delivery. Slowdown in sales velocity and collections and delay in launches due to macroeconomic factors may constrain cash flow, and hence, will be a key monitorable.

 

• Improving financial flexibility and capital structure: Networth was sizeable at Rs 1,245 crore  as on September 30, 2023. SPL has also issued corporate guarantees for debt raised by its subsidiaries. Overall consolidated debt was range bound around Rs 653 crore in the first half of fiscal 2024, vis-à-vis Rs 643 crore in the last quarter of fiscal 2023. Debt could see moderation, given the improvement in collection, advanced stages of completion in key projects, policy of partnering with investors and focus on the asset-light model. The group is likely to focus on reducing debt and will maintain its gearing at 0.55 time as on September 30, 2023. Any deviation from the debt reduction trajectory will be a key monitorable.

 

Average cost of debt has declined to 11.4% as on September 30, 2023, from 12.5% as on December 31, 2022. The group has managed to bring down the interest rate by 110 basis points since the third quarter of fiscal 2023, which defines a healthy refinancing ability. SPL will continue to partner with investors for project purchases and focus on the asset light model of JDA/JV and DM model; for instance, SPL has partnered with ASK Property Fund to set up an investment platform for acquisition of residential real estate projects. Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin for the six months of fiscal 2024 was 19% and should be around 25% for fiscal 2024. The financial risk profile is likely to be strong over the medium term, supported by steady cash accrual and absence of large, debt-funded land acquisition.

 

Weaknesses: 

• Susceptibility to cyclicality in the real estate industry: Exposure to risks and cyclicality inherent in the real estate sector may result in volatility in saleability, realisations and cash flow. Over the past few years, saleability has been impacted by macroeconomic factors such as demonetisation, implementation of the Real Estate Regulatory Act and the Goods and Services Tax. Hence, it will remain susceptible to changing economic cycles.

 

Cyclicality in the real estate segment causes fluctuations in cash inflow. As against this, cash outflow towards projects and debt obligation are relatively fixed, resulting in substantial cash flow mismatch. The Covid-19 pandemic caused some disruption in cash flow for real estate developers. The company too felt the impact with collections at Rs 830.9 crore in fiscal 2021. However, pick-up in the business environment has translated into increased sales in its projects.

 

• Exposure to geographic concentration risk: Revenue is moderately concentrated in Bengaluru. However, the company has expanded into Chennai and Kolkata, and has around 11.76 and 8.74 msf of projects, both ongoing and under-approval. Bengaluru market may continue to account for as high as 45% 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.

Liquidity: Adequate

Liquidity will be supported by healthy saleability and collections in ongoing projects and new launches. It will be further aided by monetisation of the land bank in Kolkata and receipt of DM fees from Xander. Financial flexibility is supported by strong refinancing ability demonstrated in the current fiscal and healthy relationships with investors.

Outlook: Stable

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

Rating Sensitivity Factors

Upward factors

• Healthy cash generation, leading to sustained reduction in debt-to-total assets to below 15% and a stronger financial risk profile.
• Significant improvement in scale and sales velocity.

 

Downward factors

• Weakening of the financial risk profile due to higher-than-expected borrowing, with debt-to-total assets ratio exceeding 25%.
• Lower-than-expected bookings and substantial debt funding for upcoming projects, weakening liquidity.

About the Company

SPL is a real estate development company, based in South India. It has been engaged in this business for over two decades and is mainly focused on the mid-market and affordable housing categories. It is a part of the Shriram group that has four decades of experience 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 a 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