| Smartworks Coworking Spaces Private Limited | ||||
| Rating downgraded to 'CRISIL BBB+ / Stable' | ||||
| Rating Action | ||||
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| 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 downgraded its rating on the long-term bank facility of Smartworks Coworking Spaces Pvt Ltd (SW) to ‘CRISIL BBB+/Stable’ from ‘CRISIL A-/Stable’.
The rating actions reflects weaker than expected performance of SW during fiscal 2021 and H1FY2022. Delay in handover of newer centers and lower-than-expected ramp up of occupancy particularly in new centers owing to impact of second and third wave of Covid-19 pandemic, resulting in negative operating leverage and higher reliance on debt for expansion combined with one-off expenses resulted in net PAT losses in fiscal 2021 and H1FY2022 even as EBITDA remains positive. However, cash accruals have remained positive in these two years. Uptick trend in occupancy levels and pre-signing clients for 25-30% of the new centres to support stable operating efficiency over the medium term, will be key monitorable.
Occupancy has remained moderate at 70-80% of billable seats during previous fiscal and H1FY2022 of current fiscal largely due to slower occupancy ramp up and delayed move-ins from customers (occupancy of ~57% for new space basis billable seats) because of impact of two covid-19 waves in current fiscal. Furthermore, slower handover of new capacities resulted in moderation in operating profitability in current fiscal with SW reporting operating level losses till October 2021.
CRISIL Ratings considers the ramp up of newly added large spaces such as Malpani Agile, Marisoft, WTT in recent months with strong pre-opening occupancy and fast ramp up in occupancy during H2FY2022 resulting in monthly rental and EBITDA run rate estimated at Rs 35-40 crore and Rs 5-8 crore, respectively, in January-Mar 2022. Further, the company has received letters of intent for more than 20,000 seats (monthly revenue of Rs 10 crore per month) and that too at higher rentals leading to near full occupancy in mature centers and rapid occupancy ramp up in newer centers. This should result in occupancy level improving to erstwhile levels and support future cash flow generation and will remain a key rating sensitivity factor.
Revenue is expected to increase in fiscal 2023, led by large space addition of ~2.5 million sq. ft in H2FY22 (including upcoming management contracts is expected to become operational over the next 12 to 18 months), full year contribution of rental from newly added large enterprise clients. Smartworks during the fiscal has established market leadership in the flexible spaces industry. CRISIL Ratings expects monthly average revenue rate to improve sharply over Rs 60-70 crore resulting in benefit of operating leverage and healthy increase in cash flows next fiscal. Though co-working space is expected to see healthy growth in near to medium term, subdued economic activity and hybrid work-from-office practice adopted by most corporates during covid waves may also pose risk to ramp up in occupancy rate in the near term, as seen in recent past. However, Smartworks unique model with focus on large enterprise clients with long sticky tenures eliminating asset liability has provided cushion during COVID-19 reflected in robust renewals and collections. CRISIL Ratings will continue to monitor developments with respect to the ramp up in free cash flows over next 6- 12 months.
Going forward, SW will be opening larger centres with operational area of greater than 300,000 sq. ft and planned expansion of 30-40% space every year. Trend in occupancy level, rent free period advantage, and pre-signing clients for 35-40% of the new centres to support stable operating efficiency over the medium term, will be key monitorable.
SW’s financial profile has moderated on account of lower than expected cash generation leading to higher dependence on external debt for capacity addition. SW has availed additional term loan of ~Rs 63 crore in current fiscal resulting in Net Debt increasing to Rs 100 crore . Company plans to incur capital expenditure (capex) of Rs ~Rs 300-330 crore in fiscals 2022-2024, which is expected to be funded through internal accrual, long-term debt and cash surplus. Given increase in cash accruals in near term, overall debt is likely to remain ~ Rs 160-190 crore over the next two fiscals. As a result, DSCR which moderated in current fiscal and will improve gradually in near to medium term. CRISIL Ratings takes comfort on prudent liquidity policy of the company’s management in the form of cash and equivalent of ~Rs 125 crore, Escrow receivables and unencumbered liquidity of Rs 30-35 crore
The ratings reflect the strong market position in coworking space and cash flow stability from good client base, geographical diversity and improving occupancy levels. These strengths are partially offset by company’s modest debt protection metrics, exposure to cyclicality in the real estate sector, and volatility to interest rate and occupancy. |
Key Rating Drivers & Detailed Description Strengths: Strong market position in coworking space SW is the largest flexible workspace platform in India with market share of around 20% and operational workspace of ~ 6.2 million sq. ft in 10 cities across 35 centres with over 400 customers. SW offers flexibility with minimal capex and quick turnaround (typically under 45 days) to clients compared to 6-9 months for traditional office spaces. SW has the benefit of first-mover advantage, pan India reach, scale and to build and extend its market leadership. It has rapidly and profitably scaled up its operations over the last five fiscals while establishing strong client base with focus on mid to large enterprise clients. Strong and growing customer base, along with unique product offering, services and facilities are expected to support healthy growth over the medium term.
Smartworks platform aggregates unorganized supply at class A locations with short term extendable lease terms resulting in favorable terms and lower rentals. The company has eliminated asset liability mismatch on demand and supply side lease
Good client base, geographical diversity and improving occupancy levels aid cash flows also supported by healthy ticket size and renewal rates Operations are spread across 35 centres with over 400 clients, which provides healthy revenue diversity and minimises business risk. Moreover, it caters to mid-size and enterprise clients only with a lock-in period of at least two years for most clients, which ensures cash flow stability. SW enjoys over 87% renewal rates and increasing percentage of multi city deals. Company is focusing to reduce concentration risk with sectoral diversification and progressively reduced dependency from top clients over years with moderate revenue contribution from its top clients. This is further bolstered by geographical diversity with presence in 10 cities with largest revenue contribution of ~27% from one city.
With presence in multiple cities, established relationships with large clients, focus on pre-signing 35-40% of space and data-driven decision making helped SW to emerge as a demand aggregator. Several of its existing clients have increased their engagement levels with SW by renting out more seats in the same premises or across locations. This has helped to keep renewal rate high and healthy occupancy levels for matured centres, of ~ 80-90% of billable seats in current fiscal, despite the pandemic.
The rating also factors in the well-secured lease structure, with lock-in and lease period of 2.5-3 years and an in-built revenue escalation clause of 5-10% for most tenants.
Weakness: Modest debt protection metrics Financial profile has weakened on account of losses for two consecutive fiscals and usage of debt for expansion, as indicated by expected gearing and total outside liabilities to tangible networth ratio. Total debt (Gross) levels are likely to increase to over Rs 200 crore (with Net Debt of Rs 100 crore) in current fiscal from Rs 134 crore in fiscal 2021.
With expected improvement in operating performance in fiscal 2023, net cash accruals to sharply increase to over Rs 100 crore per annum. Company plans to incur capital expenditure (capex) of Rs ~Rs 300-330 crore in fiscals 2022-2024, which is expected to be funded through internal accrual, and cash surplus. As a result, total debt is expected to remain at Rs 160-190 crore levels over next two fiscals. Slower ramp up in net cash accruals resulting in higher dependence on external debt and delayed recovery in debt metrics will remain key sensitivity factor.
CRISIL Ratings takes comfort on prudent liquidity policy of the management in the form of cash and equivalent of ~Rs 125 crore, excess escrow receivables and unencumbered liquidity of Rs 30-35 crore.
Susceptibility to volatility in interest rates and occupancy Cash inflow remains susceptible to volatility in occupancy levels or realisations (derived from rentals per sq. ft), while cash outflow is relatively fixed, except for fluctuations in interest rates (as it is floating). However, Company is able to pass on negative economic impact from low occupancy towards discounts from landlords and operational cost savings (like Electricity, Housekeeping etc). The economic impact of the pandemic poses a downside risk to occupancy levels, given the material impact on market rentals and overall demand. The occupancy level for new centres has started ramping up is last few months post-handover in H1FY2022 whereas, matured centres struggled in H1FY22 and is seeing a sharp improvement in recent months. Although the cash flow will be able to absorb the impact of fluctuations in interest rates and occupancy partially, these remain rating sensitivity factors.
Exposure to cyclicality in the real estate sector Rental collection (key source of revenue) is susceptible to economic downturns, which constrain the tenant's business risk profile and, therefore, occupancy and rental rates. Emergence of competing facilities in the vicinity could also cannibalise tenants or rental rates. SW is developing larger centres of greater than 300,000 sq ft, and hence, also exposed to project implementation or stabilisation risk in the early stages. The Company has opened its largest centre, Malpani Agile at Pune, spread over an area of ~ 690,000 sq. ft with healthy profitability. However, cash flow from the operational portfolio should help in servicing the existing debt. |
Liquidity: Adequate The debt service coverage ratio is expected to be adequate over the medium term. Liquidity is supported by a debt service reserve account (DSRA) covering one month of debt obligation. The company also has adequate cash balance (including encumbered) of over Rs 120 crore as on December 31, 2021. SW has escrow mechanism in place with HDFC bank, wherein rent from few reputed and large customers are deposited. This provides additional comfort to the lender as debt repayment is backed by stable cash flow. |
Outlook - Stable CRISIL Ratings believes the credit profile of SW will benefit, over the medium term, from steady cash flow from lease rentals and comfortable financial risk profile. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 2015, SW was founded by Mr Neetish Sarda (founder) and Mr Harsh Binani (co-founder). SW is a pan India, flexible, fully serviced workspace platform catering to the needs of large corporates and high-growth start-ups. Within a span of four years, SW has grown to operate space spread over 6.2 mn sqft in 10 cities across 35 centres with over 400 customers.
Amongst other major shareholders is Space Solutions PTE Ltd, an entity of Keppel Land.
SW reported Rs 244 crore in revenue and net loss of Rs 41 crore for April to December 2021 period. |
Key Financial Indicators
*IND-AS numbers which includes certain notional expenses on account of first-time IndAS adoption |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Proposed Long Term Bank Loan Facility | 61.83 | Not Applicable | CRISIL BBB+/Stable |
| Term Loan | 88.17 | HDFC Bank Limited | CRISIL BBB+/Stable |
This Annexure has been updated on 14-Mar-2023 in line with the lender-wise facility details as on 23-Feb-2023 received from the rated entity.
Criteria Details
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