Detailed Rationale

CRISIL Ratings has revised its outlook on the Non-Convertible Debentures (NCDs) of VR Dakshin Private Limited (VR Dakshin; formerly known as Sugam Vanijya Holdings Private Limited) to ‘Stable’ from ‘Negative’ and reaffirmed the rating at ‘CRISIL BBB’.

 

The reaffirmation of ratings with revision in outlook to ‘Stable’ from ‘Negative’ reflects recovery in consumption for both malls to over 100% for Chennai mall (Contributing 75-80% of cashflows) and 60-80% for Bangalore mall (contributing 20-25% of cash flows) of pre-covid levels despite lower-than-expected occupancy of 86% for Chennai and 45% for Bangalore. The occupancy levels though are expected to improve with a large anchor tenant expected to take up more than 25% space in Bangalore mall and for Chennai mall occupancy levels expected to inch-up to 90% gradually. Moreover, the rental rates in Chennai mall have improved substantially to Rs 135 psf from Rs 105 psf pre-pandemic. The company has sufficient liquidity in the form of DSRA- equivalent to 3 month of debt servicing (Rs 29 cr) and additional cushion of Rs.27 cr including fixed deposit of Rs 5 cr, expected promoter infusion of Rs.12-13 cr expected in FY23 and unutilized CC limits of Rs.10 cr which is equivalent to 2.5-3.0 months of debt servicing.

 

The rating continues to reflect increased income from rentals aided by reputed clientele, adequate debt protection metrics supported by flexible terms of the rated NCDs and strong operational and management support from the sponsors. These strengths are partially offset by reduction in occupancy levels and susceptibility to competition leading to fluctuations in occupancy levels and cyclicality in the hospitality industry.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of VR Dakshin as the company has no financial linkages with other group companies.

 

CRISIL Ratings has treated the NCDs and fully compulsorily convertible debentures (FCCDs) as debt as they carry interest and are to be redeemed by 2035. However, these instruments are subordinated to external debt, have no fixed redemption schedule, and redemption/interest payment can be made only from surplus cash flow available after servicing external loans.

Key Rating Drivers & Detailed Description

Strengths:

Increased income from rentals aided by reputed clientele

The Chennai mall with total leasable retail area of 9.21 lakh sq ft became operational in June 2018 and had an occupancy of 86% as of April 2022. Though occupancy has reduced slightly from 93% in previous year to 86%, income from rentals of Chennai mall (contributing 75-80% of cashflows) has increased on account of increase in average rental rates to Rs.135/sqft from Rs.105/sqft in pre-covid year of 2020. No anchor tenants have left the space in Chennai mall.

 

The Bangalore mall with total leasable area of 4.88 lakh sqft has seen reduction in occupancy level to 45% from 73% primarily to accommodate large anchor tenant occupying entire ground floor area with ~1.27 lakhs ft area (~27% of total area). Average rental rates have increased to Rs.86 /sqft from Rs.64 /sqft in pre-covid year of 2020. 

 

Tenants in both the malls include established brands which have signed lease contracts of 3-15 years with built in escalation clauses of up to 15% every three years along with revenue share agreements, which provide healthy revenue visibility.

 

Adequate Debt protection metrics supported by flexible terms of the rated NCDs

Steady cash flow from rentals and the ballooning repayment structure of the external debt will result in a moderate debt service coverage ratio (DSCR) over the medium term. Furthermore, the terms of the NCDs are flexible with no fixed interest payment or redemption obligation. Interest will be accumulated and paid based on the surplus cash flow available after meeting construction and other operating expenses as well as servicing external bank debt. Only excess funds post NCD interest payment will be used for redemption.

 

Strong operational and management support from the sponsor

The company benefits from the strong parentage of the Virtuous Retail South Asia (VRSA). VRSA is a joint venture between Xander group and APG Asset Management. The sponsor group's experience in asset management and sizeable portfolio of properties in India have resulted in healthy occupancy and steady improvement in rentals across assets. The company benefits from the management's proactive approach towards asset maintenance to ensure tenant longevity and quality. Additionally, the sponsor is expected to infuse funds to the tune of Rs.12-13 crore in June-2022 itself in the form of debentures.

 

Weaknesses:

Reduction of occupancy level in both the malls and susceptibility to competition leading to fluctuations in occupancy levels

There has been reduction in occupancy level from 93% to 86% for Chennai mall and from 73% to 45% for Bangalore mall. Vacancy build up has been seen in Chennai Mall with few tenants vacating 89,165 sq ft of space (~9.7% of area) and 3 new tenants with 21,302 sq ft of space (~2.3% of area). Chennai mall was previously at a healthy occupancy of over 90%, however has reduced slightly to 86% now. Though no anchor tenant has vacated the space. However, the avg. rental in Chennai Mall has increased now to Rs 135 psf from Rs 105 psf in 2020, which will lead to improvement in rental income. Further, discussions are going on letting out vacant mall space to multinational brands/Jewellery brand/Food court. Accordingly, occupancy is expected to reach to 90% by the end of FY-23.

 

The company had asked its tenants to vacate the space ~ 1.28 lac sq ft of space (~27% of area) primarily to accommodate large anchor tenant which led to increase in vacancy from 73% to 45%. However, occupancy in Bangalore mall is expected to increase to 72% with large anchor tenant occupying ~27% area from June-2022 (lease expected to be signed in June-22 itself). Average rental rates have increased to Rs.86 /sqft from Rs.64 /sqft in pre-covid year of 2020.  Additionally, company has purposely not leased out the balance space to other tenants as with large anchor tenant coming in, footfalls are expected to improve, and this will give the company opportunity to lease out the remaining space to new tenants at better rental rates.

 

Rental collection, the main source of revenue, is volatile and susceptible to economic downturns, which would impact tenants’ business risk profiles, and hence occupancy and rental rates. Any termination of leases and/or delay in signing of new leases, especially in light of the pandemic, will impact the cash flow. Emergence of any competing mall/office space, while unlikely, could divert footfall. The ability of cash flow to absorb the impact of fluctuations in occupancy remains a rating sensitivity factor.

 

Susceptibility to intense competition and cyclicality in the hospitality industry

The Indian hospitality industry is witnessing intense competition due to the growing presence of foreign players and expansion by domestic players. Moreover, the industry is vulnerable to changes in domestic and global economies such as subdued demand on account of the pandemic which has resulted in severe strain on occupancy.

Liquidity: Adequate

Average DSCR is expected above 1.2 times over the tenure of the debt. The company has sufficient liquidity in the form of DSRA- equivalent to 3 month of debt servicing (Rs 29 cr) and additional cushion of Rs.27 cr including fixed deposit of Rs 5 cr, expected promoter infusion of Rs.12-13 cr expected in FY23 and unutilized CC limits of Rs.10 cr which is equivalent to 2.5-3.0 months of debt servicing. The NCD structure allows interest to be accumulated annually and paid depending on the availability of cash. Furthermore, absence of any fixed redemption schedule for the NCDs adds flexibility to cash flow management.

Outlook: Stable

CRISIL Ratings believes the credit risk profile of VR Dakshin will remain stable over the medium term on account of improved footfall and consumption in malls leading to improved rental income, expected improvement in occupancy and escalations in rental rates.

Rating Sensitivity factors

Upward factors:

• Stabilisation of operations, leading to earnings before interest, taxes, depreciation and amortisation (EBITDA) of Rs 130 crore or above
• Recovery in consumption to pre-covid levels with no substantial increase in vacancy or reduction in rental rates
• Significant reduction in debt level through prepayment

 

Downward factors:

• Vacancy remaining over 30% for Bangalore mall beyond fiscal 2023 or over 15% for Chennai mall or reduction in rental rates, thereby weakening the debt protection metrics
• More than expected additional debt

About the Company

Incorporated in 1987, VR Dakshin Private Limited (formerly known as Sugam Vanijya Holdings Private Limited) acquired land parcels in Bengaluru and Chennai for construction of mixed-use development consisting of malls, commercial offices, and a hotel. The company is owned and funded by APG Asset Management and the Xander group through a joint venture, Virtuous Retail South Asia Pte Ltd.

 

The mall in Bengaluru is in the Dyvasandra Industrial Area and has leasable space of 4.88 lakh sq ft in retail space and a 54-room hotel. The Chennai mall is in Anna Nagar and has leasable space of 9.21 lakh sq ft in retail space and a 20-room hotel. Both malls have commenced operations.

Key Financial Indicators

Particulars	Unit	2022*	2021	2020
Operating revenue	Rs crore	162	113	248
Profit after tax (PAT)	Rs crore	(115)	(121)	(85)
PAT margin	%	NA	NA	NA
Adjusted debt/adjusted networth	Times	NA	NA	NA
Interest coverage	Times	0.75	0.39	0.88

*Based on provisional financials

Any other information: Not applicable