June 9, 2017 / 6:43 AM / a year ago

Fitch Affirms Lodha Developers at 'B'; Outlook Negative

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, June 09 (Fitch) Fitch Ratings has affirmed India-based homebuilder Lodha Developers Private Limited's (Lodha) Long-Term Issuer Default Rating (IDR) at 'B', and maintained the Negative Outlook. The agency has also affirmed Lodha's outstanding USD200 million senior unsecured notes due in 2020 at 'B' and Recovery Rating of 'RR4'. The outstanding US dollar notes are issued by Lodha's wholly owned subsidiary Lodha Developers International Limited and guaranteed by Lodha and certain subsidiaries. The notes are rated at the same level as Lodha's IDR as they represent the company's unconditional, unsecured and unsubordinated obligations. The affirmation of Lodha's IDR reflects the company's healthy presales and cash collections in the fiscal year to 31 March 2017 (FY17) in spite of weak domestic demand for real estate, and Fitch estimates that the company is likely to continue to maintain leverage (as measured by net adjusted debt/adjusted inventory) below 80% over the next two years. The Negative Outlook continues to reflect the near-term risks to the company's credit profile, in particular refinancing risk associated with sizeable maturities, including financing for its London project, over the next 12 months. Although Lodha has access to domestic funding sources, the company has not yet communicated a detailed refinancing plan for its upcoming maturities. This risk is coinciding with challenging operating conditions and new regulations governing Indian homebuilders that limit their ability to move cash across projects as freely as before, all of which could complicate proactive refinancing initiatives. A revision of the Outlook to Stable would be contingent upon an improvement in Lodha's liquidity and a lengthening of its debt maturity profile. KEY RATING DRIVERS Healthy Presales, Cash Collections: Lodha's presales improved to INR69.2 billion in FY17, from INR64.3 billion in FY16, amid weaker domestic demand for property, especially against the backdrop of India's currency demonetisation on November 8 last year. Surprisingly, demand for Lodha's projects were somewhat less impacted in the December quarter compared with most of the other large Indian homebuilders that Fitch tracks. Lodha's presales bounced back strongly in February and March this year, which we attribute to the advanced stage of completion of many of its large projects, as well as the view that the adverse effects of demonetisation on large homebuilders appears to have passed. Strong sales in FY17 were also supported by the company's Palava project, which benefits from the government's push on affordable housing including the announcement of its infrastructure status, and tax and interest-cost incentives to buyers. Cash collections improved significantly to INR76.2 billion, from INR60.7 billion over the same period, as more of Lodha's projects are being completed. We expect the company's presales to remain broadly flat around INR70 billion in FY18 after factoring in its project completion status, which should enable Lodha to sell its inventory faster, and our view that demand for Indian property is likely to remain muted in the near term. Regulatory Risks, UK Elections: Fitch believes that the implementation of India's Real Estate Regulation Act of 2016 (RERA), which came into full effect on 1 May 2017, would restrict property developers' ability to move cash freely out of construction projects. Meanwhile, its London projects could face weaker demand from any increased political uncertainties stemming from the UK elections, as high-end property is more sensitive to investor confidence than mass-market housing. London Project Risks Evolving: Lodha needs to convert the short-term project debt of around GBP225 million (INR20 billion) at its prime residential Mayfair development in September 2017, and secure construction financing to fund an estimated balance cost of around GBP197 million. Its Mayfair development was formally launched in May 2017 and to date GBP80 million has been sold. Lodha expects to sell this project over a prolonged period in order to potentially benefit from higher profit margins. Demand for prime property in Mayfair has been less affected than other prime areas in Central London since the Brexit vote last year, and this may support Lodha's ability to secure construction financing for this project. Lodha was able to secure 30-month construction financing of GBP290 million for its smaller residential project in London earlier this year, with a bullet repayment of principal. Fitch believes this would reduce the need for Lodha to continue to fund its London projects using cash flows from its India business. The company indicates that to date it has lent around INR17 billion to its London projects in order to meet cost shortfalls. Lodha launched sales of this project, which is the smaller of the two, in April 2016, and has sold around GBP120 million to date. DERIVATION SUMMARY Lodha's 'B'/Negative rating compares well against peers Indiabulls Real Estate Limited (IBREL, B+/Stable) and Xinyuan Real Estate Co. Ltd. (B/Stable). Lodha has a stronger business profile compared to IBREL with nearly twice the operating scale, and a better track record of sales and execution over the last three to four years. However Lodha's leverage is considerably higher than IBREL, which drives its lower rating. Xinyuan is a small regional developer in China that has weaker business risk compared to Lodha. A key weakness for Xinyuan is its need to constantly replenish its land bank amid rising land costs. However Xinyuan's substantially lower leverage compared to Lodha balances out these risks. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Presales of around INR70 billion and INR90 billion in FY18 and FY19 - Cash collections of around INR75 billion-80 billion annually in FY18-FY19 - Construction cost of around INR4.5 billion-5 billion in FY18 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Fitch may consider revising the Outlook to Stable if the company is able to address its near-term domestic debt maturities, and secure sustained financing for its London project. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Limited progress towards addressing the significant contractual maturities of domestic debt falling due in FY18 - Leverage (net adjusted debt/adjusted inventory) sustained above 80%, or annual cash collections/gross debt sustained below 0.5x (FY17 Fitch estimate: 0.4x-0.5x) - Inability to secure sustained financing for its London project - Increasingly onerous terms from lenders on incremental financing raised LIQUIDITY Refinancing Risk: As of 31 March 2017, Lodha had more than INR16 billion of approved but undrawn credit facilities and estimated readily available cash of around INR3 billion, compared to around INR37 billion of contractual debt maturities in FY18. Lodha indicates that it has already secured refinancing for around INR7 billion of these maturities, and indicates that it is currently in discussions with lenders to refinance around half of the balance INR30 billion. Lodha says that it has a further 3,000 acres of unencumbered land in its Palava project, which is valued at around INR150 billion (over USD2 billion) based on land value, as well as an estimated INR40 billion of completed inventory by end-FY18, which the company can pledge to non-bank financial institutions in order to secure contingent liquidity if required. We expect Lodha to continue to generate negative FCF in FY18, for which we believe the company will be able to secure financing given its business risk profile as one of India's leading homebuilders. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Snehdeep Bohra Associate Director +91 22 4000 1732 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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