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Fitch Affirms Indiabulls Real Estate at 'B+'; Outlook Stable
October 11, 2016 / 7:06 AM / a year ago

Fitch Affirms Indiabulls Real Estate at 'B+'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE, October 11 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) of India-based property developer, Indiabulls Real Estate Limited (IBREL), and the rating on the USD175m 10.25% senior notes due 2019 issued by Jersey-based Century Limited at 'B+'. The recovery rating on the senior notes has been affirmed at 'RR4'. The Outlook on the IDR is Stable. The affirmation of the ratings assigned to IBREL, India's third-largest property developer by market capitalisation, reflect the rising trend in its contracted sales and cash collections, improving EBITDA margin and the higher coverage of contracted sales/gross debt, all of which Fitch expects to be sustained in the medium term. IBREL's land bank of 2,588 acres at the Nashik Special Economic Zone and another 1,010 acres at Gurgaon, Mumbai and Chennai, are adequate to supports six to seven years of development. This is counterbalanced by IBREL's small size in relation to global home building peers; the rise in net leverage after the developer increased its stake in the Singapore Exchange (SGX)-listed Indiabulls Property Investment Trust (IPIT); and the low earnings from its London property. KEY RATING DRIVERS Improving Property Development Business: IBREL's property development business improved significantly in the financial year ending-March 2016 (FY16). Contracted sales grew by 43% to INR29bn (USD437m) in FY16 and cash collections more than doubled to INR20bn (FY15: INR9bn). Fitch expects this trend to be maintained in the medium-term, underpinned by India's improving macroeconomic fundamentals. The developer's ongoing project portfolio comprised twelve projects (excluding IPIT's residential projects) located in seven cities at end-June 2016, with a gross development value (GDV) of INR262bn. Blu Estate & Club in Mumbai remains the developer's largest project, accounting for over 34% of GDV at end-June 2016. Leverage Rises with IPIT Stake: IBREL increased its stake in the loss-making IPIT to 54.95% in 1QFY17, from 47.51%, following IPIT's free-float declining to 3%; below the Monetary Authority of Singapore's (MAS) stipulated floor of 10%. Trading of IPIT shares on the SGX has been suspended. IPIT's portfolio comprises two prime office developments in Mumbai - One Indiabulls Centre and Indiabulls Finance Centre - and three luxury residential developments - Indiabulls Sky, whose construction has been completed, and the ongoing Indiabulls Sky Forest and Indiabulls Sky Suites, with a GDV of INR77bn. IBREL has fully consolidated IPIT's accounts, increasing its consolidated debt by SGD597m (INR29bn). The developer's net leverage, measured by net adjusted-debt/adjusted inventory, increased to nearly 50% in 1QFY17, after moderating to 44% in FY16 (FY15: 53%). IPIT, which is constituted as a Singapore-listed trust, is permitted under MAS guidelines to declare dividends only when it starts generating positive net income. IBREL is committed to completing IPIT's residential development projects and managing its office properties. However, the developer is not likely to earn dividends until IPIT's residential projects sustain the current momentum in sales and generate positive net income. Stable Financial Metrics: IBREL's financial performance improved in FY16, with its operating EBITDA margin increasing to 28% (FY15: 23%), a moderation in net leverage and the ratio of contracted sales/gross debt improving to 0.5x (FY15: 0.3x). Fitch expects the developer to sustain its increasing trend in contracted sales, with the ratio of contracted sales/gross debt likely to trend upwards to 1.0x by end-FY20. IBREL's net leverage, which is close to the 50% level where Fitch may consider a rating downgrade, is also likely to be contained below this level. Low Earnings from London Property: The book value of IBREL's property at 22 Mayfair Street, London, is INR18.1bn (10.55% of total assets), while its rental income accounts for just 2% of consolidated revenue. The rental income meets only some of the interest on the debt raised (including the US dollar-denominated notes) to fund the property's acquisition in FY15. The developer has secured a planning permit from Westminster City Council for mixed-use property and the current leases expire in March 2017. Redevelopment, which may take 24 to 28 months to complete, is scheduled to begin soon thereafter. The income potential of this property may be ascertained only from FY20. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for IBREL include: - Revenue to grow steadily to approximately INR70bn by FY20, and - Maintaining an EBITDAR margin of around 35% RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - EBITDA margin sustained below 25% - Net debt/adjusted-inventory sustained above 60% - Contracted sales/gross debt sustained below 0.6x (FY16: 0.48x) Positive: Future developments that may, individually or collectively, lead to positive rating action include: - successful development of London property - project diversification, with no single project accounting for more than 10% of total sales LIQUIDITY Comfortable Liquidity: IBREL's liquidity has improved, with cash almost doubling to INR12.4bn at end-FY16 (FY15: INR6.7bn). The developer's listed mutual fund investments, which have a book value of INR1.6bn and market value of INR1.7bn, provide some financial flexibility. The outstanding cash balance is adequate to meet the debt maturities in FY17. Fitch expects IBREL's liquidity to remain comfortable in the near to medium term. Long-Term Secured Debt: Most of IBREL's debts are long term, in line with the company's plan to fund all its ongoing projects using long-term funds to avoid liquidity issues during construction. In addition, most of its debt are secured and are taken out by the special purpose vehicles developing the projects. Summary of Financial Statement Adjustments Fitch has consolidated IPIT's total debt based on our assessment of strong linkages between IBREL and IPIT, most notably that IBREL guarantee's IPIT's debt. Given the significant structural subordination with respect to IPIT's debt, Fitch has not adjusted EBITDA or FFO in respect of IPIT. Contact: Primary Analyst Nandini Vijayaraghavan, CFA Director +65 6796 7216 Fitch Ratings Singapore Pte Ltd. 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Hasira De Silva, CFA Director +65 6796 7240 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012920 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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