Moody's Investors Service has assigned a (P)B1 corporate family rating (CFR) to Indiabulls Real Estate (Indiabulls), a large Indian real estate developer. At the same time, Moody's has also assigned a provisional (P)B1 rating to the proposed USD notes to be issued by Century, a wholly owned subsidiary of Indiabulls.
The notes will be guaranteed by Indiabulls and all of its material Indian subsidiaries, that is those generating more than 5% of the group's consolidated EBITDA. The outlook on the ratings is stable. This is the first time Moody's has assigned ratings to Indiabulls. Moody's will remove the provisional status on the ratings upon successful completion of the bond issue and upon review of final documentation.
Indiabulls' rating is supported by the good visibility of its cash flows, as provided by contracted sales, and its large area under construction, while an improving economic environment in India will support future sales. The rating is also supported by the company's strong execution capability, strategically located land bank- which is adequate for development over the next 5 years- and strong margins.
However, the rating is constrained by a relatively short track record of delivery, high financial leverage, and exposure to the cyclical and fragmented character of the real estate sector in India.
''The rating further incorporates our expectation that liquidity will improve following the proposed bond issuance and that its credit metrics will strengthen over the next several years as key projects reach revenue-recognition thresholds,'' says Vikas Halan, a Moody's vice president and senior credit officer.
The company expects to generate contracted sales of 15.8 million square feet (msf) (Rs 146 billion) over the next 3 years (between April 2014 and March 2017) and compared with 8.5 msf (Rs 60 billion) over the last 3 years.
''However, even if we assume that it sells only 10% of its area under construction of 37.9 msf (including 8.5 msf to be launched over the next 6 months) - which would be a lower rate than that for even the last 2 years-it can still sell over 3.5 msf each year,'' says Halan.
''Therefore, we expect it to achieve 70-75% of its sales volume and value targets over the next 3 years,'' adds Halan.
Moody's says that Indiabulls' track record is relatively short. It is currently constructing 12 residential projects totaling about 17,514 residential units, but has only completed and delivered three projects/phases totaling 727 units. At the same time, it has three other projects on the verge of delivery.
In addition to the residential projects, Indiabulls' associate Indiabulls Properties Investment Trust (IPIT), a business trust listed on the Singapore Exchange in which Indiabulls has a 47% shareholding, has completed two commercial projects (Indiabulls Finance Centre, Mumbai; and One Indiabulls Centre, Mumbai) with a Saleable Area of 3.21 msf and is constructing three residential projects in Mumbai - Indiabulls Sky, Indiabulls Sky Forests, and Indiabulls Sky Suites. Indiabulls manage the operations and maintenance of the two commercial properties completed by IPIT.
In July 2014, the company acquired its first property in London, increasing portfolio diversification, but also exposing it to the risk of operating in a new market.
''Following the proposed bond issuance, EBITDA/Interest will likely fall below 2.5x in FY15 from 3.1x in FY14, but will improve to above 3.0x in FY16. Revenue to debt will stand around 57% in FY15, but surpass 70% in FY16,'' says Halan.
Following the proposed bond issuance, secured debt to total assets will measure 21%-22%. Such a level of secured debt indicates material subordination risk for bond holders.
''We rate the bonds at par with the corporate family rating as the subordination risk is mitigated by the fact that the claim of bond holders on the London asset is not subordinated to the claim of Indian lenders. And we expect that any recovery for the bond holders from the London asset alone would be sufficient to avoid notching down from the (P)B1 corporate family rating,'' says Halan.
The stable outlook reflects our expectation that the company will substantially achieve its sales targets, execute its construction plans without material delays, and will stay disciplined in acquisitions for its land bank in India over at the next 2-3 years.
An upgrade over the medium term is unlikely as we expect the company's credit metrics to remain weakly positioned for its rating over this period. Upward rating pressure could emerge beyond FY17, if it establishes a track record of (1) achieving planned sales and increasing revenue recognition; (2) maintaining a reasonable cash balance above 150% of debt maturing for the next 12 months; and (3) maintaining strong financial discipline, such that revenue/debt is above 100% and EBTIDA/interest is above 3x on a sustained basis.
Downward rating pressure could emerge if (1) the company's liquidity and operating cash flow generation deteriorate because of weak contracted sales or aggressive land acquisitions; (2) there is a decline in prices for its products, slower-than-expected revenue recognition, or a fall in profit margins, negatively affecting interest coverage and/or financial flexibility; or (3) the company engages in material debt-funded acquisitions.
Shares of the company gained Rs 1.8, or 2.71%, to trade at Rs 68.20. The total volume of shares traded was 647,065 at the BSE (11.48 a.m., Thursday).
