By Karun Tiwari

India Ratings and Research (Ind-Ra) has assigned Arvind SmartSpaces Limited (ASSL) a Long Term Issuer Rating of ‘IND A-’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

Proposed long-term loan*#

-

-

-

INR3,000

IND A-/Stable

Assigned

Short-term loan

-

-

-

INR1,000

IND A1

Affirmed


*According to in the principal sanction, these facilities will largely be replacing the existing funding lines to finance the construction and development costs of ASSL’s residential/commercial projects while keeping some borrowing cushion for the forthcoming projects.

#Unallocated

Analytical Approach: Ind-Ra continues to take a consolidated view of ASSL and its subsidiaries/joint ventures while arriving at the ratings due to the strong operational and strategic ties among them.

KEY RATING DRIVERS

Comfortable Credit Metrics: ASSL’s net leverage (net debt/adjusted inventory) was 0.40x in FY20 (FY19: 0.48x) and sales efficiency (pre-sales/net debt) was unchanged year-on-year at 1.6x. The metrics have been stable over FY16-FY20, aided by strong presales. Ind-Ra expects ASSL to maintain the credit metrics at similar levels over the medium term because of the financial discipline the company has exhibited so far through limited reliance on debt to fund its projects, although presales are likely to be pressured in the near term due to the COVID-19-led economic slowdown and its consequent impact on household income that might impact housing demand. Nonetheless Ind-Ra expects to see a recovery 3QFY21 onwards. A higher-than-expected fall in presales or a longer-than-expected recovery in the housing demand will remain key credit monitorables.

Moderate Segment as well as Geographical Diversification: ASSL's historical sales have been fairly diversified across segments with mid-segment projects, premium/luxury projects, commercial sales projects and affordable projects constituting 55.4%, 36.3%, 4.1% and 4.2% of the presales, respectively. The unsold inventory remains fairly diversified as well with mid-segment projects, premium/luxury projects, commercial sales projects and affordable projects constituting 57%, 22.1%, 5.6% and 15.3% of the presales, respectively. ASSL has moderate geographical diversification with a fairly even presence in Ahmedabad and Bangalore (by sale value).

Linkages with Strong Promoter: ASSL is part of Lalbhai Group (flagship companies – Arvind Limited and Arvind Fashions Limited) and uses the same brand name as being used by the group for its flagship company. The promoters also infused INR998.7 million in ASSL during FY17-FY18 by subscribing to preference share warrants, which were subsequently converted into common equity. Also, the companies have common director(s) on their boards. 

Liquidity Indicator - Adequate: ASSL had cash and cash equivalents of INR55 million at FYE20 (FYE19: INR99 million), along with an undrawn line of credit facilities as well as construction finance debt worth INR913 million. At end-March 2020, ASSL had sold units worth INR6,363.7 million of the ongoing projects, where it received INR3,523 million. This provides collection visibility of INR2,840.7 billion over FY21-FY23. In addition, ASSL has INR1,337 million worth of completed inventory. The entity had repayments of INR1,446 million due in FY21; it has availed the Reserve Bank of India-prescribed moratorium for two of these facilities amounting to INR1,346 million over June-August 2020. The entity has also availed interest moratorium across select debt facilities over April-August 2020. The committed cash flow from the already sold units, along with completed unsold inventory, available cash and cash equivalents and the undrawn credit lines are likely to be sufficient to fund ASSL’s near-to-medium-term funding requirements of the ongoing and launched projects (INR7,263 million at end-March 2020) and debt maturities. 

The rated proposed facilities will be utilised towards funding the construction and development costs of residential/commercial projects of ASSL, and will eventually replace the existing funding facility. Also, the management plans to keep some borrowing cushion in case any new project opportunities arise. Ind-Ra does not expect ASSL’s pre-sales to net debt to deteriorate, and stay below 1x on a sustained basis in the medium term.

Small Scale of Operations with Moderate Delivery Track Record: ASSL has completed seven projects since its inception in 2009 with a total developed area of 4.24 million square feet (sf) and is executing nine projects with a total developable area of 14.71 million sf. Of this, it sold 30.7% at end-March 2020. Of the sold value, the company has, so far, collected 55.3% while incurring costs of 41.1% of the estimated project cost. 

ASSL recorded pre-sales of INR2,859 million in FY20 (FY19: INR2,767 million), aided by the launch of three new projects, with collections of INR2,368 million (INR2,130 million). The volatility in the sales and collection numbers is due to ASSL’s small scale of operations, and varied timing of new projects launches. It's completed inventory constitutes 17% of the total inventory and is valued at INR1,337 million. 

High Project Concentration: SPPL’s top three projects contributed 63.3% to the overall pre-sales for FY20 (FY19: 68.5%), with Forreste (Township Project) contributing around 37.5% to these pre-sales. The unsold inventory across these three projects constitutes around 56.9% of the overall inventory market value, although 26.8% of this value is contributed by ASSL’s share in Beyond Five Project, which has not seen any progress since ASSL’s last rating review. ASSL’s affordable housing project Aavishkaar constitutes 15.3% of the unsold inventory, which contributed only INR109.8 million presales in FY20 (3.1% of the overall project inventory).

Moderate Standalone Financial Profile: ASSL reported revenue of INR1,513 million in FY20 (FY19: INR2,338 million), and EBITDA of INR345 million (INR629 million). The company had other income of INR106 million in FY20 (FY19: INR162 million) while its finance cost was INR182 million (INR201 million).

Cyclical Industry; Exposed to Regulations: Players in the real estate industry have volatile cash flows due to high cyclicality which, during a downturn, impacts demand severely. The sector is exposed to a number of regulatory requirements including local bodies’ clearances/master plans that are subject to frequent changes, and thus lead to confusion, non-compliance and the delays in the execution of projects.


RATING SENSITIVITIES

Negative: Higher-than-expected project costs or lower-than-expected sales resulting in an increased reliance on debt, leading to pre-sales to net debt declining below 1x, all on a sustained basis, could result in a negative rating action. 

Positive: Successful project and geographical diversification, leading to an increase in the scale of operations and higher-than-expected sales while maintaining the credit metrics, all on a sustained basis, could result in a positive rating action. 


COMPANY PROFILE

Headquartered in Ahmedabad, ASSL is the real estate arm of Lalbhai group and was set up in December 2008. ASSL is primarily focused on the development of residential projects.

Its residential projects comprising villas, apartments and plots are targeted towards middle income and high-income customers. The company’s existing integrated townships comprise executive golf course with villas, apartments, retail, commercial and recreational areas. It also undertakes commercial and industrial projects on a selective basis.

FINANCIAL SUMMARY (Consolidated)

Particulars

FY20

FY19

Pre-sales (INR million)

2,859

2,767

Revenue (INR million)

2,995

2,621

EBITDA (INR million)

888

680

EBITDA margin (%)

29.6

25.9

Interest coverage (x)

3.6

3.2

Gross debt (INR million)

2,182

1,710

Cash & equivalents (INR million)

55

99

Net debt (INR million)

2,127

1,611

Adjusted inventory (INR million)

4,801

3,627

Pre-sales/gross debt (x)

1.4

1.6

Pre-sales/net debt (x)

1.4

1.7

Pre-sales/adjusted inventory (x)

64

76

Gross debt/ adjusted inventory (%)

45

47

Net debt/adjusted inventory (%)

44

44

Source: ASSL, Ind-Ra

*Adjusted inventory is the sum of inventory, trade receivables, unbilled revenue, advances paid to vendor and investment properties less customer advances



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating

Rating Type

Rated Limits (million)

Rating

8 July 2020

10 April 2019

Issuer Rating

Long-term

-

IND A-/Stable

 

 

Short-term loan

Short-term

INR1,000.0

IND A1

IND A1

IND A1

Proposed long-term loan*

Long-term

INR3,000.0

IND A-/Stable

 

 



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Analyst Names

  • Primary Analyst

    Karun Tiwari

    Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurgaon Haryana 122002
    0124 6687272

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121