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Covid-19 impact: Mall revenues set to halve this fiscal, says CRISIL

Much of the impact on mall revenue is because multiplexes, food courts, restaurants and gaming zones have not yet opened in many locations as per government orders

Revenue of mall operators is set to halve this fiscal because of the Covid-19 pandemic-driven lockdowns, CRISIL’s analysis of the top 10 malls it rates indicated.

CRISIL expects vacancies to inch up to over 10 percent over the next 12-18 months compared with 4 percent as of March 2020.

These malls have total rated debt of around Rs 4,200 crore and cover 7.5 million square feet (msf), with pan-India presence. These have strong sponsors and high debt service coverage ratio (DSCR) of around 1.5 times on average.

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Hence, notwithstanding pressure on revenues, impact on the credit quality of CRISIL rated malls is expected to be limited in the near term.

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Much of the impact on mall revenue is because multiplexes, food courts, restaurants and gaming zones have not yet opened in many locations as per government orders. These businesses, which contribute around 22 percent to the total revenues, have borne the brunt of the impact on operations due to social distancing and are also expected to take the longest to recover.

For the other categories, such as apparels, cosmetics, electronics, and bookstores, which contribute around 75 percent of mall revenues, consumption is still low at 30-35 percent of previous years’ numbers in the first month of operations post reopening.

With revenues dented, and recovery expected to be slow, these businesses have started renegotiating their contracts with mall owners – for waivers in lease payments, or discounts over the period of lockdown and in the medium term – thereby impacting mall revenues.

“We expect a 50-100% lease waiver for the period of lockdown, followed by a 30-50% concession in rentals in the current quarter and the next, which will reduce to 0-20% in the quarter to March. A gradual build-up in revenue can be expected from the current quarter, though for the fiscal overall, a revenue loss of 45-50% appears to be in order. The loss would get bigger if the lockdowns are extended or are re-imposed,” said Sachin Gupta, Senior Director – Crisil Ratings.

Malls also face the risk of cannibalisation of revenue by online platforms. Increasingly, as customers get accustomed to online spending during the lockdown, there is a risk of some not returning to malls due to change in behaviour patterns. This could lead to higher vacancies and pressure on rentals.

Mall owners may need to give deep concessions to keep their tenant profile intact and may even need to shift to a 100 percent revenue sharing model. The current revenue stream includes a minimum guaranteed rental along with a portion from revenue share. Revenue share contributed around 14 percent to revenue in fiscal 2020, while the bulk was from minimum guaranteed rentals.

Despite the projected steep drop in revenue and its consequent impact on profitability, CRISIL believes its rated mall portfolio would be able to withstand this stress in the near term due to the availability of three-month liquidity (in the form of Debt Service Reserve Account) for most assets and ability of sponsors to bring in liquidity to ease short term cash mismatches.

Furthermore, the RBI moratorium has also eased the pressure on cashflows for debt servicing in this fiscal. Revenues returning to at least 80 percent of the pre-pandemic levels by next fiscal would be a key monitorable.

“A slippage below 80% level would lead to a deterioration in the DSCR of these assets to below 1 time. The assets may need equity infusion or lengthening of debt maturity to bring back DSCRs in the comfortable range of over 1.2 times,” says Sushmita Majumdar, Director – Crisil Ratings.

Malls had clearly become the ‘go to destination’ for most Indians seeking entertainment. The length of the lockdowns and the impact of social distancing norms, along with change in customer behaviour towards online platforms, would determine the long-term impact on the credit profiles on these assets, it noted.
First Published on Aug 5, 2020 03:48 pm
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