Ansal Housing & Const upgraded to `Fitch BB-(ind)`/ stable

Fitch Ratings has upgraded India-based Ansal Housing and Construction Ltd's (AHCL) National Long-Term rating to 'Fitch BB-(ind)' from 'Fitch D(ind)'. The Outlook is Stable. A list of additional rating actions is provided at the end of this commentary.

The upgrade reflects regular servicing of term loans by AHCL over the last six months.

The ratings continue to draw comfort from AHCL's over two-decade-long experience in the domestic real estate business; it has executed projects totalling over 69.5m sq ft to date. The company has a strong brand name in northern India, where it mainly operates in Tier II & Tier III cities and thus benefits from low land acquisition costs compared with that in metro cities. However, the company intends to focus more on the faster-developing cities namely Gurgaon and Noida in future.

Fitch notes that there are limited construction-related risks in AHCL's on-going projects as a majority of the land under development (around 55%) would be sold as plots.

Net adjusted financial leverage (including a corporate guarantee of INR221m) improved to 4.2x in FY12 (year end March) from 4.9x in FY11, as EBITDA increased to INR933m from INR713m.

Also, an increase in customer advances by INR1,379m (FY12: INR2,771m) and in trade creditors by INR922m (FY12: INR1,862m) partly negated the negative impact of a substantial increase of INR3,248m in inventory (FY12: INR9,073m). The latter is particularly attributed to its newly launched project in Gurgaon Sector- 86 and its project expansion in Gurgaon Sector 92 and Sector 103. However, the increase in inventory resulted in cash flow from operations deteriorating to negative INR379m in FY12 (FY11: negative INR78m).

Fitch notes that AHCL's future cash flows would be supported from the expected cash inflow from around 40% of its on-going projects sold till FY12.

The ratings are, however, constrained by the likely increase in AHCL's funding requirements in view of the substantial size of the projects under execution; projects of nearly 28m sq ft to be executed over the next four to five years. The ratings are also constrained by the current subdued operating environment in the real estate market.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- any major time/cost overrun in on-going projects

- a shortfall in cash flows due to slowing down of sales

Rating actions on AHCL's bank instruments are as follows:

• INR100m term loan: upgraded to National Long-Term 'Fitch BB-(ind)' from 'Fitch D(ind)'
• INR750m secured overdraft facilities: upgraded to National Long-Term 'Fitch BB-(ind)' from 'Fitch D(ind)'
• INR594m non-fund-based limits: assigned National Short-Term 'Fitch A4+(ind)'

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.