Fitch Ratings' report on Indiabulls Real Estate
Fitch Ratings has assigned India-based Indiabulls Real Estate Limited (IBREL) a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'B+'. The Outlook is Stable. The agency has also assigned IBREL's proposed US dollar denominated guaranteed notes an expected rating of 'B+(EXP)' and Recovery Rating of 'RR4'.
The proposed senior notes will be issued by Jersey-based Century Limited, a wholly owned subsidiary of IBREL, and will be unconditionally and irrevocably guaranteed by IBREL and its key subsidiaries. The notes will rank pari passu with IBREL's and the other guarantors' existing and future senior unsecured indebtedness. The notes are therefore rated at the same level as IBREL's rating of 'B+'.
Fitch has taken a consolidated view of IBREL because of the strategic and operational linkages among its operating subsidiaries. Only IBREL's key subsidiaries have extended guarantees to the proposed notes. If the operations of any non-guarantor restricted subsidiaries improve to account for 5% or more of IBREL's consolidated EBITDA, they will be required to extend guarantees to the notes in the future. In addition, Fitch expects that, if required, IBREL would be able to access cash or assets of the non-guarantor restricted subsidiaries, which have minimal debt. There are also cross-default provisions covering debt of over USD15m for the non-guarantor restricted subsidiaries.
KEY RATING DRIVERS
Diversified Projects: IBREL has projects across India, with significant presence in the key metropolitan areas of Mumbai, Delhi (NCR) and Chennai. The residential projects also cover various categories from middle-income to luxury. The diversity mitigates risks arising from volatility in a particular category or location.
Diversified, Low-Cost Land Bank: IBREL has a land bank of about 7 million square metres, which is sufficient to support project development over the next six to seven years based on current plans. The diversity and low cost of IBREL's land holdings are likely to support its project growth and its sound profitability. IBREL's EBITDA margin in the year ended 31 March 2014 (FY14) was 31.2%.
High Debt Levels: IBREL's debt has increased during FY15 following a largely debt-funded acquisition of property in London for INR16.2bn. Fitch expects the company's debt levels to peak in FY15 and remain high during the next two years. Fitch expects the leverage, as measured by the net debt/ adjusted inventory, to remain around 40%-50% as the company is likely to replenish its land bank. The agency expects the company's contracted sales to gross debt to weaken to around 0.6x in FY15 (FY14: 1x) due to the high debt, although this is likely to improve to 1x over the next two years.
Strong Long-Term Growth: Fitch expects the Indian real estate market to expand strongly in the medium to long term, supported by increasing demand that is driven by improving economic growth, limited supply in the key cities and rising income levels. The youthful Indian population and increasing urbanisation are also likely to support demand. Demand is also likely to increase due to the government's aim to provide housing for all by 2020 and its plans to develop about 100 cities/ townships.
Cyclical Sector: The real estate business is inherently cyclical and is highly sensitive to macroeconomic conditions. Thus any weakening of macroeconomic factors may impact demand. These risks are mitigated over the near to medium term by expectations of improving GDP growth in India.
Regulatory Risks: The real estate business in India is largely regulated by the local authorities with some approvals from the state or central government required in some instances. Any delay in approvals or change in regulations may impact the development of IBREL's projects.
London Property Introduces FX Risk: IBREL's proposed US dollar notes will fund part of the cost of its recent London property purchase, with the remainder to be used for general corporate purposes including future expansions. This will expose the company to foreign exchange risks because the majority of its earnings are currently in the Indian rupee and it will start to develop the London property only after FY17. This is partly mitigated by current lease rentals at the London property, which are sufficient to meet the interest cost of the GBP110m loan that IBREL took to finance the acquisition. The company plans to refinance GBP77.5m of the loan with proceeds from the US dollar bond. The foray into London also exposes IBREL to risks associated with development of the site, such as obtaining planning permission and fluctuations in material costs.
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