Select Infrastructure Private Limited: Rating Reaffirmed at [ICRA]AA(Stable)

September 27, 2019 Select Infrastructure Private Limited: Rating reaffirmed at [ICRA]AA(Stable) Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]AA(Stable); Long term Unallocated 197.0 197.0 Reaffirmed Total 197.0 197.0 *Instrument details are provided in Annexure-1 Rationale The rating reaffirmation reflects Select Infrastructure Private Limited’s (SIPL) robust accruals, which coupled with low debt have resulted in consistently healthy debt protection indicators. On a provisional basis, the company recorded interest coverage of 10.4 times, total debt/OPBDITA1 of 0.6 times, and DSCR of 8.8 times in FY2019. The debt coverage indicators are based on the obligations pertaining to the NCDs issued to the promoter group and the company does not have any external debt. The strong accruals result from Select Citywalk’s (SIPL’s mall) premium lessee profile, consistently high occupancy levels, healthy footfalls and its good reputation in National Capital Region (NCR). Further, the mall is able to generate steady footfalls from offices, multiplexes and hotels in the area by virtue of its location in the Saket District Centre of South Delhi. ICRA’s rating continues to derive comfort from the company’s strong promoter group and the property’s favourable location in proximity to multiple affluent localities in South Delhi. The rating is, however, constrained by the company’s expansion plans for Select Citywalk over the near to medium term (subject to requisite approvals), which would expose it to project and marketing risks. However, ICRA draws comfort from the company’s established market position and the management’s long track record of developing and managing retail space. The rating is also constrained by the marginal decline in footfalls in the mall in FY2019 due to an increase in competition in the NCR; the footfalls may further decline due to reopening of the neighbouring mall post renovation. The rating continues to be constrained by the SIPL’s obligation towards unsecured borrowings from promoters, existing as well as potential competition from multiple malls in the NCR, and concentration risks arising out of operations of a single property. The rating also takes into consideration SIPL’s retailing business through franchise as well as in-house brands, which has resulted in moderation of margins and increase in working capital intensity of operations. ICRA has noted that South Delhi Municipal Corporation had instructed the malls in its jurisdiction to provide parking for free. However, SIPL has been charging parking fee as per the terms and conditions of the original lease deed with DDA. The matter is yet to be settled by the concerned authority. Additionally, there is a pending dispute pertaining to income tax liability. SIPL has won the case at the Income Tax Appellate Tribunal (ITAT) pertaining to four assessment years, but the Income Tax Department has appealed against the same at the High Court. Any adverse judgement may result in additional tax outflows. ICRA will continue to monitor these developments and take the appropriate rating action as and when more clarity emerges. 1 OPBDITA- Operating Profit before Depreciation, Interest, Tax, and Amortisation 1 ICRA has also noted the company’s plans to expand in mall management business, tie-up with other malls in the country and intended expansion of the existing mall. Going forward, the quantum of investment made for these initiatives and consequent impact on its debt coverage indicators, the extent of withdrawals by the promoters by way of interest, dividends or through redemption of unsecured debentures, the timely execution and stabilisation of the proposed capex, and leveraging of this property by the promoters will be the key rating monitorables. The outlook on the rating is Stable on account of the consistently healthy operating metrics and the established track record. Key rating drivers and their description Credit strengths Favourable location of mall provides access to large catchment area with strong purchasing power - SIPL’s mall is located in Saket District Centre (South Delhi) and its catchment area includes affluent sections of South Delhi. The catchment area (within 10 km radius) of the mall includes colonies such as Panchsheel Park, Saket, Geetanjali Enclave, Greater Kailash, Safdarjung Enclave, Sainik Farms, Defence Colony, New Friends Colony, Golf Links, Lodhi Colony, etc. The high purchasing power of the residents in the vicinity provides the brands with a good catchment to cater to, which has also aided the company in charging high rentals from the same as well as maintaining healthy footfall of the target segment in the mall. Premium lessee profile - The mall houses premium brands. Some of the brands currently occupying space in the mall are H&M, Gap, Zara, Croma, Sephora, Massimo Dutti, Van Heusen, Louis Phillipe, Tissot, Mango, Puma, Crossword, Reebok, Lacoste, Allen Solly, and Dyson, etc., which result in healthy footfall in the mall. High occupancy and premium lessee profile result in strong operating metrics - Since inception, the mall has been able to achieve high occupancy levels (more than 95%). The high occupancy and premium lessee profile translate into strong operational cash flows. Further, the high sales achieved by the tenants result in higher revenues for SIPL on account of the revenue-sharing agreement that the company enters into with almost all its lessees. Strong debt protection indicators due to healthy internal accruals and low leverage - The coverage indicators of the company remain strong. The interest coverage ratio stood at 10.4 times in FY2019 (provisional) vis-à-vis 10.3 times in FY2018, total debt/OPBIDTA stood at to 0.6 times in March 2018 as well as March 2019 (provisional), and DSCR improved to 8.8 times (provisional) in FY2019 compared with 6.7 times in FY2018. The total debt of the company remained the same in FY2019 and comprised NCDs issued to promoters; the company has nil non-promoter debt. Credit challenges Proposed expansion plans expose SIPL to project and marketing risk - The company’s expansion plans for Select Citywalk over the near to medium term (subject to requisite approvals) would expose it to project and marketing risks. However, the mall’s reputed position in NCR and the management’s established track record of developing and managing retail space in the past provides some comfort. Pending tax dispute - There is a pending dispute pertaining to income tax liability. SIPL has won the case at the ITAT pertaining to four assessment years, but the Income Tax Department has appealed against the same at the High Court. Any adverse judgement may result in additional tax outflows. ICRA will continue to monitor these developments and take the appropriate rating action as and when more clarity emerges. 2 Decline in footfall in FY2019 - Footfall declined marginally in the mall in FY2019 due to an increase in competition in the NCR; the footfalls may further decline due to the reopening of a neighbouring mall post renovation. SIPL faces competition from multiple malls in Saket District Centre, such as DLF Place (though the same was closed for renovation for most of FY2019), DLF Southcourt, and Emaar MGF Metropolitan. In addition, it faces competition from the malls in the NCR – DLF Mall of India, DLF Emporio, DLF Promenade, Ambience Vasant Kunj and Ambience Gurgaon. The increase in the supply of retail space in the NCR and aggressive pricing by competitors to get reputed brands has also contributed to the marginal decline in footfall at the mall in FY2019. Concentration risks - SIPL faces concentration risks (such as geographical and sectoral) arising out of operating a single property. Further, the company is currently considering various ventures – mall management, mall construction, as well as expansion in the current mall (subject to approval for additional floor space index). These may adversely impact the credit risk profile. However, the exact impact cannot be ascertained as the plans have still not been firmed up. Liquidity position: Strong SIPL’s liquidity position is Strong, as evidenced by free cash and liquid investments of Rs 53.8 crore as of March 2019 (provisional), unutilised working capital facility of Rs. 15.0 crore, and strong free cash flow generation of the mall. Rating sensitivities Positive triggers – The crystallisation of scenarios for rating upgrade is unlikely over the medium term. Nevertheless, in case of significant increase in scale and diversification of revenues, there could be a scenario for rating upgrade. Negative triggers – Negative pressure on SIPL’s rating could arise in case of a decline in occupancy to below 90% of the leasable area or drop in rentals by more than 10% on a prolonged basis. Also, adverse impact, if any, of the proposed capex plan and the ongoing income tax dispute on the credit risk profile of the company will be a credit negative. Analytical approach Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Debt Backed By Lease Rentals (LRD-Lease Rental Discounting Loans) Parent/Group Support Not applicable Consolidation/Standalone Standalone About the company Select Infrastructure Private Limited (SIPL) was set up in 1979 as Sita Transport Private Limited. It remained a shell company till October 2003, when its name was changed to SIPL. It is a closely held company owned by the Sharma family (70%) and Aarone Group (30%). The company owns and manages a retail property in Saket in New Delhi, having a total covered area of 0.39 million sq. ft. Select Citywalk was developed as a mixed-use property with commercial offices, retail space, alongside service apartments and cinemas. The total cost of the project was over Rs. 480 crore. Commercial offices and service apartments were sold by SIPL in FY2008. The company retained the retail space with itself and is managing the same on a 100% lease-based strategy and on a minimum monthly guarantee (MMG) model, wherein SIPL receives the lease rent or a predetermined percentage of revenues, whichever is higher.

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