Sugam Vanijya Holdings Private Limited

September 04, 2018

Summary of rated instruments Current Rated Amount Instrument* Rating Action (Rs. crore) Proposed Non-Convertible Debenture 485.00 Provisional [ICRA]BBB+(SO)(Stable); Assigned Proposed Term Loan 135.00 Provisional [ICRA]BBB+(SO)(Stable); Assigned Proposed Overdraft 30.00 Provisional [ICRA]BBB+(SO)(Stable); Assigned Proposed Non-fund-based Limits 50.00 Provisional [ICRA]BBB+(SO)(Stable); Assigned Total 700.00 *Instrument details are provided in Annexure-1

Rating action ICRA has assigned the long-term rating of provisional [ICRA]BBB+ (SO) (pronounced provisional ICRA triple B plus structured obligation) to the proposed Rs. 485.00-crore non-convertible debenture programme and the proposed Rs. 215-crore bank facilities of Sugam Vanijya Holdings Private Limited (SVHPL, the company). The outlook on the long-term rating is Stable.

The presence of rental escrow mechanisms and debt service reserve account1 (DSRA, equivalent to 3 months interest) for the rated loan has resulted in a structured payment mechanism that prioritises servicing of the SO rated facilities.

The rating assigned is provisional as of now (as denoted by the prefix ‘Provisional’ before the rating symbol) and is subject to the fulfilment and review of all pending actions/ documentation pertaining to the facility rated by ICRA. The final rating may differ from the provisional rating in case the completed actions/ documentation is not in line with ICRA’s expectations.

Rationale The assigned rating favourably factors in the strong promoter profile—the company is a part of the Virtuous Retail Group, which is an established player in the Indian retail real estate market. The rating also derives comfort from the presence of SVHPL’s malls in attractive catchment areas of Bengaluru and Chennai and the healthy track record of the Bengaluru mall’s operations. Both the malls benefit from the presence of reputed and diversified tenant profile. ICRA also takes note of the adequate cover of the escrowed rental income on the principal and interest obligations in the Bengaluru mall. Additionally, the rentals are expected to be sufficient to service the debt obligations of the recently commissioned Chennai mall.

The rating is, however, constrained by the nascent stage of the Chennai mall’s operations. Additionally, the high leverage because of lease rental discounting loans (LRD)—loan to annual rental income of 5.6 and 6.5 times for the Bengaluru and Chennai malls respectively—is also a credit negative. Moreover, the coverage ratios remain vulnerable to changes in interest and tax deduction rates.

1 While the debenture trustee/lender has the right to dip into the DSRA, the rated instrument does not have a DSRA invocation mechanism

Outlook: Stable ICRA believes the company will continue to maintain healthy occupancy in VR Mall, Bengaluru, and successfully tie-up leases for the unleased areas in VR Mall, Chennai, resulting in adequate debt coverage indicators. The outlook may be revised to Positive if higher-than-expected cash flows improve debt protection metrics. The outlook may be revised to Negative if reduction in occupancy levels or significant top-up of loans increases leverage levels.

Key rating drivers

Credit strengths Reputed parentage lends strong operational support: SVHPL is a part of the Virtuous Retail Group, which has developed an operational retail area of 5.4 million square feet across Bengaluru, Chennai, Surat and Mohali. At present, it is developing a 1.6-million square feet retail area in New Delhi. The Group is promoted by Virtuous Retail South Asia, a joint venture between private equity investor, Xander Group, and Dutch pension fund asset manager, APG Asset Management.

Attractive catchment area: Both the malls are favourably located and have an attractive catchment area. While the VR Mall in Bengaluru is in Whitefield, a suburb in Bangalore with significant commercial office and residential development, VR mall in Chennai is situated in Anna Nagar, which is a prime residential area, and is easily accessible from Kilpauk, Mogappair and Nungambakkam residential areas of Chennai.

Healthy track record of operations in VR Bengaluru; strong and diversified tenant profile: The VR mall in Bengaluru has been operational since October 2015 and has 90% occupancy level. The tenant profile is diversified and consists of prominent brands such as Marks & Spencer (M&S), Hennes & Mauritz AB (H&M), Forever 21, and PVR. The VR Bengaluru mall has been able to generate favourable market response within a short-span of three years; it generated a lease income of Rs. 39.61 crore in FY2018. The commercial operations of the hotel began in April 2016 and the occupancy levels improved to 52% in FY2018 from 24% in FY2017. In the VR mall, Chennai, the company leased 77% of the total leasable area to prominent brands such as Spar, Lifestyle, M&S, Forever 21, PVR and Home Centre.

Presence of DSRA: The Debt Service Reserve Account (DSRA) of three months interest to be maintained for the proposed NCD and lease rental discounting loans (LRD) provides additional liquidity support. The company also maintains three months interest DSRA for its existing LRD loans for VR Bengaluru.

Credit challenges Limited track record of VR Chennai mall: The VR mall in Chennai was commissioned on June 18, 2018, and hence it has a limited track record. The company is exposed to market risk as it is yet to tie up 23% of the leasable area (including co- working space). Its presence in a highly competitive micro market further enhances the market risks. However, 1.13 lakh sq. ft of area is close to being tied up and 1.10 lakh sq. ft is under active conversation, which are expected to result in over 95% occupancy in the next couple of months.

High leverage levels: The Chennai and the Bengaluru properties are highly leveraged with Debt/ Annual Rental of 6.5 times and 5.6 times, respectively, resulting in limited financial flexibility. Moreover, the company also has NCDs, amounting to Rs 448 crore, issued to Robusta Holdings Pte Ltd (100% held by the parent company). These NCDs are, however, subordinate to the rated loans, and the interest and principal on the same are to be serviced to the extent of availability of free cash flows. However, any surplus post the external debt servicing would be utilised towards repayment of the group NCDs. The interest accrued on the NCD is proposed to be serviced to the extent of Rs 100-150 crore through the proposed loan proceeds.

Vulnerability of coverage indicators to fluctuations in revenue share, interest and TDS rates: The coverage indicators such as Net Rent/EMI and NOI/EMI are exposed to the variations in revenue share apart from the changes in interest and TDS rates. However, the coverage indicators in the Chennai mall are expected to be comfortable, in line with those witnessed in the Bengaluru mall.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Links to applicable criteria:

Corporate Credit Rating Methodology

Debt Backed by Lease Rentals

About the company: Incorporated in 1987, SVHPL is engaged in developing and operating commercial projects named VR Bengaluru Mall and VR Chennai Mall. The mall in Bengaluru is on the Whitefield Road, on the Dyvasandra Industrial Area, and has a leasable area of 5.98 lakh sq. ft; while the mall in Chennai is in Anna Nagar and has a leasable area of 10.08 lakh sq. ft. Both the retail malls have a hotel (The Waverly) and co-working office space (The Hive) apart from multiplexes, restaurants and other entertainment activities. The company is owned and funded by APG Asset Management and the Xander Group through a joint venture—Virtuous Retail South Asia Pte Ltd. The company does not have any further construction activity planned in the current company.

In FY2018, on a provisional basis, the company reported a net loss of Rs. 46.39 crore on an operating income of Rs. 75.10 crore, as compared to a net loss of Rs. 71.21 crore on an operating income of Rs. 57.35 crore in the previous year.

Key financial indicators FY2017 FY2018(Provisional)

Operating Income (Rs. crore) 57.35 75.10 PAT (Rs. crore) -71.21 -46.39 OPBDIT/OI (%) -13.65% 19.72% RoCE (%) -0.43% 0.22%

Total Debt/TNW (times) 21.27 17.82 Total Debt/OPBDIT (times) -140.35 82.98 Interest coverage (times) -0.06 0.03

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years: Chronology of Rating History for Current Rating (FY2019) the Past 3 Years Date & Date & Rating Rating Date & Amount Amount in in Rating in Rated Outstanding Date & Rating FY2018 FY2017 FY2016 Instrument Type (Rs. crore) (Rs. crore) September 2018 - - - 1 Proposed NCD Long 485.00 - Provisional [ICRA]BBB+ - - - Term (SO)(Stable) 2 Proposed Term Long 135.00 - Provisional [ICRA]BBB+ - - - Loan Term (SO)(Stable)

3 Proposed Long 30.00 - Provisional [ICRA]BBB+ - - - Overdraft Term (SO)(Stable) 4 Proposed Non- Short 50.00 - Provisional [ICRA]BBB+ - - - Fund Based Term (SO)(Stable) Limits

Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument Details Date of Amount Issuance / Coupon Maturity Rated ISIN No Instrument Name Sanction Rate Date (Rs. crore) Current Rating and Outlook Provisional NA Proposed NCD - 8.75% - 485.00 [ICRA]BBB+(SO)(Stable) Proposed Term Provisional NA - 8.75% - 135.00 Loan [ICRA]BBB+(SO)(Stable) Proposed Provisional NA - 8.75% - 30.00 Overdraft [ICRA]BBB+(SO)(Stable) Proposed Non- Provisional NA - - - 50.00 Fund Based Limits [ICRA]BBB+(SO)(Stable) Source: Sugam Vanijya Holdings Private Limited

ANALYST CONTACTS

Shubham Jain Mathew Kurian Eranat +91-0124-4545306 +91-8043326415 [email protected] [email protected]

Adarsh Reddy Shivani Sahoo +91-8043326405 +91-8043326406 [email protected] [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-124-2866928 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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