Select Infrastructure Private Limited
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Select Infrastructure Private Limited July 18, 2018 Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Long term Unallocated 197.0 197.0 [ICRA]AA(Stable); Reaffirmed Total 197.0 197.0 *Instrument details are provided in Annexure-1 Rating action ICRA has reaffirmed the long-term rating of [ICRA]AA (pronounced ICRA double A) to the Rs. 197.0-crore1 long-term unallocated limits of Select Infrastructure Private Limited (SIPL)2. The outlook on the long-term rating is Stable. Rationale The rating reaffirmation reflects SIPL’s steady and robust accruals, which coupled with the low debt have resulted in healthy debt protection indicators. The strong accruals are the result of Select Citywalk’s (SIPL’s mall) premium lessee profile, its consistently high occupancy levels, and its good reputation in National Capital Region (NCR). Also, by virtue of being in the Saket District Centre in South Delhi, the mall is able to generate footfall from offices, multiplexes and hotel in the area. ICRA’s rating continues to derive comfort from the company’s strong promoter group and the property’s favourable location due to proximity to multiple affluent localities in South Delhi. The rating is, however, constrained by the marginal decline in footfall in the mall in FY2017 and FY2018 due to increase in competition in NCR. The rating continues to be constrained by the company’s obligation towards unsecured borrowing from promoters, existing as well as potential competition from multiple malls in 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. 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 terms and conditions of the original lease deed with DDA. 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 and the Income Tax Department has appealed against the same at the High Court; any adverse judgement may result in additional tax outflows. ICRA would continue to monitor these developments and take appropriate rating action as and when more clarity emerges on any of them. ICRA has also noted the company’s plans to expand in mall management business, tie-up with other malls in the country or expand the current mall (subject to approval for additional floor space index). Going forward, the quantum of investment made for planned expansion and consequent impact on its debt coverage indicators, coupled with the extent of withdrawals done by the promoters by way of interest, dividends or through redemption of unsecured debentures will be the key rating sensitivities. 1 100 lakh = 1 crore = 10 million 2 For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications 1 Outlook: Stable ICRA expects SIPL’s operational cash flows to remain healthy on account of its strong operating metrics. The outlook may be revised to Positive if substantial growth in revenues and profitability strengthen the financial risk profile. The outlook may be revised to Negative if cash accrual is lower than expected, if any major capital expenditure adversely impacts the operational or financial risk profile or payments to promoters impacts the credit risk profile. Key rating drivers Credit strengths Favourable location of the mall provides access to large catchment area with healthy 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. High occupancy and presence of premium brands result in healthy cash flows and strong operating metrics - Since inception, the mall has been able to achieve high occupancy levels (more than 95%). It also houses premium brands. Both these factors translate into strong operational cash flows. Some of the brands currently occupying space in the mall are H&M, Gap, Zara, Massimo Dutti, Van Heusen, Louis Phillipe, Tissot, Mango, Puma, Crossword, Reebok, Lacoste, Allen Solly, Dyson etc. In addition to the healthy footfall generated by the presence of established brands in the mall, the high sales achieved by the tenants results 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 and have also improved YoY. The interest coverage ratio increased from 8.9x in FY2017 to 10.14x in FY2018 (provisional), total debt/OPBIDTA declined to 0.60x in March 2018 (provisional) from 0.67x in March 2017, and DSCR improved to 9.83x (provisional) in FY2018 from 6.63x in FY2017. The total debt of the company remains the same in FY2018 and comprises NCDs issued to promoters; the company has no external debt. The increase in net worth, coupled with similar debt level, resulted in the marginal decline in SIPL’s gearing to 0.45 times in March 2018 (provisional) from 0.46 times in March 2017. Credit challenges Accentuated competition in malls in NCR leads to decline in footfall in FY2017 and FY2018 - SIPL faces competition from multiple malls in Saket District Centre, such as DLF Place, DLF Southcourt, and Emaar MGF Metropolitan. In addition, it faces competition from the malls in NCR – DLF Mall of India, DLF Emporio, DLF Promenade, Ambience Vasant Kunj and Ambience Gurgaon. The increase in the supply of retail space in NCR and aggressive pricing by competitors to get reputed brands has resulted in the marginal decline in footfall at the mall in FY2017 and FY2018. Franchise/store operating business results in moderation of margins and higher funding requirements - In FY2012, the company ventured into franchise/store operating business. It started by having three brands under its fold in FY2012. However, the portfolio has now expanded to 15 stores. The company generated provisional revenues of Rs. 53 crore in FY2018 against Rs. 55 crore in FY2017 and Rs. 59 crore in FY2016, which accounted for 19% (provisional) of its operating income in FY2018. ICRA notes that the company’s entry into this new business line has resulted in moderation of margins 2 and increase in capital requirement and in higher working capital intensity. However, this is not materially impacting its credit metrics due to healthy cash flows, strong accruals from leasing business and the company’s limited debt. Concentration risks - SIPL faces concentration risks (such as geographical, sectoral etc) arising out of operating a single property. Further, SIPL 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. 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 (LRD-Lease Rental Discounting Loans) About the company Select Infrastructure Private Limited (SIPL) was set up in 1979 by the name of 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. In FY2018, on a provisional basis, the company reported a net profit of Rs. 74.61 crore on an operating income (OI) of Rs. 282.19 crore compared with a net profit of Rs. 66.54 crore on an OI of Rs. 270.54 crore in the previous year. Key financial indicators FY2017 FY2018 (Provisional) Operating Income (Rs. crore) 270.54 282.19 PAT (Rs. crore) 66.54 74.61 OPBDIT/OI (%) 50.57% 53.89% RoCE (%) 42.63% 47.79% Total Debt/TNW (times) 0.46 0.45 Total Debt/OPBDIT (times) 0.67 0.60 Interest Coverage (times) 8.90 10.14 NWC/OI (%) -17% -31% 3 Status of non-cooperation with previous CRA: Not applicable Any other information: None Rating history for last three years Chronology of Rating History for the Current Rating (FY2019) Past 3 Years Date & Date & Date & Date & Rating in Rating in Rating in Amount Amount Rating FY2018 FY2017 FY2016 Rated Outstanding Instrument Type (Rs.