March 11, 2020 APG Industrial Conglomerate Private Limited: [ICRA]BBB(Stable) assigned Summary of rating action Current Rated Amount Instrument* Rating Action (Rs. crore) Term Loan 165.00 [ICRA]BBB(Stable); Assigned Total 165.00 *Instrument details are provided in Annexure-1 Rationale The rating assigned to the bank lines of APG Industrial Conglomerate Private Limited (APGICPL, or the company) positively factors in the low market risk related to the agreements signed with leading ecommerce company in India for the entire leasable area. The leases will have long tenure of 20 years and a lock-in period of three to five years. The rating is further supported by the low funding risk as debt is already tied up and the promoters have already infused around 85% of the required equity upfront. The rating draws further comfort from the track record of the development and asset manager (LOGOS India) in the development and maintenance of warehousing projects, and that of the sponsor group (Assetz Property Group), in the real estate sector. The rating is, however, constrained by APGICPL’s project’s residual execution risk since it is in the construction phase. The project is also exposed to some regulatory risk – with documentation pending – for the land allocation and other approvals required as a condition precedent for lease commencement. The rating is also constrained by the company’s high leverage and its exposure to refinance risk associated with the construction finance loan maturing in December 2021. Nonetheless, the refinancing risks are partly mitigated by the leasing tie-up already in place for the entire area under development, and the expected commencement of the rent payment by close of FY2021. The rating is, further constrained by the high tenant concentration, with the single tenant contributing 100% of the total rental income. The rating also takes into account the increase in the competition in the industrial warehousing segment in India, which may put pressure on the occupancy or rental rates over the medium to long term. The Stable outlook reflects ICRA’s expectation that the company will continue to benefit from the operational track record of the sponsor group and that of the development manager, as well as from the presence of a long-term leasing tie-up with strong profile of the tenant and a lock-in period of three to five years. Key rating drivers and their description Credit strengths Track record of sponsor and development manager – The company is promoted by Assetz Property Group, and is the development and asset management is being executed by LAI Investment Manager Private Limited, which is a joint venture between LOGOS Property Group and Assetz Property Group. The development manager will be responsible for the end-to-end execution of the project. LOGOS Property Group has developed/ developing logistics real estate across 59 properties including Australia, China, Singapore, Indonesia, India etc.. The Assetz Property Group, headquartered in Singapore and founded in 2006, is a real estate development and asset management company with four business verticals – commercial, residential, warehousing and fund management. 1 Low market risk – The company is developing a warehouse facility for leading ecommerce company in India on the build to suit basis on a total land area of 30 acres situated in Hitech, Defence and Aerospace Park, Devanahalli, Bangalore, with a leasable area of 0.98 mn sq ft. It has already signed an agreement to lease for the entire leasable area which eliminates market risk. The lease tenure is for 20 years, with a further renewal option of 20 years – at the option of the tenant – and the lock-in period is three to five years. Limited funding risk – Total cost of the project is Rs. 263 crore which is to be funded through a Rs 165-crore debt and the remainder being equity. The funding risk for the project remains limited as the debt’s sanction is already in place and the promoters have already infused around 85% of the required equity. The company has signed a fixed-price engineering, procurement and construction (EPC) agreement with its contractor, with a back-to-back arrangement for penalties for cost-and-time overruns. Credit challenges Exposed to execution risk – The company’s project is exposed to a residual execution risk as it is in its initial stages of the construction phase with some of the key approvals pending. However, the same is mitigated to an extent by the low complexity of the project, and the fixed-price agreement with its contractor with back-to-back penalties. Its ability to obtain a lease deed from the Karnataka Industrial Area Development Board (KIADB) for the project land, in time, will be crucial for the timely project completion to take place. However, there is some comfort from the fact that the company has already made full land payments. Risk of timely refinancing – The leverage remains on the higher side for the project with debt-to-equity ratio of 1.68:1 times resulting in moderate coverage indicators. The company’s ability to refinance the construction loan, maturing in December 2021 with an LRD (lease rental discounting) loan at favourable terms to maintain healthy coverage indicators, remains crucial. Nonetheless, the refinancing risks are partly mitigated by the leasing tie-up already in place for the entire area under development and the expected rent commencement by the close of FY2021. High tenant concentration risk – The company remains dependent on the single asset-and-single tenant for its revenue generation. This makes it vulnerable to any delays in rent remittance by the tenant or vacancy risk. However, a strong tenant profile, a lock-in period of three to five years and the investment by the tenant in fit-outs reduce the vacancy risk. Liquidity position: Adequate As the project is under the construction phase, the company does not maintain any significant liquidity. The liquidity position is supported by undrawn sanctioned line of credit and equity infusion from promoters, as and when required. About 85% of the required equity has already been infused by the promoters. Rating sensitivities Positive triggers – The rating could be upgraded if the project is completed within the expected timelines and the loan is refinanced with lease rental discounting loan resulting in DSCR greater than 1.15x on a sustained basis. Negative triggers – The rating could be downgraded if the project is not completed within the expected timelines or if the construction loan is not refinanced, in time, or if there is any material weakening of the debt coverage metrics through significant increase in debt levels at the time of refinancing into an LRD loan. 2 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 The rating is based on the standalone profile of the rated entity About the company The company is a part of the Assetz Property Group (APG), which is a diversified real estate development and management group, APGICPL is developing a warehouse facility for a leading ecommerce company in India on a total land area of 30 acres situated in Hitech, Defence and Aerospace Park, Devanahalli, Bangalore. The leasable area is 0.98 mn sq ft with an expected annual rent of Rs. 25.0 crore. The total cost of the project is Rs. 263 crore which is to be funded partly through a debt of Rs. 165 crore and the remaining from equity. LOGOS Group is acting as the development manager for the project and is responsible for the end-to-end execution of the project, including its marketing, construction, and maintenance. Key financial indicators (audited) FY2018 FY2019 Operating Income (Rs. crore) 0.00 0.00 PAT (Rs. crore) 0.00 0.00 OPBDIT/OI (%) - - RoCE (%) - - Total Outside Liabilities/Tangible Net Worth (times) 10.4 10.4 Total Debt/OPBDIT (times) - - Interest Coverage (times) - - DSCR - - Status of non-cooperation with previous CRA: Not applicable Any other information: None 3 Rating history for the past three years Current Rating (FY2020) Rating History for the Past 3 Years Instrument Amount Amount Rating FY2019 FY2018 FY2017 Type Rated Outstanding Mar 11, 2020 - - - Long 1 Term Loan 165.0 - [ICRA]BBB(Stable) - - - Term Amount in Rs. crore 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 click here 4 Annexure-1: Instrument details Date of Amount Issuance / Coupon Maturity Rated Current Rating ISIN Instrument Name Sanction Rate Date (Rs. crore) and Outlook NA Term Loan Dec 2019 9.85%* Dec 2021 165.00 [ICRA]BBB(Stable) *Linked to MCLR Source: APGICPL Annexure-2: List of entities considered for consolidated analysis Not Applicable 5 Analyst Contacts Shubham Jain Mathew Kurian Eranat +91 124 4545306 +91 80 4332 6415 [email protected] [email protected] Shiffali Garg +91 124 4545868 [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: +91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected] About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange.