October 05, 2020 Revised Shapoorji Pallonji and Company Private Limited: Ratings downgraded to [ICRA]BBB+/ [ICRA]A2; ‘negative’ outlook removed, and rating placed on watch with negative implications Summary of rating action Previous Rated Current Rated Instrument* Amount Amount Rating Action (Rs. crore) (Rs. crore) Long-term rating: [ICRA]BBB+; downgraded from [ICRA]A+, ‘negative’ outlook removed, and rating placed under watch with negative implications Non-fund based limits 15,000 15,000 Short-term rating: [ICRA]A2; downgraded from [ICRA]A1 and rating placed under watch with negative implications Long-term rating: [ICRA]BBB+; downgraded from [ICRA]A+, ‘negative’ outlook removed, and rating placed under watch with negative implications Fund-based limits 6,000 6,000 Short-term rating: [ICRA]A2; downgraded from [ICRA]A1 and rating placed under watch with negative implications Total 21,000 21,000 *Instrument details are provided in Annexure-1 Rationale The ratings downgrade of Shapoorji Pallonji and Company Private Limited’s (SPCPL) bank facilities takes into account the constrained financial flexibility of the Shapoorji Pallonji Group’s (SP Group), as their fund-raising plans by pledging stake in Tata Sons Private Limited (TSPL) has been put on hold with the Supreme Court having brought a stay on pledging of TSPL shares. The rating downgrade also reflects the impact of the Covid-19 induced nationwide lockdown on SPCPL’s construction and real estate businesses. The impact is expected to be more severe in its real estate business vertical. While the operations have resumed and expected to improve gradually, ICRA has factored in the disruption adversely impacting SPCPL’s revenue, profitability and cashflows. Along with this, the working capital cycle could also get elongated thereby reducing its cash flow from operations. The dual impact of stay on fund raising against pledge of TSPL shares and the adverse impact of covid-19 on the cashflows had resulted in group’s stretched liquidity and heightened credit risk. SPCPL’s debt repayment obligations stand at Rs. 5,320 crore for FY2021 at a standalone level and Rs. 9999 crore at the group level. ICRA is given to understand SPCPL has made an application to all its lenders for one-time restructuring of its loans (including the lenders’ exposure in the form of fund based and non-fund limits, commercial papers, and non- convertible debentures) under the Reserve Bank of India’s (RBI) resolution framework for Covid-19 related stress announced on August 6, 2020. The application for restructuring was made prior to the due date with an acknowledgment from lenders requesting SPCPL to submit the resolution plan for further evaluation. SPCPL has subsequently missed its repayment obligations (including Rs. 200 crore of CPs that were due on September 25, 2020). However, ICRA has not recognised the missed payment as default in accordance with the rating approach published recently on ICRA’s website and available at this link (click here). Further, ICRA has relied on the communication from SPCPL’s management that all the investors in SPCPL’s money market instruments and securities (CPs and NCDs) are lending institutions. The rating of SPCPL has been placed on watch with negative implications to reflect the uncertainty around whether the resolution plan would be invoked or not, and if invoked what would be the terms of the resolution plan. Timely invocation and implementation of the resolution plan within the regulatory timelines1, with favorable terms easing the burden on the cash flows resulting in improvement of coverage metrics, remains critical and would be a key rating monitorable. While the promoters have infused close to Rs. 3,875 crore in SPCPL during FY2020, including ~Rs.1,900 crore from Sterling & Wilson Solar Limited (SWSL) IPO, however, the same has been deployed to meet the funding requirements of several group companies. The debt at the standalone levels increased further to Rs.9,846 crore as on March 2020 from Rs. 7,995 crore as on March 2019. In the current fiscal, the promoters have infused ~Rs.270 crore to support debt repayment obligations. While revising the ratings, ICRA has also taken note of the deferral of repayment of Rs. 1,148 crore inter- corporate deposits (ICDs) due to SWSL from its promoters – SPCPL and Mr. Khurshed Daruvala, by one year to September 30, 2021, which further reflects the constrained liquidity position of the group. While SPCPL is not a borrower for these ICDs, their impending settlement has resulted in an increase in SP group’s overall funding requirements. While the Group has been able to successfully divest 258 MW of operational solar projects to a private equity firm in April 2020; ICRA expects delays in asset monetisation plan of the group given the current weak economic environment. The ratings also factor in the equity mobilization risk towards various ongoing & planned infrastructure projects. The ratings continue to positively factor in SPCPL’s status as the flagship company of the SP Group, having a well- established presence in the construction, real estate and infrastructure business. The ratings take into account the strong investment portfolio of SP Group comprising of listed and unlisted equity investments as well as large land and property holdings. The SP Group is the single-largest shareholder in TSPL, the holding company of the Tata Group, with an 18.37% stake. While the SP Group announced its plan to divest its entire stake in TSPL and Tata Group has expressed its willingness to buyout their stake, which is a positive development for SP Group from a long-term perspective, the valuation and timelines for the conclusion of the transaction are currently uncertain. ICRA would continuously monitor the developments on this front. The ratings also derive strength from the group’s strong execution capabilities, the extensive experience of the promoters, and the expertise of its managerial and technical personnel heading the key business verticals. Key rating drivers Credit Strengths • Flagship company of SP Group – The Shapoorji Pallonji (SP) Group is one of the well-established and diversified business groups of India having a strong brand value and legacy of over 150 years. SPCPL is the flagship company of the SP Group having presence in construction, real estate and infrastructure businesses. • Strong investment portfolio – SP Group enjoys financial flexibility driven by strong investment portfolio comprising of listed and unlisted equity investments and significant value of land and property holdings. SP Group is also the single largest shareholder in TSPL, the holding company of the Tata Group, with an 18.37% stake. SP Group announced its plan to divest its entire stake in TSPL and Tata Group has expressed its willingness to buyout their stake, however, the timelines for the conclusion of the transaction are currently uncertain. • Robust and well diversified order-book position – SPCPL had an order book of ~Rs. 37,120 crore as on March 31, 2020, after adjusting the orders cancelled/put on hold by Andhra Pradesh government. The well-diversified order book across sectors, geographies and clientele provides revenue visibility in the near to medium term and reduces order book 1 Resolution under this framework may be invoked not later than December 31, 2020 and must be implemented within 180 days from the date of invocation. Inter Creditor Agreement has to be signed by all the lending institutions within 30 days from the date of invocation. concentration risk. The order book to operating income ratio stands at 4.3 times of FY2020 revenues from construction segment providing revenue visibility in the medium term. • Experienced promoters and competent management – SPCPL derives strength from the extensive experience of its promoters, strong and competent management, reflecting the expertise in its execution capabilities in their key businesses. Credit Challenges • High debt repayment obligations and impact of covid-19– SPCPL’s debt repayment obligations in FY2021 stand at Rs. 5,320 crore at standalone level and Rs.9,999 crore at consolidated level. The covid induced nationwide lockdown also has severely impacted its revenue, profitability and cashflows. As a result, the cashflow from operations and current available liquidity remain inadequate to service the same. The company has, therefore, made an application on September 17, 2020 to all the its lenders/investors (of Commercial Papers and Non-Convertible Debentures) for one- time restructuring of its loans (including the lenders’ exposure in the form of fund based and non-fund limits, commercial papers, and non-convertible debentures) under the Reserve Bank of India’s (RBI) resolution framework for Covid-19 related stress announced on August 6, 2020. Subsequently, the company has missed the payment of Rs. 200 crore of CP due on September 25, 2020 which has not been recognised as default in accordance with the rating approach published recently on ICRA’s website. Timely invocation of the resolution plan and implementation of the same within the regulatory timelines with favourable terms easing the burden on cashflows remains critical. • Highly leveraged capital structure – Being the flagship company of the SP group, SPCPL has made investments and provided financial support to various group companies and ventures. The long gestation period of some of these projects, especially in the real estate sector, has resulted in high debt levels for the company. Further, the fund infusion by promoters in FY2020 has been largely utilised towards fulfilling debt obligations of various group entities leading to further elevation in debt levels. SPCPL’s standalone external borrowing increased from Rs. 7,995 crore as on March 31, 2019 to Rs. 9,846 crore as on March 31, 2020. Besides this, the working capital cycle is expected to elongate going forward given the slow realisation of receivables owing to the pandemic, which would have a bearing on SPCPL’s working capital borrowing levels.