Detailed Rationale

CRISIL Ratings has upgraded its ratings on the long-term bank facilities of CSJ Infrastructure Private Limited (CSJ Infra; part of Nexus Malls [Blackstone India retail platform]) to ‘CRISIL A/Stable’ from ‘CRISIL A-/Stable’. CRISIL Ratings has withdrawn its rating on the non-convertible debentures (NCDs) of CSJ Infra following a request from the company and on receipt of a 'no due certificate' due to satisfaction of charge and extinguishment of NCDs. CRISIL Ratings has also withdrawn its rating on Rs 5.67 crore of bank facilities. The rating action is in line with CRISIL Ratings’ policy on withdrawal of bank loan ratings.

 

The rating upgrade reflects strong recovery in performance of the mall, Elante, operated by CSJ Infra. The retail sales at the mall reached pre-pandemic level in Q4 of last fiscal. It was also aided by reopening of cinema halls. The occupancy of the mall remained healthy even during the pandemic and it currently stands at ~99% backed by timely renewals of lease agreements and execution of new agreements. Consequently, the operating income of the mall is expected to remain strong in fiscal 2023 and debt protection metrics will remain adequate over the tenure of the debt. Additionally, strong liquidity with three months DSRA of Rs 39 crore and cash and equivalents of around Rs 101 crore as on September 30, 2022 support the credit profile.

 

The mall has gradually ramped up after reopening post the second wave. Strong recovery was witnessed in the second half, with retail sales reaching the pre-pandemic level in March 2022. The retail sales are expected to remain above pre-pandemic levels in fiscal 2023 as well. Although the income and earnings before interest, tax, depreciation and amortisation (EBITDA) in the first half of fiscal 2022 was impacted by the waivers in rentals given to tenants, it has reverted back to the pre-pandemic level aided by strong recovery in retail sales. The rental income for the fiscal 2022 stood at ~88% of that in fiscal 2020 which is ~38% higher than fiscal 2021.

 

CSJ Infra also holds a hotel asset named Hyatt Regency. The hotel occupancy recovered strongly to ~70% in April-July period of fiscal 2023 vis-à-vis average occupancy of ~37% in fiscal 2021 and ~54% in fiscal 2022. At the same time the average room rent (ARR) has also improved by ~45% from the pre-pandemic levels. The hotel is expected to continue good performance going forward given the travel (business travelers and tourists) as well as festivities picking up (large banquet hall to hold large events) with the catchment area extending to NCR.

 

The rating continues to reflect healthy mall occupancy, a diverse and reputed clientele, favourable location of the hotel, strong operational and management support from the sponsor, and moderate debt protection metrics. These strengths are partially offset by exposure to volatility in mall industry performance, fluctuations in interest rates, and susceptibility to cyclicality in the hospitality industry.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of CSJ Infra. The company owns and operates the Elante mall, Elante office complex and Hyatt Regency hotel in Chandigarh, and has no financial linkages with any other companies of the Nexus Malls group.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy mall occupancy, diverse and reputed clientele, and favourable location of the hotel: The Elante mall has a leasable area of 12.3 lakh sq ft, of which ~99% was occupied as of September 2022. The occupancy has remained high at over 95% over the past seven years underlining strong quality of the asset. The office complex has a leasable/ saleable area of 1.47 lakh sq ft with about 46% occupied. The mall’s scale and attractive catchment area ensured a healthy mix of anchor, vanilla, and food and beverage tenants. The rating also factors in the well-secured lease structure, with lock-in and lease period of over nine years and an in-built revenue escalation clause of 15% for most tenants. Tenant concentration is moderate, with the top 10 tenants (excluding revenue share) occupying around 36% of the area and contributing to 24% of minimum guaranteed rentals. A portion of the total rental is also generated through revenue-share income.

 

The company derived ~75% of the revenue from the mall business while ~22% from hotel in fiscal 2022. The company has a tie up with Hyatt Hotels for the premium Hyatt Regency brand, which caters to both leisure and business travelers. Hyatt Hotels owns, manages and franchises over 700 properties across 54 countries, and its expertise and CSJ Infra benefits from the brand value. Centrally located in Chandigarh, the hotel is close to the airport as well as the railway station. Hyatt Regency also benefits from revenue diversification, with food and beverage, banquet, and other services contributing 40-50% to its total revenue. The hotel has been operational for around six years, and had achieved occupancy of over 79% and healthy operating margin of over 33% pre-Covid.

 

• Strong operational linkages and management support from the sponsor: CSJ Infra benefits from the strong parentage of Nexus Malls platform which is an India retail platform of Blackstone, which owns and operates one of the largest portfolios of retail real estate in India across various micro markets. The sponsor group's experience in asset management and sizeable portfolio of properties in India has ensured healthy occupancy and steady improvement in rentals across assets. Additionally, the company benefits from the management's proactive approach towards asset maintenance to ensure tenant longevity and quality, in line with its global portfolio.

 

• Moderate debt protection metrics: The average DSCR should remain healthy over the tenure of the debt, supported by steady cash flow from rentals and the ballooning debt repayment structure. The loan has a put option at the end of 60 months from disbursement, that is, in fiscal 2025. The company will benefit from the ability and track record of successfully refinancing loans, should the option be exercised. Nevertheless, any significant increase in debt will weaken debt protection metrics, and hence, remains a key rating sensitivity factor. The company is planning to sell off the office space completely. In case of the sale, the proceeds will be used for mandatory prepayment.

 

Weaknesses:

• Exposure to volatility in mall industry performance and interest rates: Rental collection, the main source of revenue, is volatile because of economic downturns, thereby impacting the tenant's business risk profile and, hence, occupancy and rental rates. However, the mall should derive benefit from the proactive approach of the Nexus Mall management towards maintenance activities. Current occupancy is at ~99% backed by timely renewals and execution of new agreements. The company has also successfully renewed/ entered into new agreements with tenants for 20% of the total leasable area since September 2021. Emergence of any competing mall, though unlikely at present, can also redirect footfall from Elante. Furthermore, the floating interest rate on debt exposes the company to interest rate risk. Although cash flow will be able to partly absorb the impact of fluctuations in occupancy and interest rates, these remain rating sensitivity factors.

 

• Susceptibility to competition and cyclicality in the hospitality industry: Competition in the hotel industry in India has remained high due to the growing presence of international chains and expansion by domestic players. While the Hyatt hotel is conveniently located with access to a good catchment area, it is susceptible to competition from any new hotel coming up in the area. Moreover, the industry is vulnerable to downturns in the domestic and global economies. During a downturn, premium hotels are affected more as their revenue per available room declines more sharply than that for mid-sized or economy hotels, while operating cost remains high. Thus, cash flow from premium properties is more susceptible to downturns. During the first wave of the pandemic, occupancy of the hotel fell to 4% in the first quarter of fiscal 2021, but recovered to 57% in the third quarter of the fiscal. Occupancy fell again to 26% in the first quarter of fiscal 2022 during the second wave, and improved to over 60% from the second quarter itself post easing of restrictions. The occupancy for April-July 2022 period has improved to 70%. ARR, however, remained resilient throughout the pandemic and has grown by ~45% over the pre-covid level.

Liquidity: Strong

DSCR for fiscal 2023 is expected to be over 1 due to higher occupancy and no waivers in fiscal 2023. The cash flow will be sufficient to cover interest obligation and regular maintenance over the next three fiscals through 2025. The company maintains DSRA covering three months of debt obligation (Rs 39 crore as on September 30, 2022), apart from cash and equivalents of around Rs 101 crore as on September 30, 2022.

Outlook: Stable

CRISIL Ratings believes the business and financial risk profiles of CSJ Infra will continue to be supported by stable cash flow with healthy occupancy and rental rates.

Rating Sensitivity factors

Upward factors:

• Substantial growth in rental income by over 10% per annum year-on-year (excluding waivers), while maintaining costs, thereby strengthening surplus generation and debt protection metrics
• Significant reduction in debt aided by prepayment

 

Downward factors:

• Increase in vacancy to more than 10% or reduction in rental rates, thereby weakening the debt protection metrics
• Any additional debt drawdown

About the Company

CSJ Infra is a part of Nexus Malls, the retail arm of Blackstone. It owns and operates the Elante mall, the Elante office complex and the Hyatt Regency hotel in Chandigarh. The mall has leasable area of 12.3 lakh sq ft and has been operational since 2013. It has a well-diversified clientele and had healthy occupancy of 99% as of September 2022. The office complex has a total leasable/ saleable area of 1.47 lakh sq ft, of which around 46% was occupied as of September 2022.

 

Hyatt Regency is a premium luxury hotel with 211 rooms, including 25 suites. The hotel also has four restaurants and a banquet space of 36,000 sq. ft, apart from other services such as spa, gym, salon, business club and an outdoor swimming pool. It is favourably located in Chandigarh, right next to the Elante mall. Operations commenced in April 2016.

Any other information: Not applicable