Rating Rationale
September 28, 2023 | Mumbai
Electronics Technology Parks- Kerala
Rating reaffirmed at 'CRISIL A+/Stable'
 
Rating Action
Total Bank Loan Facilities RatedRs.593.38 Crore
Long Term RatingCRISIL A+/Stable (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable’ rating on the bank loan facilities of Electronics Technology Parks- Kerala (ETP Kerala).

 

The rating reaffirmation reflects the stable credit profile of ETP Kerala backed by steady cash flows from Phases I & III and expected increase in leasing of Phase IV, which was completed in February 2022. Occupancy in Phase IV has improved to 81% as of August 2023 from 50% last year. Rental income had increased in fiscal 2023 backed by annual escalations, signing of new contracts at higher rates and stoppage of concessions offered to tenants during the pandemic. The ratings also factor in the additional lease rental discounting (LRD) loan against the Technocity building in Phase IV as well as upcoming capital expenditure (capex) towards construction of office space with built-up area of around 1.2 lakh square feet (lsf) in Phase I and 8.5 lsf in Phase IV, which is expected to start from fiscals 2024 and 2026, respectively, depending on market conditions.

 

The rating continues to reflect the steady cash flow, with healthy occupancy and diversified clientele, and strong debt protection metrics of ETP Kerala, backed by comfortable liquidity and low debt. These strengths are partially offset by moderate scale, susceptibility to cyclicality in the real estate sector and to risks related to vacancy, fluctuations in interest rates, and project implementation.

Analytical Approach

For arriving at its rating, CRISIL Ratings has considered the standalone business and financial risk profiles of ETP Kerala, as it has no fungible cash flow with any other entity.

Key Rating Drivers & Detailed Description

Strengths:

 

  • Healthy debt protection metrics backed by comfortable cash flow and low debt: Debt service coverage ratio (DSCR) should remain healthy over the tenure of the LRD loan, supported by steady and comfortable cash flow and low debt. Average DSCR is expected above 2 times through the debt repayment tenure. ETP Kerala also has a tight escrow mechanism, wherein lease rentals of 64 customers are deposited directly into the account and servicing of the rated LRD loan has the highest priority, after which surplus cash flow will be available to meet operating expenses and capex, if any. The firm is likely to maintain healthy liquidity at all point of time which will be sufficient to meet at least six months of debt obligations.

 

  • Increase in annual rental income: Rental income from leasing of commercial assets increased 20% to Rs 90.3 crore in fiscal 2023 from Rs 75 crore in fiscal 2022 (Rs 77 crore in fiscal 2021). The growth was chiefly because of increase in monthly rental inflow led by annual escalations in contracts, signing of new contracts at higher rates and stoppage of partial waiver of rentals offered to tenants during Covid-19. ETP Kerala will maintain steady rental income with annual escalation of 5% over the medium term.

 

Weaknesses:

  • Susceptibility to risks related to vacancy and fluctuations in interest rates: With lease rentals and land lease payments being the only sources of revenue for ETP Kerala, there is significant exposure to vacancy risk. However, long-term lease agreements with tenants mitigate this risk to a certain extent. Additionally, heavy demand allows ETP Kerala to maintain a wait list and enables immediate leasing out of area, if any tenant vacates. That said, floating interest rate on debt exposes its debt coverage ratios to fluctuations in interest rates.

 

  • Moderate scale of operations: The portfolio of ETP Kerala is moderate compared with peers, with 21.91 lsf of leasable area and annual rental income of Rs 90.3 crore (excluding operations and maintenance and other incomes). While ETP Kerala undertakes capex largely backed by demand from existing and prospective tenants, any speculative capex will expose it to market risk.

 

  • Exposure to cyclicality in the real estate sector: Rental collection (key source of revenue for ETP Kerala) is susceptible to economic downturns, which constrain the business risk profiles of tenants, thereby affecting occupancy and rental rates. Emergence of competing facilities in the vicinity could also cannibalise tenants or rental rates. Moreover, ETP Kerala faces geographic concentration risk as it draws its entire revenue from a single region. Any downturn in the micro market will impact revenue.

Liquidity: Strong

Liquidity will remain strong, buoyed by steady cash flow from lease rentals, which will be sufficient to meet debt obligation of Rs 20-30 crore per annum as well as annual campus maintenance capex of around Rs 30 crore and working capital requirement over the medium term. Moreover, ETP Kerala has ample liquidity of Rs 57.2 crore in the form of fixed deposits as well as bank balance as of June 2023. It is likely to maintain sufficient liquidity to meet six months of debt obligation throughout the tenure of the loans.

Outlook: Stable

CRISIL Ratings believes ETP Kerala will benefit from steady cash flow, backed by long-term lease agreements with a diversified clientele, which will maintain healthy debt protection metrics and liquidity over the medium term. The management's proactive approach towards property maintenance, will help maintain tenant stickiness and asset quality. Further, ETP Kerala will also benefit from its established operational track record, strong relationships with tenants and robust financial flexibility arising from strong support from the Kerala government and its comfortable leverage position.

Rating Sensitivity factors

Upward factors:

 

Downward factors:

  • Weakening of debt protection metrics, due to lesser-than-expected cash flow, resulting from vacancy of over 10% or lower lease rental rates
  • Drawdown of larger than anticipated debt for upcoming capex

About the Firm

Set up by the Kerala government in 1990, ETP Kerala operates Technopark in Trivandrum. The park is India's first information technology (IT) park, and among the three largest in the country. It is also the first technology park to be assessed at Capability Maturity Model Integration Level 4, and to obtain International Standards Organisation (ISO) 9001:2015, ISO 14001:2015 and ISO 45001:2018 certifications.

 

Technopark houses over 486 companies in the IT and IT-enabled sectors, with a total of 63,000 employees. It houses major IT companies such as Allianz, UST Global, Guidehouse India Pvt Ltd, Speridian Technologies, Envestnet Asset Management India Pvt Ltd, Tata Consultancy Services, Ernst & Young Global Shared Services Center, RR Donnelley Publishing India Pvt Ltd, IBS Software Services, SunTec Business Solutions Pvt Ltd, QBurst Technologies Pvt Ltd, RM Education Solutions India Pvt Ltd etc.

 

Annual grants received from the Kerala government are used for funding capex and land acquisition.

Key Financial Indicators (standalone)*

As on / for the period ended March 31

 

2023

2022

Operating income

Rs crore

107.4

91.8

Reported profit after tax (PAT)

Rs crore

44.7

31.7

PAT margin

%

41.6

34.6

Adjusted debt/adjusted networth

Times

0.09

0.04

Interest coverage

Times

9.98

14.15

*CRISIL Ratings adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Long-term loan NA NA May-30 82.8 NA CRISIL A+/Stable
NA Long-term loan* NA NA Aug-23 6.95 NA CRISIL A+/Stable
NA Long-term loan NA NA Dec-24 12.4 NA CRISIL A+/Stable
NA Proposed long-term bank loan facility NA NA NA 491.23 NA CRISIL A+/Stable

* Fully repaid by Aug-2023

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 593.38 CRISIL A+/Stable   -- 30-06-22 CRISIL A+/Stable 20-07-21 CRISIL A+/Stable 24-07-20 CRISIL A/Stable CRISIL A/Stable
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Long Term Loan 82.8 The Federal Bank Limited CRISIL A+/Stable
Long Term Loan 12.4 The Federal Bank Limited CRISIL A+/Stable
Long Term Loan& 6.95 The South Indian Bank Limited CRISIL A+/Stable
Proposed Long Term Bank Loan Facility 491.23 Not Applicable CRISIL A+/Stable
& - Fully repaid by Aug-2023
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties
CRISILs Bank Loan Ratings
Understanding CRISILs Ratings and Rating Scales

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