Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable’ rating on the long-term bank facilities of Hgp Community Pvt Ltd (Hgp; part of the Hiranandani core group).

 

The rating continues to reflect the Hiranandani core group’s established brand and strong positioning in the Mumbai Metropolitan Region (MMR), diverse revenue profile and strong financial flexibility. The rating also factors in the expected improvement in the financial risk profile owing to prepayment of debt in the residential business. These strengths are partially offset by concentration of operations in Powai and Thane regions of MMR, loans and advances to group entities and withdrawal by promoters, and exposure to cyclicality and regulatory risks in the real estate segment.

 

The group derives income from two businesses: real estate development and leasing of assets, with real estate development expected to contribute 70-75% of the cash inflow over the medium term. Operating performance of the group’s residential business is expected to moderate in fiscal 2025 with sales expected at Rs 650-700 crore (as against ~Rs 2,900 crore in fiscal 2024) owing to limited launches planned during the year. However, sales are expected to pick up over the medium term to Rs 2,800-2,900 crore with new projects to be launched from fiscal 2026. Collection is expected to remain robust at Rs 1,200-1,300 crore in fiscal 2025, driven by committed receivables from already sold projects launched in fiscal 2024. Collection under the residential business was strong ~Rs 1,900 crore in fiscal 2024, driven by healthy collection from new sales, with sales velocity of 70-75% for recently launched projects and sales of completed unsold inventory. Receivables from the sold area in the ongoing projects are adequate to cover pending construction cost and debt obligation related to ongoing projects as on March 31, 2024.

 

Income from the leasing business is expected to improve to Rs 500-600 crore over the medium term (against ~Rs 448 crore in fiscal 2024) on account of completion of two commercial projects with a total area of 2.23 million sq ft (msf), with rentals from these properties starting from fiscal 2026. The existing lease portfolio remains strong with occupancy of around 95% and low exposure to retail tenants. With the addition of leasable area of 2.23 msf, occupancy is expected to moderate to 82-88% over the medium term.

 

Gross debt is expected to reduce to Rs 3,100-3,200 crore in fiscal 2025 (against ~Rs 3,360 crore as on March 31, 2024), along with repayment of entire residential segment debt. Lease rental discounting (LRD) loan is expected to account for ~85% of total debt in fiscal 2025 (against 88% in fiscal 2024) due to increase in construction finance debt to Rs 460 crore as of November 2024, which was availed for the construction of commercial buildings and is expected to be converted into LRD debt in fiscal 2026, leading to improvement in the debt profile (with the LRD debt forming ~95% of total debt in fiscal 2026).

  

Healthy cashflow and low leverage in the residential segment is expected to translate into debt to cash flow from operations (CFO) ratio of less than 1.5 times over the medium term (0.02 time as on March 31, 2024) and CFO to interest ratio of above 8 times over the medium term (~15.2 times in fiscal 2024). However, higher-than-expected debt availed for the residential segment will remain monitorable. LRD debt to lease rental ratio is expected below 6 times over the medium term, compared with 6.59 times as on March 31, 2024.

 

At the group level, liquidity is supported by cash and equivalent of ~Rs 1,991 crore as on March 31, 2024 (majority of which is earmarked for project development in Real Estate Regulatory Authority [RERA] accounts), unsold inventory of around ~Rs 669 crore and almost fully paid-up land bank of around ~727 acres, against which additional debt can be raised.

Analytical Approach

CRISIL Ratings has combined the business and financial risks profiles of Hgp and six group entities to assess the overall credit risk profile of the Hiranandani core group, in line with its criteria for rating entities in homogeneous groups. These entities have business, managerial and operational linkages, and significant financial fungibility. Other entities jointly held by the brothers have not been consolidated as they mainly hold land and are debt-free. CRISIL Ratings has not consolidated entities wherein projects by the Niranjan and Surendra Hiranandani families are being undertaken individually as they are managed separately.

 

Also, CRISIL Ratings has treated non-convertible debentures from the promoters as neither debt nor equity as they are long-tenured, interest-free and do not have fixed repayment schedule

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established brand and strong market position in the real estate sector in MMR: Presence of over three decades in the real estate segment has enabled the Hiranandani group to develop highly saleable projects, undertake quality construction and maintain strong relationships with key clients. The group has developed and delivered over ~25 msf till March 2024, mostly in the residential segment, and has around 4.4 msf under construction or planned. It has strong brand equity and reputation for quality in construction, which is reflected in the premium pricing commanded by its projects vis-à-vis other projects in the vicinity. Its market position is further underpinned by its large, low-cost land bank of around 727 acres across MMR, which supports profitability. Strong operating efficiency backed by internal construction capabilities reduce cost and help pace construction according to requirement.

 

• Diversified revenue profile: The group derives income from two businesses: real estate development and leasing of assets. It is expected to generate cash inflow of Rs 1,700-2,000 crore over the medium term (~Rs 2,500 crore in fiscal 2024), with real estate development contributing to 70-75% of the inflow. In addition to the ongoing and planned development portfolio of ~4.4 msf over the medium term, the group has a leased assets portfolio of ~5.3 msf. It is expected to add around 2.23 msf of leasable commercial area over the next 12 months, construction of which has been completed. This should improve the lease income of the group over the long term. Customer concentration in commercial lease assets will remain high, with Tata Consultancy Services Ltd contributing around 44% of total rentals. However, track record of longstanding relationship between the two groups, long-term lease agreements (balance lock-in of more than eight years) and high fit-out cost incurred by the tenant offset the revenue concentration risk.

 

• Strong financial flexibility: At the group level, the financial risk profile is characterised by healthy collection from the real estate segment, which is expected to generate customer advances of Rs 1,200-1,500 crore over the medium term. Financial flexibility is supplemented by the group’s refinancing ability, access to cash and equivalent of ~Rs 1,991 crore as on March 31, 2024 (majority of which is earmarked for project development in RERA accounts), unutilised bank limit of ~Rs 290 crore and flexibility to top-up LRD loans against expected lease income of over Rs 450 crore per annum over the medium term.

 

Weaknesses:

• Loans and advances to group entities and withdrawal by promoters: Net outflow to group companies and withdrawal by promoters stood at Rs 1,591 crore in fiscal 2023. The group’s management has indicated that funds were withdrawn only after repayment of debt as there was significant cash surplus due to strong collection in fiscal 2023. There were no withdrawals in fiscal 2024. Withdrawal of surplus by promoters will remain monitorable over the medium term.

 

• Geographical concentration and susceptibility to risks inherent in the real estate sector: Projects in Powai and Thane are the major contributors to revenue. Therefore, significant slowdown in demand or oversupply in the region will impact revenue, and hence, will be a key rating sensitivity factor. Cyclicality in the real estate sector may lead to fluctuations in cash inflow because of volatility in realisation and saleability. In contrast, cash outflow for completion of projects and servicing debt is relatively fixed. The real estate sector is characterised by multiplicity of property laws and non-standardised government regulations across states. The group’s saleability in Powai was impacted by stay order on sales in the past, and thus, regulatory risks persist.

Liquidity: Strong

Liquidity will remain strong supported by good saleability and collection in the ongoing projects and new launches. The group had cash and equivalent of ~Rs 1,991 crore as on March 31, 2024 (majority of which is earmarked for project development in RERA accounts), and unutilised bank lines of around ~Rs 290 crore as on March 31, 2024. Cash accrual will likely be adequate to meet debt obligation. Liquidity is also supported by strong financial flexibility with a healthy loan-to-value (LTV) ratio of 40-50% over the medium term and is supplemented by steady cash flow from the lease business and the ability to raise additional LRD loans, if required. The group has sold receivables and ready unsold inventory available from its completed residential projects, which lends stability to cash flow.

Outlook: Stable

CRISIL Ratings believes the Hiranandani core group will continue to benefit from its established position in the MMR real estate market. The financial risk profile will remain supported by the cap on incremental debt and healthy financial flexibility.

Rating sensitivity factors

Upward factors:

• Substantial progress in new launches in the residential segment, translating to significant increase in sales over Rs 5,000 crore on a sustained basis
• Significant increase in collection in the residential segment and lease rentals on a sustained basis, leading to improvement in the cash flow position
• Prepayment of debt, strengthening the financial risk profile

 

Downward factors:

• Sharp decline in operating cash flow, triggered by slackened saleability of existing and proposed projects or delay in project execution
• Debt to CFO ratio of more than 1.5 times in residential sales business on a sustained basis or higher-than-expected debt drawn, thereby weakening the financial risk profile
• Substantial withdrawal by promoter groups or any change in management’s stance on operational, financial and/or management linkages within the entities consolidated to arrive at homogenous rating for the Hiranandani core group

About the Group

The Hiranandani group was set up in the late 1970s by Mr Niranjan Hiranandani and Mr Surendra Hiranandani. The group is closely held by the Hiranandani family members and comprises partnerships and private limited companies. It undertakes real estate development, with focus on development of large, mixed-use township projects. It is one of the early developers to have undertaken township development projects, such as Hiranandani Gardens in Powai and Hiranandani Meadows and Hiranandani Estate in Thane.

 

As on March 31, 2024, profit after tax (PAT) was Rs 728 crore on operating income of Rs 2,451 crore.

Any other information: Not Applicable