Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank facilities of Island Star Mall Developers Private Limited (ISML; part of the PML-CPPIB platform) at ‘CRISIL A+/Stable’.

 

The rating reaffirmation reflects stable credit profile of the platform with operations in new retail assets – Phoenix Citadel (PC), Indore which started from December 2022, Phoenix Mall of the Millennium (PMM), Pune which started operations from September 2023 and Phoenix Mall of Asia (PMA), Bengaluru which started operations from October 2023 ramping up.

 

Lease rental income of the platform is expected to more than double (y-o-y) in FY2024 with PMA, Bengaluru and PMM, Pune starting operations, operations of PC, Indore ramping up and performance of Phoenix Marketcity (PMC), Bengaluru sustaining. Further, occupancy of the retail assets under the platform are expected to remain at 90% or higher in the near term.

 

Increase in rental income in the medium term is expected to lead to healthier accruals resulting in better near-term debt service coverage ratio (DSCR). Further, with all 4 malls under the platform starting or continuing operations, the ratio of debt to lease rentals is expected to remain comfortable at below 3 times in the medium term.

 

Higher accruals are also expected to be utilized towards capex for the under-construction assets of the platform. There are five under construction assets (commercial office, and retail) under the platform, which are expected to be commissioned in a phase wise manner from FY2025 onwards. Considering PML’s extensive experience in construction and operations of retail and commercial office assets, the under-construction assets are not expected to pose a significant challenge.

 

The rating continues to reflect the platform’s stable cash flow, supported by healthy mall occupancies and a diverse and reputed clientele, and comfortable financial risk profile. The rating also factors in operational, managerial, and financial support from parent, The Phoenix Mills Limited (PML, rated ‘CRISIL AA-/Positive’), These strengths are partially offset by exposure to risks related to the large scale of proposed under-construction projects, and vulnerability to volatility in interest rates and occupancy.

Analytical Approach

For arriving at the rating, CRISIL Ratings has consolidated the business and financial risk profiles of all existing and proposed assets of PML, if any, with CPPIB as partner (referred to as CPPIB platform). This is because these entities are in the same line of business and have common promoters.

 

CRISIL Ratings has also moderately consolidated equity commitment from PML at group level to the extent of equity and support requirement. This is because PML is the majority shareholder in these entities and is expected to bring in support, if required.

 

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:

• Stable cash flow from lease rentals, supported by healthy occupancy, and diverse and reputed clientele: The platform’s existing operational assets have a leasable area of around 44 lakh square feet (sq. ft) and leasing occupancy of over 90% with reputed brands as tenants. The platform witnessed consumption of Rs 2,119 crore in 9M FY24, which is expected to improve further with operations ramping up in the 3 new malls.  Rentals are expected to improve in FY2024, with the ramp up in the new Malls - Phoenix Citadel, Indore which commenced operations in December 2022, Phoenix Mall of Asia, Bengaluru (commenced operations in September 2023) and Phoenix Mall of the Millennium, Pune (commenced operations in September 2023).

 

Top ten tenants occupy 41% of the area, resulting in moderate tenant concentration. The rating also factors in the well-secured lease structure with lock-in period and lease period of 1-15 years, and an in-built revenue escalation clause of 5-20% for most tenants. Furthermore, a portion of the total rental is generated through revenue-share income.

 

• Comfortable financial risk profile: Loan-to-value (LTV) for the platform is healthy at below 40%. Average DSCR (CRISIL Ratings adjusted) over the remaining tenure of the debt is expected to remain above 1.5 times. Healthy liquidity of Rs 861 crore (as of September 2023 including DSRA and unutilised OD) at platform level continues to support cash flow position. Significant portion of outstanding debt in the platform is backed by highly stable rent-generating assets with debt around Rs 300 crore (TL+OD) in under construction assets in Alyssum Developers and Sparkle One Mall Developers respectively as on January 31, 2024. Debt to lease rental ratio is expected to remain comfortable at below 3.0 times for the platform going forward. Lower than expected lease rentals, higher than expected incremental debt, or any significant cash outflow in the form of support to subsidiaries, may impact the financial risk profile and hence, will be key rating sensitivity factors.

 

• Strong operational, managerial, and financial support from parent: PML is a majority shareholder of ISML. The mall shares the brand and logo of the Phoenix Mills group, which is a leading player in the retail mall business in India. This, coupled with a combination of scale and attractive catchment area, is reflected in a healthy mix of anchors, mini anchors, and vanilla and food and beverage tenants. Additionally, the company benefits from the management’s proactive approach towards mall maintenance to ensure tenant stickiness and asset quality. Sponsors may infuse funds in the platform towards equity commitments for under-construction and planned projects and in case of support requirements.

 

Weaknesses:

• Exposure to risks related to large scale of proposed under-construction projects: Large projects have been planned in new and current geographies, with significant investment of over the next five fiscals. Although the group has sound experience in developing and managing retail assets, its ability to execute, market, and scale-up these projects on time will remain critical. Any significant delay in project execution or cost overruns may weaken financial risk profile.

 

• Susceptibility to changes in interest rates and occupancy: A substantial portion of agreements (55%) will be due for renewal over the three fiscals through March 2027 for PMC Bengaluru with no upcoming renewals in the 3 new malls. Timely renewal/leasing of this area at similar or better terms in comparison with the existing agreements, will remain a key rating sensitivity factor. Furthermore, the floating interest rate on debt exposes the company to fluctuation in interest rates. Although the cash flow will be able to absorb the impact of fluctuations in interest rates and occupancy to some extent, these will remain rating sensitivity factors.

Liquidity: Strong

Average DSCR (CRISIL Ratings adjusted) for the platform is also expected to be adequate at above 1.5 times over the medium term. The cash accrual is expected to be sufficient to cover debt obligations over fiscals 2025 to 2027. Liquidity is supported by the maintenance of a DSRA of around Rs 11 crore and cash equivalents and liquid investments of Rs 850 crore as on September 30, 2023. Support from PML should be available to for cash flow mismatches, if any.

Outlook: Stable

CRISIL Ratings believes credit risk profile of ISML will remain healthy supported by healthy cash flows from operational assets.

Rating Sensitivity factors

Upward factors

• Substantial growth in rental income by over 15% per annum on a sustained basis along with increase in scale to over Rs 750-800 crore (on a platform level).
• Maintaining operating margins, thereby strengthening surplus generation and strong improvement in debt protection metrics like debt/NOI.
• Timely completion and leasing of under-construction assets within budgeted cost.
• Improvement in credit risk profile of PML.

 

Downward factors

• Increase in vacancy by more than 10-15% or reduction in rental rates, weakening the debt protection metrics.
• Draw down of higher-than-expected incremental debt.
• Weakening of credit risk profile of PML.

About the Company

ISML is a 51:49 subsidiary of PML and Canada Pension Plan Investment Board (CPPIB). ISML owns and operates the Phoenix Market City mall in Whitefield, Bengaluru. The mall has a total leasable area of 10 lakh sq. ft and has been operational since 2010. The mall has a well-diversified clientele and healthy occupancy of around 98% (as of December 2023).

 

The company, through its wholly owned subsidiaries, also owns and operates Phoenix Citadel, Indore, which started operations from December 2022, Phoenix Mall of the Millennium, Pune, which started operations from September 2023 and Phoenix Mall of Asia, Bangalore which started operations from October 2023. The company is also undertaking capex in PMC Bengaluru which includes extension of the mall and addition of commercial office space and a hotel. Additionally, CPPIB has also partnered PML in 2 more assets – Phoenix Grand Victoria Kolkata (retail) and Project Rise, offices at Lower Parel Mumbai. CPPIB holds 49% shares in Phoenix Grand Victoria and 40.26% shares in Project Rise, while the remaining are directly held by PML and not routed through Island Star. However, all assets within the CPPIB umbrella are expected to have fungibility amongst themselves.

 

About the Platform

ISML is a part of the PML-CPPIB platform, post-acquisition of 49% stake by CPPIB. The platform has 4 operational assets – PMC Bengaluru, Phoenix Citadel, Indore, Phoenix Mall of Asia, Bengaluru and Phoenix Mall of the Millennium, Pune. The commercial sections (offices) along with PMA Bengaluru and PMM Pune are being constructed. Additionally, CPPIB has also partnered PML in 2 more assets – PMC Kolkata and Project Rise, offices at HSP Mumbai. For these two, CCPIB holds 49% shares while the remaining are directly held by PML, and not routed through Island Star.

About the Group

PML is a leading retail mall developer and operator in India. It is the pioneer of retail-led, mixed-use developments with completed development of over 20 million square feet spread across retail, hospitality, commercial, and residential asset classes. The company has an operational retail portfolio of approximately 11.12 million square feet of retail space spread across 13 operational malls in 8 cities of India. The company is further developing 2 new retail destinations in 2 major cities of India and expanding 2 of its existing retail destinations which will together add approximately 3.0 million sq. ft. of retail space. Besides retail, the company has an operating commercial office portfolio with gross leasable area of 2 million square feet and plans to add approximately 5.0 million sq. feet of commercial office across existing retail properties going forward. The company also has an exclusive residential project with saleable area of about 3.5 million sq. ft. in Bengaluru and is developing a premium project in Alipore Kolkata with a saleable area of over 1.0 million sq.ft. The company also owns and operates two hotels – The St. Regis, Mumbai and Courtyard by Marriot, Agra and currently has a Grand Hyatt hotel under planning at Whitefield Bengaluru. The PML group acquired a land parcel in Thane during November 2023 admeasuring 11.5 acres which is currently under planning and design.

 

Over the past few fiscals PML has diluted its stake in some of its operational assets to two strong private equity partners, CPPIB and GIC, forming separate platforms for future development. While PML still has majority stake in all of its SPVs, limited cash flow fungibility is expected between the entities which are controlled by PML (includes fully-controlled entities and certain joint ventures (JVs)) and the ones belonging to either of the PML-CPPIB or PML-GIC platforms. No cash flow fungibility is expected prior to debt servicing. While surplus may be distributed to each partner, it will only happen once the under-development assets stabilise. Consequently, CRISIL Ratings is now looking at the credit risk profiles of all the three platforms, referred to as the PML-only platform (includes certain JVs), PML- CPPIB platform and PML-GIC platform, separately with only outflows from PML-only platform towards equity and support requirements for the PML-CPPIB and PML-GIC platforms.

Key Financial Indicators: ISML (consolidated)*

As on/for the period ended March 31,		2023	2022
		Actual	Actual
Operating income	Rs crore	261	176
Profit after tax (PAT)	Rs crore	120	59
PAT margin	%	45.9	33.3
Adjusted debt/adjusted net worth	Times	0.12	0.13
Interest coverage	Times	4.09	3.59

*CRISIL Ratings-adjusted financials

Platform-level information is provided in the write-up

Any other information: Not applicable