Detailed Rationale

CRISIL Ratings has revised the outlook on its rating on the long-term bank facilities of Island Star Mall Developers Private Limited (ISML; part of the Phoenix Mills group) to ‘Stable’ from ‘Negative’, while reaffirming the rating at ‘CRISIL A’.

 

The outlook revision reflects strong recovery in retail sales witnessed across malls in Q2 2022 and October 2021 post reopening after the second wave of the pandemic, expected further improvement in retail sales in H2 2022 and strengthening of liquidity position of the group through stake dilution in assets and equity fund raising through qualified institutional placement (QIP).

 

While the pandemic and consequent closure of malls have impacted performance, the recovery has been steady post reopening. After closure of malls in April 2021 due to the second wave, malls gradually reopened from June 2021 albeit with restrictions. Despite the restrictions, strong recovery was witnessed, with retail sales reaching 74% of pre-pandemic (Q2 2020) level in Q2 2022. Consequently, revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) for Q2 2022 were adequate at 67% of pre-pandemic level each (excluding for Phoenix Palassio, Lucknow, which became operational in July 2020). Retail sales further improved to around 90% of pre-pandemic level in October 2021. Recovery in revenue and profits in H2 2022 is expected to be strong.

 

The group has also taken steps to ensure availability of ample liquidity to tide over the current situation and meet growth capital requirements in the medium term. Since August 2020, the group has raised a total of ~Rs 3400 crore through –

a) Rs 1,100 crore through QIP,

b) an agreement with Government of Singapore Investment Corporation (GIC) for stake sale of 26% in 3 subsidiaries for Rs 1,111 crore (realised in June 2021),

c) infusion of Rs 196 crore from Canada Pension Plan Investment Board (CPPIB) for meeting capital expenditure (capex) requirements in under construction assets housed under ISML and

d) deal with CPPIB for investment of Rs 384 crore in two tranches for development of the group’s new asset in Kolkata for a 49% stake in the project (Rs 180 crore of this has been realised).

 

Additionally, on November 15, 2021, CPPIB committed to invest Rs 1,350 crore in tranches for acquiring 49% stake in Plutocrat Commercial Real Estate Pvt. Ltd (PCREPL; holding company for developing an office-led mixed-use asset in Mumbai). CPPIB has already infused Rs 787 crore towards the development as of date. All these initiatives have strengthened the liquidity position of the group with cash balances, liquid investments and undrawn bank lines standing at an aggregate of Rs 2,622 crore as on November 18, 2021. CRISIL Ratings expects the liquidity position to remain strong in the near to medium term.

Analytical Approach

CRISIL Ratings has notched up the standalone rating based on the expectation of strong support from the parent, TPML, both on an ongoing basis and in case of distress. This is in line with CRISIL’s criteria for notching up standalone ratings of companies based on parent support.

 

This is in addition to factoring in ISML’s standalone business and financial risk profiles. Cash flow is escrowed to the lender, and the company will have access to the surplus for any other purpose only after debt servicing. Furthermore, CRISIL Ratings has fully consolidated special-purpose vehicles (SPVs), created to undertake the ongoing capital expenditure (capex) programme, with expectation of support for cost overrun and/or shortfall in debt servicing, if any. However, no support may be required over the next few years as equity funding for these assets is already tied up and the projects will be in the construction phase during this period. Any support requirement is expected only as construction of new assets nears completion. Furthermore, CRISIL Ratings expects the company to retain surplus cash flow after debt servicing, which will reduce requirement of external funds for supporting SPVs, if need arises.

 

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:

• Strong operational, managerial, and financial support from parent: TPML is a majority shareholder of ISML, which in turn owns and operates Phoenix Marketcity, Bengaluru. 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.

 

• Stable cash flow from lease rentals, supported by healthy occupancy, and diverse and reputed clientele: The company’s Phoenix Market City mall, Bengaluru, has a leasable area of around 10 lakh square feet (sq. ft) and has maintained occupancy of over 90% for the past seven years, with reputed brands as tenants. The occupancy was maintained at 91% as of September 2021. The mall witnessed consumption of Rs 673 crore in fiscal 2021, that is ~69% of pre-pandemic level (fiscal 2020), despite the mall remaining shut till June 2020 and re-opening only for limited operating hours between June to September 2020. Consumption for the mall in Q2 2022 reached 92% of pre-pandemic levels (fiscal 2020), leading to consumption reaching 86% of pre-pandemic levels in H1 2022, despite subdued Q1 2022 due to the second wave of pandemic

 

    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.

 

• Strong debt protection metrics: The debt service coverage ratio (DSCR- CRISIL adjusted) was around 1.0 time in fiscal 2021 and is expected to be above 1.0 time in fiscal 2022. Average DSCR (CRISIL adjusted) over the remaining tenure of the debt is expected to remain above 1.4 time. Debt protection metrics are supported by adequate liquidity through a debt service reserve account (DSRA) of Rs 15 crore, to be maintained throughout the loan tenure.

 

    The rating also factors in retention of surplus cash flow within the company over the medium term, in the absence of any large capex towards the mall. Lower-than-anticipated lease rentals, higher-than-expected additional debt draw down, or any significant cash outflow in the form of support to subsidiaries, may constrain the financial risk profile and hence, will be key rating sensitivity factors.

 

Weaknesses:

• Exposure to risks related to large scale of proposed under-construction projects: Large projects have been planned in new and current geographies, with overall investment of around Rs 2,800 crore. 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. Nevertheless, close to 70% of the funds have been deployed for under construction retail assets, and debt-to-equity ratio for the investments is expected at 1.0 time, which mitigates the risk to a large extent. Till date, no external debt has been contracted for the under-construction projects in Bengaluru, Pune and Indore; while for the Ahmedabad mall, debt of Rs 97 crore has been drawn down.

 

• Susceptibility to changes in interest rates and occupancy: A substantial portion of agreements (54%) will be due for renewal over the three fiscals through March 2024. Timely renewal/leasing of this area at similar or better terms in comparison with the existing agreements, will remain a key rating sensitivity factor, especially in light of the pandemic. 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

The DSCR (CRISIL adjusted) was around 1.0 time in fiscal 2021, and average DSCR (CRISIL adjusted) over the remaining tenure of the debt is expected to remain above 1.4 times. The cash accrual is expected to be sufficient to cover debt obligations of Rs 75-85 per annum over fiscals 2022 to 2024. Liquidity is supported by the maintenance of a DSRA of Rs 15 crore. While the company had cash equivalents and liquid investments of ~Rs 50 lakhs as on March 31, 2021, the liquidity at the Phoenix Mills group is strong at Rs 2,560 crore in the form of cash, cash equivalents, undrawn bank lines and DSRA as on November 16, 2021, which should be available to support cash flow mismatches at ISML, if any.

Outlook: Stable

CRISIL believes ISML will continue to benefit from steady cash flow, which will result in sustenance of adequate debt protection metrics over the medium term.

Rating Sensitivity factors

Upward factors:

• Upgrade in the credit risk profile of TPML could result in a similar rating change on ISML
• Improvement in near term debt service coverage ratios (CRISIL adjusted) to above 1.2 time and maintenance of healthy liquidity position
• Upward change in credit risk profile of TPML could have a similar rating change on UDPL

 

Downward factors:

• Downgrade in the credit risk profile of TPML could result in a similar rating change on ISML
• Increase in vacancy by more than 10% or reduction in rental rates, weakening the debt protection metrics
• Draw down of higher-than-expected incremental debt

About the Company

ISML is a 51:49 subsidiary of TPML 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. It has a well-diversified clientele and healthy occupancy of around 91% (as of September 2021).

About the parent

TPML is the flagship company of the Phoenix Mills group and was incorporated in January 1905 as a textile manufacturer. It diversified into real estate development in 1986 by first constructing a residential tower and then opening High Street Phoenix (HSP) mall in Lower Parel in 1999, followed by Palladium mall (next to HSP) in 2009. Palladium mall caters to uber-luxury brands. Apart from retail assets, TPML also owns and operates Phoenix House, a commercial office space of 1.4 lakh sq. ft in the same premises.

 

About the Group

The Phoenix Mills group is the largest player in the Indian retail mall segment and has a portfolio of 59 lakh sq. ft of eight well-established retail mall assets across major cities in the country and a recently launched mall with 9.5 lakh sq. ft of leasable area. It also has an office portfolio of 13.7 lakh sq. ft in Mumbai and Pune (which shall be increased to 20.24 lakh sq. ft post completion of Tower 2 and Tower 3 in Pune), two operational hotels (one each in Mumbai and Agra), and residential real estate of 37 lakh sq. ft in Bengaluru and Chennai

 

In April 2017, the group entered into an agreement with CPPIB to sell up to 49% stake in ISML for close to Rs 1,700 crore. Development of retail assets will be undertaken across metros and Tier-I cities via wholly owned special-purpose vehicles. In May 2021, CPPIB and TPML entered into an agreement to extend their commitment to the existing alliance by investing an additional Rs 800 crores into ISML. A further commitment of Rs 700 crores has also been done.

 

On Dec 01, 2020, The Phoenix Mills Ltd and its subsidiaries, Offbeat Developers Private limited, Graceworks Realty and Leisure Private Ltd and Vamona Developers Private Ltd have jointly signed a non-binding term-sheet with GIC Private Ltd for formation and development of a strategic retail-led mixed-use platform. Subsequently, GIC has acquired 26% equity stake in these subsidiaries for an aggregate consideration of Rs. 1,111crore; GIC’s stake may further increase to ~33%-36% in the above-mentioned subsidiaries through an additional infusion of up to Rs. 400 crores within the next 12-month period. This is expected to be used as a platform to develop retail-led mixed development properties.

 

In May 2021, CPPIB proposed to invest Rs 384 crore in two tranches for a 49% stake in Phoenix’s subsidiary, Mindstone Mall Developers Pvt Ltd. The funds will be utilised towards development of the group’s new asset in Alipore, Kolkata. Of this, Rs 180 crores have been received as on November 2021.

 

On November 15, 2021 CPPIB committed to invest Rs 1350 crores in tranches for acquiring 49% stake in Plutocrat Commercial Real Estate Pvt Ltd (PCREPL), that is the holding company for Project Rise. It is an office-led mixed-use development with gross leasable area of 1 msf of office space and 0.2 msf of retail space. Rs 787 crores has already been infused by CPPIB towards the project.

 

Key financial indicators – Consolidated*

Particulars	Unit	2021	2020
Revenue	Rs crore	1147	2097
Profit after tax (PAT)	Rs crore	37	421
PAT margin	%	3.3	20.1
Adjusted gearing	Times	0.72	0.94
Interest coverage	Times	1.71	2.98

*CRISIL Ratings-adjusted numbers, including full consolidation of Classic Mall Development Company Pvt. Ltd (CMDCPL), Classic Housing Projects Pvt. Ltd (CHPPL), and Starboard Hotels Pvt. Ltd (SHPL)

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Term Loan	NA	NA	Jun-25	480.0	NA	CRISIL A/Stable
NA	Overdraft Facility	NA	NA	NA	75.0	NA	CRISIL A/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Alyssum Developers Pvt Ltd	Full	Subsidiary
Sparkle One Mall Developers Pvt Ltd	Full	Subsidiary
Sparkle Two Mall Developers Pvt Ltd	Full	Subsidiary
Insight Mall Developers Pvt Ltd	Full	Subsidiary