Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank loan facility of Kukatpally Developers Private Limited (KDPL; wherein Lake Shore India Retail Venture Fund is the majority shareholder) to ‘Positive’ from ‘Stable’, while reaffirming the rating at ‘CRISIL BBB-’.

 

KDPL houses an under-construction mall asset situated in Kukatpally, Hyderabad with a leasable area of 8.1 lac square feet (lsf).

 

The revision of outlook factors increase in construction and financial progress to around 70-75% as on November 2024 from ~50% as on October 2023 and healthy pre-leasing momentum with LOI signed for ~40% of leasable area and lease and license agreement signed by retailers for ~8% of the total area. Therefore, given the progress on construction and likely leasing plans put in place, the start of mall operations seem likely in second quarter of calendar year (CY) 2025. Timely operationalization of mall, increase in signed lease agreements, occupancy and overall stabilization of the mall will remain a key monitorable. 

 

The ratings reflect expectation of timely construction completion, benefit of full funding tie up, and previous track record of Lake Shore India Retail Venture Fund in leasing and managing retail malls. These strengths are partially offset by project execution risks, demand risks and exposure to cyclicality in the real estate and retail sectors.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has taken a standalone view on the company. Funds infused by Lakeshore through optionally convertible debentures (OCDs) of Rs 364.4 crores are treated as ‘neither debt nor equity’ despite having 15% rate of interest, as the same is cumulative and will be paid after lender approval. Moreover, these OCDs are subordinated to bank loan, have ‘pay when able’ clause for payment of both interest and principal, have no default calling rights and have a long tenure, which represent characteristics of hybrid instruments.

Key Rating Drivers & Detailed Description

Strengths:

• Moderate project risk driven by substantial completion of construction and full tie up of construction funding: Gateway Mall, situation in Kukatpally, will be a large upcoming mall in Hyderabad with gross leasable area of 8.1 lakh sq ft. The mall is currently under construction stage and is expected to be launched by second quarter of CY2025. The civil construction of the mall has been completed, with JMC Projects, a construction company under Kalpataru Group, as the civil contractor, and currently MEP work is being undertaken by Grune Designs, thereby mitigating part of the construction risk. Funding risk is mitigated as company has already tied-up the funding for the project in D:E (Debt to Equity) ratio of 47:53, ~70% of the total project cost has been incurred as on November 2024. Entire equity commitment due under financial closure as per Lender’s sanction letter has been brought in and 40% of the total tied up debt has been disbursed. The undisbursed limits will be sufficient to fund the balance project cost. Fire NOC has been applied for and the mall is expected to be launched by second quarter of CY2025 on incurring 80% of the project cost and balance to be incurred post launch with balance cost largely including retention money of contractors.

 

• Previous track record of the fund in leasing and managing retail assets: Lake Shore India Retail Venture Fund, since its inception in 2017, has gradually built its expertise in investing, development and operating A-Grade malls. The primary investor in the fund is Abu Dhabi Investment Authority (ADIA, the sovereign wealth fund of Abu Dhabi (Rated S&P AA/Stable)).

 

The fund is presently managing retail assets with a total leasable area of around 4.1 million sq.ft. across Delhi NCR, Mumbai, Thane, Pune,Hyderabad and Ghaziabad. Although the fund has managed six properties, its mall management and the leasing teams have displayed competence, with all four operational malls under the fund operating at 95%+ occupancy levels. Also reflected, with LOI signed for ~48% (including 8% signed lease agreements) of leasable area of which cinema, entertainment and anchor tenants form about 60% and balance are food & beverage and inline tenant, average rentals are ~Rs 120 per sq.ft. per month.

 

Weaknesses:

• Exposure to demand risks and moderate construction risk: KDPL is the first greenfield mall project being undertaken by the fund with 70% of the project cost incurred and mall is expected to be launched by second quarter of CY025, thus exposing the project to moderate levels of construction related risks Though, Letter of Intent (LOI) has been signed for ~48% of the leasable area, the asset remains exposed to demand risk until final leasing agreements are signed. However, the management is in discussion with many anchor tenants to pre-lease  upto 80% of the space in the next 3-4 months.

 

Although the group has experience in managing retail assets, its ability to construct, market, and scale-up this greenfield project on time will remain critical. Any significant delay in project execution or cost overruns may weaken KDPL’s financial risk profile and will remain a key rating sensitivity factor.

 

• Exposure to cyclicality in the real estate sector and exposure to volatility in interest rates: The real estate sector in India is cyclical and volatile, resulting in high fluctuations in cash inflows because of volatility in realisations. Rental revenue of the mall remains susceptible to factors such as consumer spending, macroeconomic conditions and sudden exit of large/multiple clients. The lease agreements are based on fixed rent, minimum guarantee and revenue-sharing basis. Retail sales are driven by festive seasons, promotions and discounts, which result in sales volatility for the tenants and consequently in rental income. CRISIL Ratings believes increase in competition resulting in reduced lease rental renewals or sustained slowdown in economic activity causing the exit of tenants and consequently higher vacancy may impact rental revenue at the mall. 

 

The floating interest rate on debt further exposes the company to interest rate risk and any delays in last mile approvals   may also pose challenges in budgeted completion of the mall within expected timelines.

 

However, CRISIL Ratings believes the experience of the fund in managing and leasing malls may help reduce the impact of cyclicality in the real estate sector.

Liquidity: Adequate

Liquidity is adequate with average DSCR expected to remain comfortable throughout the tenure of the debt. Liquidity is also supported by comfortable liquidity position of Lake Shore India Retail Venture Fund. The fund will also support the project in case of cost overrun or during inability to service debt as stated in the shortfall undertaking in the sanction letter, thereby providing operational, technical and financial support to KDPL as seen in other assets managed by LSIRVF. However, KDPL, after debt servicing, will upstream cash to LSIRVF by making interest payments on OCDs.

Outlook: Positive

CRISIL Ratings believes KDPL’s business risk profile will improve with expected timely completion of the under-construction project followed by subsequent leasing and stabilization. It will also be supported by expected stable cash flow generation post-operationalization of the retail mall in Hyderabad real estate market.

Rating sensitivity factors

Upward factors:

• Timely operationalization of mall with stabilization of operations with occupancy levels higher than 70%-80% at competitive rental rates.
• Lower than expected debt at the time of operationalization of the mall leading to a sustained higher than anticipated debt service coverage ratio.

 

Downward factors:

• Any time or cost overruns adversely impacting the debt protection metrics or occupancy levels below 50-60% at the time of operationalization of the mall
• Higher than expected debt at the time of refinancing the construction loan leading to deterioration in financial risk profile

About the Company

KDPL was incorporated in 2010 and houses an under-construction mall asset located in Kukatpally, Hyderabad with gross leasable area of 8.1 lakh sq ft. KDPL is 94% owned by Lake Shore India Retail Venture Fund (which is ~97% owned by ADIA and 3% by the four individual contributors to the fund). The fund has gradually built its expertise in investing, development and operating A-Grade malls and is presently managing six projects with a total leasable area of around 4.1 million sq.ft. across Delhi NCR, Ghaziabad, Mumbai, Thane, Pune and Hyderabad.

Key Financial Indicators*

As on / for the period ended March 31	Units	2024	2023
Operating income	Rs crore	NM*	NM*
Reported profit after tax	Rs crore	NM*	NM*
PAT margin	%	NM*	NM*
Adjusted debt/adjusted networth	Times	NM*	NM*
Adjusted Interest coverage	Times	NM*	NM*

*NM: Not meaningful; The financials are not meaningful as the mall is under-construction.

List of covenants

• Minimum Asset cover (Fair market value of the project/outstanding loan amount) of 1.5x

Any other information: Not Applicable