Rating Rationale
June 16, 2022 | Mumbai
Nirlon Limited
'CRISIL AA+/Stable' assigned to Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.1230 Crore
Long Term RatingCRISIL AA+/Stable (Assigned)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the long-term bank facilities of Nirlon Limited (Nirlon).

 

The rating reflects the company’s steady cash flow supported by the advantageous location of Nirlon Knowledge Park (NKP), its healthy occupancy and marquee clientele. The rating also factors in strong debt protection metrics and established track record of the asset. These strengths are partially offset by exposure to geographical and tenant concentration risks and susceptibility to volatility in occupancy and interest rates.

Analytical Approach

CRISIL Ratings has taken a standalone view of the business and financial risk profiles of Nirlon as it has only two assets, NKP and Nirlon House, and nil financial linkages with group companies.

Key Rating Drivers & Detailed Description

Strengths:

  • Stable cash flow: NKP is in Goregaon East and is close to the Western Express Highway, one of Mumbai’s arterial highways, Jogeshwari-Vikhroli Link Road and two railway stations on the Western Railway line. This has made the park an attractive destination for leading global banking and financial services companies such as JP Morgan, Morgan Stanley, Citicorp, Deutsche and BNP Paribas. The occupancy of the park has remained above 90% from March 2018 and was healthy at 96.9% (excluding area under phase V) for the quarter ended March 31, 2022. The company received occupation certificate for phase V, with leasable area of 1.16 million square feet (sq. ft), in June 2021 and the entire space has been leased with rentals commencing from May 15, 2022. The occupancy now stands at 98% including the new area under phase V.

 

The rating also factors in the secure leave and license agreements with lock-in and lease periods of 3-5 years and 4-10 years, respectively, and in-built escalations of 15% every 3-5 years for most licensees.

 

  • Strong debt protection metrics: Debt service coverage ratio (DSCR) is expected above 3 times throughout the tenure of the debt. The DSCR is supported by low debt level, with the debt-to-lease rental ratio expected at below 3 times as on March 31, 2023. Additionally, liquidity is supported by the presence of a debt service reserve account (DSRA) equivalent to one month of debt servicing obligation and an overdraft limit of Rs 80 crore (Rs 62 crore utilised as on May 31, 2022). Cash and equivalent were healthy at Rs 89 crore as on May 31, 2022.

 

The lease rental discounting loan (Rs 1,150 crore as on May 31, 2022) has a tenure of 10 years, with moratorium on principal repayment for the first five years and part debt repayment during the remaining tenure, exposing the company to refinancing risk. Nevertheless, the loan-to-value (LTV) ratio is expected to be low at less than 30%, protecting investors from sudden decline in the value of the property. The company does not have any immediate capital expenditure plans, and hence, is unlikely to contract incremental debt. However, increase in debt in the absence of an additional revenue stream may impact the financial risk profile and will be a key rating sensitivity factor.

 

  • Established track record: Nirlon benefits from its track record of over 10 years of managing, leasing and marketing the property, which has resulted in healthy occupancy, even during the pandemic. The company has a professional management team with vast experience looking after the administrative and daily operations. The company has strong relationships with all stakeholders'lenders, tenants and creditors. Additionally, it benefits from the management’s proactive approach towards asset maintenance to ensure tenant retention and quality.

 

Weaknesses:

  • Geographical and tenant concentration risks: As the company has a single asset (NKP), geographical concentration risk persists. Furthermore, the top five licenses contribute to 87.8% of gross lease rentals (as of May 2022), exposing the company to tenant concentration risk; the largest licensee contributes to 40.7% of gross lease rentals (as of May 2022). While the risk is mitigated by longstanding relationships with tenants and secured leave and license agreement terms with presence of notice period and security deposit of 6-9 months, if any of these tenants vacate the premises, it may be difficult to find an alternative within the stipulated time for the entire office space. This may adversely impact rental income and will be a key rating sensitivity factor.

 

  • Susceptibility to volatility in occupancy and interest rates: Cash inflow is susceptible to volatility in occupancy or realisations (a function of rentals per sq. ft), while cash outflow is fixed, except fluctuations in interest rates (as they are floating). Around 38.6% of the area will be up for renewal over the three fiscals through 2025. Timely renewal or leasing of this area at similar or better terms will be critical. Although cash flow will be able to absorb the impact of fluctuations in interest rates and occupancy partially, these will remain key rating sensitivity factors.

Liquidity: Strong

DSCR is expected to remain above 3 times throughout the tenure of the debt. Cash flow will be sufficient to cover interest obligation and regular maintenance over the three fiscals through 2025; the company has received moratorium on principal repayment during this period. Liquidity is further supported by a DSRA equivalent to one month of debt servicing obligation, presence of overdraft of Rs 80 crore (Rs 62 crore utilised as on May 31, 2022) and cash and equivalent of Rs 89 crore as on May 31, 2022.

Outlook: Stable

CRISIL Ratings believes the debt protection metrics of Nirlon will remain robust backed by steady cash flow from lease rentals and low debt.

Rating Sensitivity factors

Upward factors:

  • Substantial geographic diversification while maintaining financial risk profile

 

Downward factors:

  • Decline in cash flow owing to fall in occupancy below 85% or renewals at lower rental rates
  • Depreciation in the value of the underlying assets or incremental debt leading to LTV ratio of over 40%

About the Company

Nirlon owns and operates NKP. The park has total leasable area of 3.06 million sq. ft and has been developed in a phase-wise manner with the final phase (phase V), comprising of 1.16 million sq. ft, receiving occupation certificate in January 2022. The company has track record of collecting rentals for over ten years. It also owns undivided interest of 75% in Nirlon House, located in Worli (leasable area of 0.05 million sq. ft).

 

The company is majority owned by Government of Singapore Investment Corporation (GIC) with 63.9% shareholding through its affiliate, Reco Berry Pvt. Ltd (as on March 31, 2022).

 

In fiscal 2022, Nirlon’s operating income and profit after tax (PAT) were Rs 384 crore and Rs 111 crore, respectively, on a provisional basis.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on / for the period ended March 31

 

2021

2020

Operating income

Rs crore

326

334

Profit after tax (PAT)

Rs crore

127

109

PAT margin

%

39

33

Adjusted debt / adjusted net worth

Times

1.70

2.18

Interest coverage

Times

17.08

7.22

 

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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

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

Lease Rental Discounting Loan

NA

NA

Apr-32

1150

NA

CRISIL AA+/Stable

NA

Overdraft Facility

NA

NA

NA

80

NA

CRISIL AA+/Stable

 

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 1230.0 CRISIL AA+/Stable   --   --   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Lease Rental Discounting Loan 1150 Hongkong & Shanghai Banking Co CRISIL AA+/Stable
Overdraft Facility 80 Hongkong & Shanghai Banking Co CRISIL AA+/Stable

This Annexure has been updated on 16-Jun-22 in line with the lender-wise facility details as on 16-Jun-22 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties

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