Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank facilities of Siddheshwari Griha Nirman Private Limited (SGNPL; part of the Salarpuria-Sattva group) at ‘CRISIL A+/Stable’.

 

The rating continues to reflect the sustained market position of the company reflected in steady increase in lease rental income over the years, which is expected to continue over the medium term along with healthy sales in the residential segment. Moreover, lower-than-expected incremental debt led to improvement in the financial risk profile.

 

The ratings continue to reflect the group’s established development track record and sound saleability of its residential projects, strong commercial portfolio supported by healthy occupancy and marquee clientele, and strong financial risk profile. These strengths are partially offset by exposure to risks related to the execution of the large commercial real estate development plans and subsequent leasing, and exposure to inherent risks in the real estate sector. Also, the group’s plan to monetize part of its commercial real estate portfolio by the way of moving these to the upcoming REIT remains a key monitorable.

 

The committed annualised lease rentals which increased 12% on-year to Rs.1,276 crore as on March 31, 2023 from Rs 1,142 crore as of March 31, 2022 and contributes to ~55% of the group’s total income. The commercial leasing portfolio has increased to 153.6 lsf as on Mar-2023 from 144.4 lsf as on Mar-2022 and is at a healthy committed occupancy of 91% as on Mar-2023. Both leasable area and annualised rentals have grown over 2 times since fiscal 2018, with occupancy sustaining at healthy levels of 90% or higher despite steady addition of substantial new area each year. Annualised lease rentals are expected to grow in the medium term with under construction commercial assets coming online in phases.

 

The group has witnessed strong residential sales of ~1.9 million square feet (mn sqft) valued at Rs 1,170 crore in fiscal 2023, a growth of 72% from fiscal 2022. The momentum is expected to continue on the back of healthy end-user demand, trend of market consolidation in the real estate market along with group’s strong pipeline of launches in the medium term. Construction activity has progressed at a healthy pace as well and this should support future sales and collections. Consequently, collections remained strong at Rs 915 crore in fiscal 2023, registering a growth of 37% over fiscal 2022. Residential sales growth in fiscal 2024 will also be supported by healthy pace of liquidation of finished inventory. The receivables from the sold area in the completed and ongoing projects are adequate to cover significant portion of the pending construction cost. Further, healthy cashflows and low leverage in the residential segment translates into debt-to-total assets ratio of 10% as on March 31, 2023 and is expected to be modest at below 10% over the medium term (CRISIL Ratings estimates).

 

The overall debt was lower-than-expected and was at Rs.6,396 crore as on Mar-2023 with LRD debt contributing 70% of overall debt. The overall debt is however expected to increase to above Rs,7,500 crore on account of increase in LRD debt with expected completion of few large commercial assets. The financial risk profile is expected to be strong with ~80% of the debt expected to be backed by highly stable rent-generating assets over the medium term. The ratio of total debt to annualised lease rentals and LRD debt to annualised lease rentals were at 4.8 times and 3.5 times, respectively, as of March 2023. CRISIL Ratings expects the LRD debt to annualised lease rentals ratio to remain below 5 times with contribution of the LRD debt to total debt remaining over 60%. The group also has strong financial ability to raise funds, if required considering the existing loan-to-value (LTV) ratio of ~40%.

 

The group is looking to diversify into new segments. It has won a large turnkey contract for development of office space for one of the Fortune 500 companies which will add to its cash flow and plans to expand into datacentres and warehousing. Investment in new areas will remain a key monitorable, however, the improved financial risk profile is expected to support the group’s plans.

Analytical Approach

CRISIL Ratings has combined the financial and business risk profiles of all the entities of the Salarpuria-Sattva group that have contracted external debt and have ongoing or planned projects. That’s because all these entities are managed by the same promoters and have fungible cash flows. The financial and business risk profiles of the group’s joint ventures (JVs) have also been combined because of the group’s significant control over their operations and as it is likely to provide need-based financial support to them for timely servicing of term debt. All the entities are collectively referred to as the Salarpuria-Sattva group. CRISIL Ratings has not combined the other businesses such as co-working spaces, co-living spaces, ecommerce, aerospace, technology, finance and investment as these are not related to the group’s core real estate business. Also, the scale of operations in these businesses is very small vis-à-vis the group’s networth.

 

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 development track record and sound saleability of residential projects

With a track record of over three decades, the group is a prominent brand and has an established position in the real estate market in Bengaluru. It has developed over 705 lsf of residential and commercial area (built up) till date, mainly in Bengaluru and Hyderabad, of which ~56% is in the commercial segment. The group benefits from its healthy reputation and strong relationship with customers.

 

It has ongoing projects with around 50 lsf of saleable area (developer share) in the residential segment. These projects had saleability of 36% (slightly lower as some of the projects were launched recently) and construction progress of 52% as on Mar-2023. Collections are expected to improve to Rs 1300-1500 crore over the medium term, supported by steady new launches, healthy sales of ongoing projects and liquidation of completed projects. Strong brand and execution track record helps achieve healthy sales at the time of launch. The group is expected to sustain its strong business risk profile over the medium term, backed by stable saleability in ongoing projects and strong pipeline of launches.

 

Strong commercial asset portfolio, supported by healthy committed occupancy and marquee clientele

The group had healthy committed occupancy of 91% in its 153 lsf commercial portfolio as on Mar-23, which has remained steady despite addition of substantial space each year. Healthy occupancy demonstrates the group’s established position in the commercial business segment in Bengaluru and Hyderabad. Customer concentration is moderate with the top 10 tenants occupying close to 45% of the total leasable area. The tenants are established players and multinational companies such as JP Morgan, Deloitte, Novartis, Microsoft and Google, which ensure timely receipt of rentals. Though 6.5% of the total leasable area will be up for renewal over next 3 years till fiscal 2026, this is not expected to pose a major challenge because of the group’s experience and longstanding relationship with the tenants, which will ensure smooth renewals. Also, many tenants have incurred large fit-out cost, which offsets the vacancy and renewal risks. The commercial asset portfolio is expected to continue to ramp-up over the medium term with new developments in Hyderabad and Bengaluru.

 

Strong financial risk profile

The capital structure is comfortable, supported by healthy networth of Rs 6,575 crore as on March 31, 2022, and bank debt of Rs 6,396 crore as on Mar-2023. 70% of current Bank debt comprises of LRD debt. Financial risk profile is also characterised by high visibility of residential operating cash inflow over the medium term, given the total saleable area potential (including ongoing projects) of ~15 mn sqft across Bengaluru and Hyderabad. 

 

While debt is expected to increase to ~ Rs 7,500 crore over the medium term on account of under-construction commercial office space, the construction loans are likely to be converted into long-tenure LRD loans once the properties become operational and are leased. CRISIL Ratings expects leverage to remain steady with LRD debt to annualised lease rentals ratio less than 5 times and contribution of the LRD debt to total debt remaining over 60%.

 

The group avails of part of the debt in the form of overdraft funding rather than conventional term loans, which helps manage cash flow better and results in lower interest outflow. The group has sufficient cushion for accessing the limit when needed. The steady lease rentals from the commercial portfolio and good saleability in residential projects should help keep the financial risk profile healthy over the medium term.

 

Weaknesses:

Exposure to risks related to execution of large commercial real estate development plans and subsequent leasing

The group has a large under-construction commercial portfolio of ~130 lsf in Hyderabad and Bengaluru. These are in various stages of development and around 37% of cost has been incurred. Seven assets with total of 75 lsf of commercial leasable area are expected to be completed over next 2 fiscal years. Any time or cost overrun and decline in demand and subsequent leasing could hit the cash flow adversely and the group may have to raise more debt to meet obligation on construction finance loans.

 

Exposure to inherent risks in the real estate sector

Cyclicality in the domestic real estate sector leads to fluctuations in cash inflow because of volatility in saleability and realisations, while outflow such as construction cost and debt obligation remain fixed. Lower-than-expected demand could result in lower collection and adversely impact cash flow. However, the strong track record of the group in the Bengaluru real estate space mitigates the implementation and demand risks.

Liquidity: Strong

The group had cash and equivalent of Rs 220 crore as of March 31, 2023, and unutilised bank lines of around Rs 2,348 crore as on March 31, 2023. Cash accrual is expected to be adequate to meet the debt obligation. Liquidity is also supported by strong financial flexibility with a healthy LTV ratio of ~40% 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 Salarpuria-Sattva group will maintain its strong financial risk profile supported by established market position and stable lease rental income

Rating Sensitivity Factors

Upward factors:

• Sustained improvement in market position, with scale up of the residential business to over Rs 1,300 crore of collection per annum and annual lease rental crossing Rs 1,500 crore
• Sustained reduction in debt and leverage, strengthening the group's financial risk profile and debt protection metrics

 

Downward factors:

• Weakening of debt protection metrics leading to total debt to annualised lease rentals ratio of more than 7.5 times
• Lower-than-expected cash flow due to delay or cost overrun in construction of additional leasable space or vacancy of more than 15% in leasable space or lower-than-expected rental rates
• Lower than expected residential collections of Rs 500 crore or lower

About the Group

The Salarpuria-Sattva group was founded by the late Mr G D Salarpuria in 1986 in Kolkata. Mr Bijay Agarwal, managing director, manages the operations of the group. The group has been involved in construction and development of real estate for 37 years. Salarpuria Properties Pvt Ltd and Sattva Developers Pvt Ltd are the two flagship companies of the group. The other group entities are mainly involved in individual projects. It has ISO 9001:2008, 14001:2004, and 18001:2007 certifications. Till date, 705 lsf of built up area has been developed, of which, around 56% comprises commercial development (in Bengaluru and Hyderabad). The group also has presence in Pune (Maharashtra), Coimbatore (Tamil Nadu), and Goa.

Any other information: Not applicable