Rating Rationale
March 31, 2020 | Mumbai
Sobha Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.3100 Crore
Long Term Rating CRISIL A+/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised the outlook on its ratings on bank facilities of Sobha Limited (Sobha; part of the Sobha group) to 'Negative' from 'Stable', while reaffirming the ratings at 'CRISIL A+/CRISIL A1'.
 
The outlook revision reflects weakening in the group's operational performance, as reflected in decline in collections to Rs 1,504 crore for the nine months ended December 31, 2019, from Rs 1,601 crore for the corresponding period of the previous fiscal. The slowdown followed revision in payment terms for projects launched, post implementation of the Real Estate (Regulation and Development) Act or RERA, with receivables spread evenly over the project life cycle. In comparison, bulk of advances from projects launched in the pre-RERA phase, were received much ahead of construction. Furthermore, the group incurred higher cost towards last-mile completion of certain older projects. These reasons together led to a sharp fall in net operating cash flow. Lower surplus generation, coupled with continued expenses towards commercial construction and land banking, resulted in higher consolidated gross debt of Rs 3,208 crore as on December 31, 2019 (from Rs 2612 crore as on March 31, 2019), while the net gearing exceeded management guidance of 1.1 times.
 
CRISIL believes the group's cash flow position could be adversely impacted by measures taken by the central government towards containment of COVID-19 which include temporary closure of non-critical establishments, resulting in complete stoppage of construction activity. This may affect future collections, while new sales may also witness a sharp slowdown, due to weak market sentiment. While all these measures are applicable till April 15, 2020, their revocation remains contingent upon directive from the Central government, and extent of spread of COVID-19. CRISIL will continue to monitor these events.
 
The ratings continue to reflect the Sobha group's healthy business risk profile, supported by strong execution capabilities and established brand position, and moderate financial risk profile, aided by strong refinancing ability. These strengths are partially offset by the aggressive debt-funded land acquisitions and exposure to risks and cyclicality in the real estate industry.

Analytical Approach

For arriving at its ratings, CRISIL has fully combined the business and financial risk profiles of all ongoing and planned projects in Sobha and its subsidiaries and associate companies. All the entities, collectively referred to as the Sobha group, are in the same line of business, have common promoters, and share significant operational, managerial, and financial linkages.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy business risk profile, supported by strong execution capabilities and established brand position:
The Sobha group has an established position in Bengaluru's real estate market. It has developed residential real estate and contractual projects of 1068.0 lakh square feet (sq. ft) as on December 31, 2019. It now has ongoing residential projects spread over 198.0 lakh sq. ft (excluding completed projects, unreleased area, and projects planned to be launched) and contractual projects of 105.1 lakh sq. ft. Strong execution capabilities are reflected in quality construction and completion of projects on time or ahead of schedule in some instances'the group delivered residential area of 54.1 lakh sq. ft in fiscal 2019. With a strong market position in Bengaluru, the group has expanded to Kozhikode, Chennai, Cochin, Coimbatore, Gurugram, Mysore, Pune, and Thrissur in recent years. It has diversified into the contractual business, and also manufactures interiors, concrete products, and glazing and metal works. These businesses together contributed to close to 40% of the total collections for the first nine months of fiscal 2020 (9m 2020), and the contribution should sustain at these levels over the medium term.
 
* Moderate financial risk profile:
Financial risk profile is moderate. Though the group has sizeable debt repayment obligations upcoming, financial flexibility is supplemented by its demonstrated refinancing ability, undrawn bank limit of around Rs 1,059 crore (including unutilised cash credit), and cash and cash equivalents of Rs 114 crore (as on December 31, 2019).
 
Weaknesses:
* Aggressive, debt-funded land acquisitions:
The group had undertaken debt-funded land purchases historically, with close to 40% of outstanding debt being used for purchase of land. Though collections have grown in recent years, debt remained high, owing to continued land acquisitions and ongoing construction. Gross debt increased to Rs 3,208 crore as on December 31, 2018, while net gearing increased to 1.3 times. The group is expected to reduce debt level and maintain net gearing at 1.10 times, over the medium term, thereby limiting incremental debt. However, any further increase in debt have an adverse impact on the financial risk profile, and hence, will remain a key rating sensitivity factor.
 
* Exposure to risks and cyclicality inherent in the real estate sector:
Cyclicality in the real estate sector could result in fluctuations in cash inflow and volatile sales. In contrast, cash outflow, such as for debt servicing, is relatively fixed. Any decline in demand could adversely impact sales velocity and collections, and thus, expose the group to significant refinancing risk.
Liquidity Adequate

Liquidity is supported by adequate saleability and collections in ongoing projects, and expectation of sustenance with new launches. External borrowing was availed to fund around 27% of project cost (reflected in outstanding debt to total assets). Long-term debt repayment obligations may range from Rs 439 crore to Rs 606 crore over the next three fiscals through March 2023. The group has adequate financial flexibility to manage upcoming repayments. Liquidity is aided by unsold inventory of Rs 5,872 crore in ongoing projects (excluding area not released for sale), along with almost fully paid-up land bank, with development potential of 2,120 lakh sq. ft, against which additional debt can be raised, if required. Undrawn bank limit of Rs 1,059 crore and cash and cash equivalents of Rs 114 crore offer an additional buffer.

Outlook: Negative

CRISIL believes the Sobha group's capital structure may weaken due to impact of COVID-19.

Rating Sensitivity factors
Upward factors:
* Higher-than-expected sales in the ongoing and upcoming residential projects, leading to substantial improvement in operating cash flow
* Sharp reduction in debt level, leading to net gearing of below 1.1 times
 
Downward factors:
* Sharp decline in operating cash flow, triggered by slackened saleability of existing and proposed projects or delays in project execution
* Weakening of financial risk profile, due to substantial borrowing, and resultant increase in net gearing to over 1.3 times
About the Company

Sobha was founded by Mr. PNC Menon in August 1995. The Bengaluru-based group has been involved in construction and development of real estate for the past 23 years. As on December 31, 2019, it has developed area of 1068.0 lakh sq. ft, of which around 75% have been in Bengaluru. The group also has presence in Thrissur, Chennai, Pune, Gurugram, Coimbatore, Calicut, Mysore, and Cochin.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 3,478 2,813
Profit after tax (PAT) Rs crore 297 217
PAT margin % 8.5 7.7
Adjusted gearing Times 1.28 0.89
Interest coverage Times 2.81 2.40

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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) Rating assigned with outlook
NA Term loan NA NA Mar-22 460.8 CRISIL A+/Negative
NA Term loan NA NA Mar-23 97.3 CRISIL A+/Negative
NA Term loan NA NA Jun-21 100.0 CRISIL A+/Negative
NA Term loan NA NA Sep-25 50.0 CRISIL A+/Negative
NA Term loan NA NA Mar-21 64.5 CRISIL A+/Negative
NA Term loan NA NA Jun-22 193.4 CRISIL A+/Negative
NA Term loan NA NA Dec-24 181.0 CRISIL A+/Negative
NA Term loan NA NA Jun-25 48.4 CRISIL A+/Negative
NA Term loan NA NA Dec-23 100.0 CRISIL A+/Negative
NA Term loan NA NA Sep-23 268.5 CRISIL A+/Negative
NA Term loan NA NA Mar-20 3.1 CRISIL A+/Negative
NA Term loan NA NA Sep-21 7.5 CRISIL A+/Negative
NA Lease rental discounting loan NA NA Jun-29 64.0 CRISIL A+/Negative
NA Lease rental discounting loan NA NA Dec-30 25.0 CRISIL A+/Negative
NA Term loan NA NA Mar-24 251.0 CRISIL A+/Negative
NA Term loan NA NA Jun-24 73.4 CRISIL A+/Negative
NA Term loan NA NA Dec-21 58.5 CRISIL A+/Negative
NA Term loan NA NA Sep-22 28.0 CRISIL A+/Negative
NA Cash credit NA NA On demand 853.1 CRISIL A+/Negative
NA Bank guarantee NA NA NA 172.5 CRISIL A1
*Based on outstanding/utilised debt as on December 31, 2019
 
Annexure - List of entities consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
Sobha City [Partnership firm] Full Subsidiary/associate
Sobha Developers (Pune) Ltd Full Subsidiary/associate
Sobha Assets Pvt. Ltd Full Subsidiary/associate
Sobha Highrise Ventures Pvt. Ltd Full Subsidiary/associate
Sobha Nandambakkam Developers Ltd Full Subsidiary/associate
Sobha Tambaram Developers Ltd Full Subsidiary/associate
Vayaloor Properties Pvt. Ltd Full Subsidiary/associate
Vayaloor Builders Pvt. Ltd Full Subsidiary/associate
Vayaloor Developers Pvt. Ltd Full Subsidiary/associate
Vayaloor Real Estate Pvt. Ltd Full Subsidiary/associate
Vayaloor Realtors Pvt. Ltd Full Subsidiary/associate
Valasai Vettikadu Realtors Pvt. Ltd Full Subsidiary/associate
*Details as on March 31, 2019
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  2927.50  CRISIL A+/Negative          31-12-18  CRISIL A+/Stable/ CRISIL A1  18-09-17  CRISIL A+/Stable  -- 
Non Fund-based Bank Facilities  LT/ST  172.50  CRISIL A1          31-12-18  CRISIL A1  18-09-17  CRISIL A1  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 172.5 CRISIL A1 Bank Guarantee 256.7 CRISIL A1
Cash Credit 853.2 CRISIL A+/Negative Cash Credit 528.1 CRISIL A+/Stable
Term Loan 2074.3 CRISIL A+/Negative Letter of Credit 299.7 CRISIL A1
-- 0 -- Proposed Short Term Bank Loan Facility 223.3 CRISIL A1
-- 0 -- Term Loan 1792.2 CRISIL A+/Stable
Total 3100 -- Total 3100 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Rating criteria for Real Estate Developers
CRISILs Criteria for Consolidation

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