| VR Dakshin Private Limited | ||
| Rating outlook revised to 'Negative'; Rating Reaffirmed | ||
| Rating Action | ||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the non-convertible debentures (NCDs) of VR Dakshin Private Limited (VR Dakshin) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL BBB’.
The revision in outlook reflects lower than anticipated occupancy in Bengaluru mall. While a large anchor tenant was expected to take up more than 25% space in Bengaluru mall, thereby pushing the occupancy to more than 70% by December 2022, the deal was not completed and occupancy for Bengaluru mall remains at around 50% presently. Occupancy in Chennai mall has remained stable at around 87%. Occupancy at both Bengaluru and Chennai mall is expected to gradually improve in FY24. Consumption levels at Chennai mall has surpassed pre-covid levels. However, consumption levels have yet to reach pre-covid levels in Bengaluru mall due to lower occupancy.
Company is also in the process of refinancing its debt of Chennai mall with NCDs of Rs 750 crore, which is expected to be completed shortly. The refinancing is expected to generate liquidity of around Rs 200 crore, utilization of which will remain a key monitorable. The company, currently, has sufficient liquidity in the form of DSRA – equivalent to 3 month of debt servicing (Rs 29 cr) and additional cushion in the form of unutilized CC limits of Rs.10 cr which is equivalent to 2.5-3.0 months of debt servicing.
The rating continues to reflect good occupancy in Chennai mall alongwith reputed clientele, adequate debt protection metrics supported by flexible terms of the rated NCDs and strong operational and management support from the sponsors. These strengths are partially offset by continued lower occupancy levels in Bengaluru mall and susceptibility to competition leading to fluctuations in occupancy levels and cyclicality in the hospitality industry. |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of VR Dakshin as the company has no financial linkages with other group companies.
CRISIL Ratings has treated the NCDs and fully compulsorily convertible debentures (FCCDs) as debt as they carry interest and are to be redeemed by 2035. However, these instruments are subordinated to external debt, have no fixed redemption schedule, and redemption/interest payment can be made only from surplus cash flow available after servicing external loans. |
Key Rating Drivers & Detailed Description Strengths: Increased income from rentals aided by reputed clientele The Chennai mall with total leasable retail area of 9.21 lakh sq ft became operational in June 2018 and had an occupancy of 87% as of January 2023. Income from rentals of Chennai mall (contributing 75-80% of cashflows) has increased on account of increase in average rental rates to Rs.125/sq.ft. from Rs.105/sq.ft. in pre-covid year of 2020. No anchor tenants have left the space in Chennai mall.
The Bangalore mall with total leasable area of 4.88 lakh sqft has seen reduction in occupancy level to around 50% as a large anchor tenant which was expected to take up more than 25% of the space has not taken up the space.
Tenants in both the malls include established brands which have signed lease contracts of 3-15 years with built in escalation clauses of up to 15% every three years along with revenue share agreements, which provide healthy revenue visibility.
Adequate Debt protection metrics supported by flexible terms of the rated NCDs Steady cash flow from rentals and the ballooning repayment structure of the external debt will result in a moderate debt service coverage ratio (DSCR) over the medium term. Furthermore, the terms of the NCDs are flexible with no fixed interest payment or redemption obligation. Interest will be accumulated and paid based on the surplus cash flow available after meeting construction and other operating expenses as well as servicing external bank debt. Only excess funds post NCD interest payment will be used for redemption.
Strong operational and management support from the sponsor The company benefits from the strong parentage of the Virtuous Retail South Asia (VRSA). VRSA is a joint venture between Xander group and APG Asset Management. The sponsor group's experience in asset management and sizeable portfolio of properties in India have resulted in healthy occupancy and steady improvement in rentals across assets. The company benefits from the management's proactive approach towards asset maintenance to ensure tenant longevity and quality. Additionally, the sponsor has infused funds to the tune of Rs.12-13 crore in June-2022 itself in the form of debentures.
Weakness: Reduction of occupancy level in both the malls and susceptibility to competition leading to fluctuations in occupancy levels There has been reduction in occupancy level from 93% to 87% for Chennai mall and from 73% to 50% for Bengaluru mall. However, occupancy has increased marginally by around 1% in Chennai mall and by around 5% in Bengaluru mall. Though no anchor tenant has vacated the space in Chennai mall. Avg. rental in Chennai Mall has increased now to Rs 125 psf from Rs 105 psf in 2020, which will lead to improvement in rental income. Further, discussions are going on letting out vacant mall space to multinational brands/Jewellery brand/Food court. Accordingly, occupancy is expected to reach to 90% by the end of FY-24.
The company had asked its tenants to vacate the space ~ 1.28 lac sq ft of space (~27% of area) primarily to accommodate large anchor tenant which led to increase in vacancy from 73% to 45%. However, the tenant did not take up the space and currently, occupancy in Bengaluru mall is around 50%. Average rental rates have increased to Rs.71 /sqft from Rs.64 /sqft in pre-covid year of 2020. Company is now focusing on leasing the area to tenants in apparel and F&B segments.
Rental collection, the main source of revenue, is volatile and susceptible to economic downturns, which would impact tenants’ business risk profiles, and hence occupancy and rental rates. Any termination of leases and/or delay in signing of new leases, especially in light of the pandemic, will impact the cash flow. Emergence of any competing mall/office space, while unlikely, could divert footfall. The ability of cash flow to absorb the impact of fluctuations in occupancy remains a rating sensitivity factor.
Susceptibility to intense competition and cyclicality in the hospitality industry The Indian hospitality industry is witnessing intense competition due to the growing presence of foreign players and expansion by domestic players. Moreover, the industry is vulnerable to changes in domestic and global economies such as subdued demand on account of the pandemic which has resulted in severe strain on occupancy. |
Liquidity: Adequate DSCR is expected above 1 time over the tenure of the debt. However, DSCR in the near term is expected to remain stretched at 1-1.1 times. The company has sufficient liquidity in the form of DSRA equivalent to 3 month of debt servicing (Rs 29 cr) and unutilized CC limits of Rs.10 cr which is equivalent to 2.5-3.0 months of debt servicing. The NCD structure allows interest to be accumulated annually and paid depending on the availability of cash. Furthermore, absence of any fixed redemption schedule for the NCDs adds flexibility to cash flow management. |
Outlook: Negative CRISIL Ratings believes the credit risk profile of VR Dakshin may weaken over the medium term on account of the continued higher vacancies impacting cash flows. |
Rating Sensitivity Factors Upward factors:
Downward factors:
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About the Company Incorporated in 1987, VR Dakshin Pvt Ltd (formerly known as Sugam Vanijya Holdings Pvt Ltd) acquired land parcels in Bengaluru and Chennai for construction of mixed-use development consisting of malls, commercial offices, and a hotel. The company is owned and funded by APG Asset Management and the Xander group through a joint venture, Virtuous Retail South Asia Pte Ltd.
The mall in Bengaluru is in the Dyvasandra Industrial Area and has leasable space of 4.88 lakh sq ft in retail space and a 54-room hotel. The Chennai mall is in Anna Nagar and has leasable space of 9.21 lakh sq ft in retail space and a 20-room hotel. Both malls have commenced operations. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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