Fitch affirms Lodha Developers ratings at ‘B’; outlook stable
MUMBAI: Fitch Ratings has affirmed builder Lodha Developers Long-Term Issuer Default Rating at 'B'. The Outlook is Stable.
The agency has also affirmed the rating on the outstanding $325 million 12% senior unsecured notes issued by Lodha Developers International and guaranteed by Lodha and certain subsidiaries at 'B' with a Recovery Rating of 'RR4'.
According to Fitch, Lodha's ratings are supported by its strong market positioning, with the highest volume market share in the Mumbai metropolitan region.
“The ratings are constrained by Lodha's high leverage, which we expect to remain elevated in the financial year ending March 2019 (FY19), before inching lower over FY20-FY21 as the company completes the construction of its London projects and starts to access cash,” the rating agency said in a statement.
In 2017-18, Lodha reported cash collection and property presales of Rs 8,560 crore in 2017-18 against Rs 7,670 crore a year ago and Rs 8,130 crore against Rs 6,970 crore a year ago, respectively.
The company has ramped up the speed of collections after several projects received occupation certificates, which is when 100% of the collection becomes due. Presales growth was supported by higher demand for completed and near-completed projects, especially from the affordable segment, Fitch said.
Lodha's volume market share in the Mumbai metropolitan region has risen to 13% as of nine months of 2017-18, up from 10% in 2016-17 and 8% in 2015-16, outpacing the overall market.
Buyer confidence has been shored up by the government's culture of improving transparency; for instance, via the introduction of the goods and services tax and revised real estate regulations. Affordability is also being improved by the government's 'Housing for All' initiative and the granting of infrastructure status to the affordable-housing sector, which aim to boost supply in the low- and mid-income segments.
Lodha has launched projects at a new location of Upper Thane within the affordable segment in addition to its flagship development underway at Palava, and other suburban locations in Mumbai. Expansion into the affordable segment could erode margins, but Fitch does not expect this to be significant.
The rating agency expects Lodha's undrawn credit lines, cash flow and business-risk profile to help the company secure incremental refinancing when needed.
Lodha reported short-term debt of Rs 21,200 crore as of 2017-18, as Indian accounting standards require real estate companies' to report debt due in the next three years as current maturities.
“Lodha has Rs 800 crore debt falling due in 2018-19, with available and undrawn onshore credit lines of Rs 3,500 crore as at FYE17, and has already refinanced the Rs 200 crore of debt maturing in 3M19.
There is Rs 4,400 crore of debt falling due in 2019-20, including the Rs 32.5 crore unsecured notes,” Fitch said.
However, it expects Lodha's first London project in Lincoln square to be completed during the financial year, releasing cash flow of around 303 million pounds, available for servicing debt at London assets during this period. There is also 102 million pounds worth unsold inventory at Lincoln Square, which we expect to be sold after 2019-20.
Lodha's leverage, as measured by net adjusted debt/adjusted inventory, of 79% in FY18 was higher than Fitch's estimate of 71% due to worse-than-expected negative operating cash flow, but sales at the India business and a pick-up in collections at the London projects, which will have incurred 91% of total construction costs by 2019-20, should help to gradually lower leverage, Fitch added.
Lodhas pre-sales in India increased at a compound annual growth rate (CAGR) of 12% between FY16-FY18 and collections rose by 18%, but collections from the London projects will only become due on project completion and handover of sold units.
Fitch expects leverage to remain high at around 79% in 2018-19 then fall to 77% in 2019-20 when the first smaller Lincoln Square project is completed and around Rs 3,300 crore collections become available to Lodha's London entities. Leverage should improve to 71% once the second larger London project, 1GSQ, completes in 2020-21 and makes around Rs 5,600 crore of collections available.
Lodha sold 22% of its London Grosvenor square project over May 2017-March 2018 and 42% of its Lincoln square project over April 2016-March 2018, achieving a combined sales value of 398 million pounds at an average selling price (ASP) of 3,260 pounds per sq ft, although collections will only be received on unit handover.
According to Fitch, the remaining area is potentially worth around 986 million pounds using the ASP, with only 265 million pounds of construction costs pending. Around 75% of cash flow, after repaying debt in London, will become available to Lodha on project completion, when collections become 100% due.