Credit Rating of Real Estate firms

Submitted To:
Prof. Monika Chopra

Submitted By:
Nikhil Chopra-19PGDM230
Shubham Jindal-19PGDM195
Sourav Das-19PGDM198
Surbhi Jain-19PGDM202
Triyaksh Batra-19PGDM205
Vishant Chopra-19PGDM207
 Real Estate Sector
Debt
Over 62 per cent or about $58 billion of the total loan advances ($93 billion) to the Indian real estate
sector by banks and NBFCs/HFCs is, currently, completely stress-free. Another 22 per cent ($21
billion) is under some pressure but can potentially be resolved. $14 billion (or merely 16 per cent) of
overall lending to Indian real estate sector is under ‘severe’ stress, meaning that there has been high
leveraging by the concerned developers who have either limited or extremely poor visibility of debt
servicing due to a combination of factors.

Pre – COVID
Rating agencies have maintained an overall negative outlook for the real estate sector for the
financial year 2020 but has a stable outlook for players in tier-I residential real estate, commercial
office, retail property development and operations. The cash flows in this segment were negative
and there were liquidity issues on account of declining sales, negative cash flows, RERA
implementation and the slowdown in non-banking financial company (NBFC) space.

Effect of COVID
1. Due to the onset of the crises, commercial activity stopped future projects halted and there
has been a supply chain disruption. As a result of this, there has been a liquidity crisis.
2. There are 3.70 lakh crore unsold housing inventory in the top 7 cities. This has in turn caused
a low domestic demand of steel and cement.

How the industry is moving

1. Sale surge in mid to affordable housing segment
2. Over-leveraged developers going out of business
3. Companies would prefer higher inventories over JIT
4. E-Commerce would give a significant fillip to the premise of warehousing industry

Effects on a few real estate companies

Feature IRB Infrastructure
Developers Limited
Pre – Crisis Credit Rating A+
Post Crisis Credit Rating A+
Cost of Borrowing 9.25%-11.9% (March 2020)
8.00%-8.50% (June 2020
Credit Strengths 1. Robust order book
providing strong
revenue visibility.
2. Efficient working capital
management.
DLF Limited
A+
A+
10.74% (Q4 2019)
10.12% (2020)
1.Pending collections and
finished unsold inventory
provides cash flow visibility.
2. There is limited execution
risk as most of the projects
are at intermediate or
advanced stages of
completion.
Godrej Properties
Limited
AA (Stable)
AA (Stable)
8.09% (Sept 2019)
7.85% (2020)
1. The company has
cash flow of Rs 4276
crores with near to
medium term visibility
2. The company has
access to large land
banks of group entities
3. They have a healthy
booking status in
ongoing residential
projects
 Credit Challenges 1. Moderate debt 1.
protection metrics as
IRB infrastructure raised
loan of Rs. 6600 cr. from
SBI and Union bank with
an interest rate of 8-
8.5%. The group's total
exposure is larger than
its entire net worth.
There was a fall in 1.
collections from
Rs.3,135 crore in
FY2019 to Rs. 2,591
crores in FY2020.
80% cost is
pending towards
projects, which are
in the nascent to
intermediate stage
i.e. project cost
incurred is less
than 55% of the
budgeted cost.

2. Susceptibility to intense 2. High inventory 2. Slow collections

competition and concentration enhances and high
cyclicality in the roads marketing risks for overheads impact
and highways sector unsold inventory operational cash
flows.

Recommendations
1. Revising monthly cash flow forecasting horizon to daily monitoring and to match their
expenditure with collections
2. Expanding the horizon of liquidity buffer to at least 9-12 months
3. The companies should try to generate cash inflow by sale of non-core real estate

Key Parameters going forward

1. Performance of REITs – Embassy Office Parks REIT Q4 results showed positive signs of
growth with a 10% y-o-y rise in net operating income. The group has a good office portfolio
and strong balance sheet and therefore should be able to come out good after the crisis.
2. One-time loan restructuring due to financial stress.
3. Foreign investment in commercial segment should be promoted.
4. Companies should aim to setting up warehousing investment platforms. This will help them
in purchasing loans or bonds that will serve as collateral in a contemplated collateralized
debt obligation.
5. We have seen how Govt and RBI is focusing on monetary policy changes to push market in
lockdown period itself we have seen two times cuts in repo rate that is from 5.15% as per 4 th
oct 2019 to 4% as on today if we consider a bit more historical data in Aug 2018 it was
around 6.5% even though there.