Moody's has rated Indiabulls Real Estate Ltd (P)B1 with stable outlook in its first rating of the company, citing good visibility of its cash flows, strong execution capability and improving economic environment of India.
Indiabulls has most of its operations in Mumbai and New Delhi but has recently acquired properties in London too.
"Indiabulls' rating is supported by the good visibility of its cash flows, as provided by contracted sales, and its large area under construction, while an improving economic environment in India will support future sales," the Moody's press release on 30 October said.
"The rating is also supported by the company's strong execution capability, strategically located land bank -- which is adequate for development over the next 5 years -- and strong margins."
However, a lack of adequate track record for the firm and the overall challenges of the Indian real estate sector constrain the rating, Moody's said.
"The rating is constrained by a relatively short track record of delivery, high financial leverage, and exposure to the cyclical and fragmented character of the real estate sector in India."
The share price of the Bombay Stock Exchange-listed Indiabulls Securities was down 0.61% on the first hour of trading on Thursday.
At 24.30 rupees ($0.40), the stock was down 15% from the 4-year high of 28.35 touched in early June, but is still up 17% so far this year.
Moody's said the rating also incorporates their expectation that liquidity will improve following the proposed USD bond issuance by its wholly owned subsidiary Century Ltd and that its credit metrics will strengthen over the next several years as key projects reach revenue-recognition thresholds.
Moody's has assigned a provisional (P)B1 rating to the USD notes issuance by Century, and said it will remove the provisional status on the ratings upon successful completion of the bond issue.
In July 2014, Indiabulls acquired its first property in London, boosting its portfolio diversification, but also exposing it to the risk of operating in a new market, Moody's noted.
Indiabulls' associate Indiabulls Properties Investment Trust (IPIT), a business trust listed on the Singapore Exchange in which Indiabulls has a 47% shareholding, has completed two commercial projects - Indiabulls Finance Centre, Mumbai; and One Indiabulls Centre, Mumbai - with a saleable area of 3.21 million square feet.
Following the proposed bond issuance, secured debt to total assets of Indiabulls will measure 21%-22%. Such a level of secured debt indicates material subordination risk for bond holders, Moody's said.
"We rate the bonds at par with the corporate family rating as the subordination risk is mitigated by the fact that the claim of bond holders on the London asset is not subordinated to the claim of Indian lenders," said Vikas Halan, a vice president at Moody's Investors Service.
"And we expect that any recovery for the bond holders from the London asset alone would be sufficient to avoid notching down from the (P)B1 corporate family rating," Halan said.
Moody's said the stable outlook reflects its expectation that the company will substantially achieve its sales targets, execute its construction plans without material delays, and will stay disciplined in the acquisition of its land banks in India over at the next 2-3 years.
But the rating agency also said an upgrade over the medium term is unlikely as it expects the company's credit metrics to remain weakly positioned for its rating over this period.