OREANDA-NEWS. Fitch Ratings has assigned India-based Lodha Developers Private Limited's (Lodha) proposed US dollar-denominated notes an expected rating of 'B+(EXP)' and Recovery Rating of 'RR4'. The notes will be issued by Lodha Developers International Limited (Lodha Mauritius), and guaranteed by Lodha. Fitch has also affirmed Lodha's Long-Term Issuer Default Rating at 'B+' with a Stable Outlook.

The final rating on the notes is contingent upon the receipt of final documents conforming to the information already received.

Lodha Mauritius is a wholly owned subsidiary of Lodha, and its proposed notes will be unconditionally and irrevocably guaranteed by Lodha and its key subsidiaries. The notes will rank pari passu with existing and future senior unsecured indebtedness of Lodha and its key subsidiaries. As of the date of the indenture, group companies that together account for 74% of consolidated EBITDA would extend guarantees to the notes, while the remaining material subsidiaries (defined in the indenture as those which account for at least 5% of consolidated EBITDA or 5% of consolidated net worth each) as of this date will be added on as guarantors within a span of six months. Subsidiaries that are not material as of the indenture date will be added on as guarantors as and when they pass the materiality test in future.

Provisions in the indenture allow the initial guarantors to access net free cash flows of other material subsidiaries via inter-company loans, and also restrict these cash flows from being paid out as dividends until the additional guarantors are in place. Under this scenario, the aggregate net cash flows (defined as operating cash inflows net of all outflows, including working capital, dividends, and debt servicing) under Fitch's projections are sufficient to service the coupon payments on the notes, even if the additional guarantors are not added. The agency has therefore taken the view that cash flow subordination to the note holders is not a key credit risk.

KEY RATING DRIVERS

Deleveraging Slower Than Expected: Lodha's leverage, as measured by net debt to inventory less customer advances, is high at 84% at end-December 2014 compared to its rating peers, and above our previous expectations. Leverage has increased from 77% at FYE14 (fiscal year ended 31 March 2014) because of expected land purchases and investments in its overseas ventures, as well as slower-than-expected cash collection from contracted sales. The slower cash collection is a result of a shift in its FY15 sales mix towards newer projects rather than the mature projects originally planned, due to slower-than-expected construction progress in some of the mature developments. Fitch currently expects leverage to remain high at around 65% at FYE16, and reduce thereafter to below 55%, which is the threshold above which negative rating action may be considered.

Nevertheless, any unanticipated land purchases over the next 18 months, or the management's limited ability to improve the pace of construction of its large projects or accelerate its overall cash collections, or any other factor that may impede Lodha's deleveraging progress, could result in negative rating action.

Largest Domestic Developer: Lodha is the largest India-based residential real estate property developer based on sales. The company has demonstrated strong execution capabilities in high-end residential developments in Mumbai. Lodha's contracted sales for the 11 months to end-February 2015 are INR75bn, and the company is broadly on track to meet its FY15 sales targets. Lodha's land bank of 25 million square meters is among the largest among Indian developers, with the land valued at over USD10bn by external valuers. The company expects its current land bank to support developments and sales over the next seven years.

Project Concentration: Lodha's rating reflects its high concentration in a few projects despite the considerable scale of its operations. Its four largest projects will account for nearly 80% of contracted sales in FY15, reducing to around 60% in FY19.

Furthermore, a majority of Lodha's medium-term sales are focused in the high-end and luxury segments, which are defined by the company as properties with per square foot prices of over INR20,000 (USD325) and over INR50,000 respectively. For the 18 months to 15 September 2014, over 60% of the company's INR106.3bn sales stemmed from these two market segments. Sales within these segments typically exhibit higher correlation with economic cycles, and therefore are generally more volatile, owing to consumers' ability to delay their purchase decisions.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- 10% growth in annual contracted sales in FY16
- Leverage reduces to 65% by FYE16, and to below 55% thereafter
- Contracted sales / gross debt increases to 1.1x at FYE16 (end-December 2014: 0.8x)
- EBITDA margin remains above 40% in FY15 and FY16 (end-December 2014: 46%)

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- Lower project concentration, with no single project accounting for more than 15% of contracted sales on a sustained basis
- High sales turnover, with contracted sales/gross debt maintained at over 1.2x

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Total debt net of cash / inventory less customer advances sustained above 55%
- Contracted sales / gross debt sustained below 1x
- EBITDA margin sustained below 25%