OREANDA-NEWS. Fitch Ratings has affirmed India-based Indiabulls Real Estate Limited's (IBREL) Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B+'. The Outlook is Stable. The agency has also affirmed the rating on the USD175m 10.25% senior notes due 2019 issued by Jersey-based Century Limited at 'B+', with Recovery Rating of 'RR4'.

KEY RATING DRIVERS

Debt Reduction Measures: IBREL has raised funds that it plans to use to reduce debt. IBREL's founder and controlling shareholder, Sameer Gehlaut, in the first half of the financial year ending March 2016 (FY16) infused equity of INR2.4bn via a preferential share issue. Gehlaut also subscribed to INR0.8bn of convertible warrants, which if converted will result in further equity infusion of INR2.3bn in 1HFY17. In addition, the company could sell land holdings to further deleverage.

Credit Metrics to Improve: Fitch expects IBREL's net debt to reduce to around INR48bn by end-FY16 from INR55.4bn a year earlier, and fall further thereafter. The agency expects IBREL's net leverage (net debt/ adjusted inventory) to improve steadily to around 55%, and contracted sales/gross debt to rise to around 0.8x by FY17. Both ratios are likely to improve further in FY18 to below 50% and around 1x respectively on a sustained basis following a short-term deterioration that breached levels at which Fitch would consider negative rating action. The company's leverage increased during FY15 to 62% (FY14: 50%) while its contracted sales/gross debt fell to 0.3x (FY14: 0.8x), mainly driven by weak operations and higher net debt levels following the purchase of properties in London and Mumbai.

Weak but Improving Conditions: The operating environment is showing signs of improvement. IBREL's contracted sales were INR8bn during 1QFY16 compared with INR5.5bn in the preceding quarter and INR5.6bn a year earlier. During FY15, the company's sales fell to INR20.3bn from INR24.3bn in FY14, and cash collection was weak at INR9.1bn. Fitch, however, expects IBREL's cash collection to nearly double during FY16, mainly driven by payments from projects that are nearing completion. The company's EBITDA margin also improved to 32% in 1QFY16 from 23.5% a year earlier.

Diversified Land Bank: IBREL has a land bank of about 7 million square metres, which is sufficient to support project development over the next six to seven years based on current plans. IBREL has projects across India, with significant presence in the key metropolitan areas of Mumbai, Delhi (NCR) and Chennai. The residential projects also cover various categories from middle-income to luxury. This diversity mitigates risks arising from volatility in a particular category or location.

Risk of Delays at Gurgaon: Of the company's eight ongoing residential projects, projects in Gurgaon, in the National Capital Region (NCR), represent nearly 34% of total saleable area. Projects in Gurgaon in general have been hampered by delays in building plans and infrastructure development. Further slowdown in demand has also driven up inventory levels in the area. However should the infrastructure in the area progress, improved road access to the area, lower interest rates, and captive market of the NCR are likely to support revival in residential property demand in the area.

Strong Long-Term Growth: Fitch expects the Indian real estate market to expand strongly in the medium to long term, supported by improving economic growth, limited supply of homes in the key cities and rising income levels. Demand slowed significantly during FY15 due to weak consumer sentiment, resulting in weak sales and high inventory levels. Fitch expects the real estate demand to pick up during 2016. The recent reduction in interest rates by the central bank is also likely to support demand while reducing costs for Indian real estate developers.

Regulatory Risks: The real estate business in India is largely regulated by the local authorities with some approvals from the state or central government required in some instances. Any delay in approvals or change in regulations may impact the development of IBREL's projects.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for IBREL include:
- Strong growth in IBREL's cash collection during FY16
- Net debt to reduce to below INR48bn in FY16 and continue falling over the medium term
- No land purchases over the next two years
- Contracted sales to increase steadily by around 20% from FY16 onwards over the medium term
- EBITDA margin of 30% or more over the medium term

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include
- EBITDA margin sustained below 25%
- Net debt/ adjusted inventory sustained above 50%
- Contracted sales/ gross debt sustained below 1x.

Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Successful development of properties in London
- Diversification of projects with no single project accounting for more than 10% of total sales.