by NR INDRAN / INT

National Long-Term rating	‘Fitch B- (ind)’
INR1,600m fully secured non convertible debentures	‘Fitch B- (ind)’

 

Fitch Ratings-Mumbai/Singapore-28 September 2011: Fitch Ratings has downgraded Neptune Developers Limited’s (NDL) National Long-Term rating to ‘Fitch B- (ind)’ from ‘Fitch BB-(ind)’. The Outlook is Negative. Its INR1,600m fully secured non convertible debentures (NCDs) due 2014 have also been downgraded to ‘Fitch B-(ind)’ from ‘Fitch BB-(ind)’.

The downgrade reflects delays in executing the company’s major projects and a reduction in cash flows leading to significant refinancing risk in financial year end March-2014 (FY14). The projects were met with delays in obtaining regulatory approvals for converting 90 acres to non-agricultural land, commencement certificates and occupation certification. The reduced cash flow has led to significant liquidity strain on its subsidiaries. It also means NDL may have to partly refinance debt repayments of INR5,455m that are due in FY14. This also includes an INR2,625m principal debt repayment of Neptune Realtors Private Limited (NRPL, 40% stake) due in FY14, guaranteed by NDL.

The Negative Outlook reflects Fitch’s expectation that high interest rates coupled with high property prices and delays in construction completion may lead to, slower demand impacting its cash generation ability.

Rating concerns arise due to uncertainty regarding the company’s ability to repay its NCDs through proceeds from its Ambivali low-cost housing project. NDL has only launched about 1.3 million sq ft (3,600 flats) out of the total 5.8 million sq ft of the project. About 90% of the 3,600 flats were pre-sold as on July 2011 and proceeds of INR511m were received as on end-July 2011.

However, Fitch notes that NDL has access to cash flows from its subsidiaries and associates – most notably Neptune Venture Development Private Limited (99.97% stake) and NRPL. Key residential projects that can support the group’s cash flow generation are 100 Above and Flying Kite. Fitch expects that the company may raise further debt by discounting lease rentals of its 0.7m sq ft retail project Magnet Mall and its 2.4m sq ft commercial project Evolution (constructed by NRPL). A significant portion of Magnet Mall has been leased and construction is going on for Evolution.

Significantly improved cash flows from the execution of the Ambivali project may result in the Outlook being revised to Stable. Significant booking cancellations, any further material delays in execution of key projects, and any aggressive new launch plans, which would lead to cash outflow, are likely to impact the ratings negatively.

NDL’s founders have more than 12 years of experience in the real estate business. NDL’s equity investors include IndiaREIT Enterprise Holdings Limited, Mauritius IndiaREIT Fund Scheme – I & III and India Basket Limited, Cyprus (promoted by REAL IS, part of the German Sparkassenfinanzgruppe). As per unaudited standalone FY11 figures, NDL reported standalone operating revenue of INR60m, other income of INR327.5m and net profit of INR239.1m.

Note to editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘Fitch AAA(ind)’ for National ratings in India. Specific letter grades are not therefore internationally comparable.
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