Smartworks sees H2 seats briefly push occupancy below 80%

Smartworks expects about 45,000 seats opening in H2 of FY '27 to temporarily push blended occupancy below 80%, as capacity at two large campuses enters the calculation before it is fully occupied. Management cited 88% occupancy and 91% committed occupancy at its 9.7 million-square-foot mature-centre portfolio as evidence of underlying demand.

Why will Smartworks occupancy fall below 80%?

Smartworks says blended occupancy may briefly fall below 80% because new capacity will be added faster than the incoming campuses can be filled. Overall occupancy was about 81% in the reported quarter, at the lower end of management's 80% to 85% range, after the company added roughly 11,500 seats during the quarter. Management described the expected H2 movement as a denominator effect rather than a disclosed weakening in demand.

The distinction between occupied and committed capacity is central to Smartworks' explanation. The overall portfolio was about 81% occupied but 86% committed, with the difference representing signed customers whose spaces were still under construction. Mature centres covering 9.7 million square feet were 88% occupied and 91% committed, while new campuses were 48% committed.

Management expects Eastside in Pune and East Bridge in Mumbai to add more than 40,000 seats to the blended calculation, within the wider 45,000-seat H2 opening plan. Smartworks does not use back-to-back deals, according to Neetish Sarda, meaning it does not depend on a single client taking an entire building at launch. That model creates a planned ramp-up period even where prefill commitments are in place.

What demand is Smartworks seeing at Eastside and East Bridge?

Smartworks had about 35% visible prefill across Eastside and East Bridge at the time of the call, with a significant share coming from existing clients expanding into those locations. Management identified banking, financial services and insurance, manufacturing and logistics as major demand sources, while also reporting demand from information technology and information technology-enabled services customers.

Eastside is expected to be ready sooner than East Bridge, management said. East Bridge had not received its occupation certificate, or OC, at the time of the call, and Smartworks said construction would start only after that approval. Management estimated a three-to-four-month build-out after the OC arrives, with East Bridge revenue potentially reaching the books in the latter half of Q4.

The expansion sits within Smartworks' target of more than 12.5 million to 13 million square feet of operational space by March 2027. The company was close to 11 million square feet operational, with 2.1 million square feet under fit-out and 2.3 million square feet awaiting handover. Its total platform covered 17.5 million square feet across 71 centres, including 10.9 million square feet across 58 operational centres.

Smartworks said it plans to add 2.5 million to 3 million square feet annually and fund that growth from within the business. In the first half, it added nearly 1 million square feet of operational space and had 4.3 million square feet under fit-out or awaiting handover within the year. The H2 opening programme is therefore part of a broader capacity build-out rather than a stand-alone addition.

How quickly does Smartworks expect new centres to fill?

Smartworks expects mature campuses to break even within one year and reach 88% to 90% occupancy within 18 months. Harsh Binani said the company's recent centres have become more than two to three times larger, but the time needed to reach roughly 90% occupancy has remained below 18 months. Management expects blended occupancy to trend towards 84% to 85% as the portfolio matures over the next four quarters.

The company linked that outlook to larger customer contracts. Clients taking more than 1,000 seats accounted for more than 41% of rental revenue, compared with 35% a year earlier. Smartworks said its growing share of larger-seat contracts supports faster absorption at bigger new campuses, although it did not provide a separate fill schedule for Eastside or East Bridge.

Mature-centre commitments were about 3 percentage points above physical occupancy, at 91% versus 88%, and management said signed space can become active within 30 to 60 days. Across the overall portfolio, committed occupancy was 5 percentage points above the 81% occupied rate. These gaps are the basis for management's view that reported occupancy understates revenue still due from already committed customers.

Smartworks also said 35-plus clients have more than 1,000 seats on its platform, while more than 70 clients operate with it in more than one city. Multi-city clients contributed 35% of rental revenue, and global capability centres accounted for 22%. Those figures show that the company is seeking to fill capacity through larger, multi-location enterprise relationships.

How will the expansion affect Smartworks revenue and cash flow?

Smartworks expects rental revenue from new supply to rise mainly in Q4 and the first quarter of the following year, because most properties require three to four months of build-out. Its mature portfolio was already 91% committed, limiting additional lease-rental growth from existing centres. Management raised FY '27 revenue-growth guidance to 33% to 35% from 28% to 30% after first-half revenue grew 41% year on year.

Other operating revenue can begin before full lease rental recognition, management said, because electricity, parking, meeting rooms and other services can be used 10 to 20 days before rent starts. Value-added-services revenue rose to Rs 170 crore in the first half from Rs 70 crore a year earlier, alongside operational real estate increasing to 10.9 million square feet from 9.1 million square feet. Smart Vantage, fit-out-as-a-service and value-added services were cited as additional contributors.

The capacity build-out will keep reported cash conversion below 1 time in H2, management said, because Smartworks pays security deposits before campuses generate revenue. The company deployed Rs 307 crore of capital expenditure in the first half, generated Rs 202 crore of normalised operating cash flow in that period and reported free cash flow negative by about Rs 104 crore. About Rs 200 crore of capital expenditure and security deposits related to centres that were not yet open.

Smartworks reported annualised normalised return on capital employed of 21.6% and net debt of about Rs 83 crore. Management said free cash flow should turn positive as the mature base approaches 13 million square feet in the next few quarters. It also said cash conversion at operating centres remained above 1 time, separating the performance of established centres from the upfront funding needs of the new-campus pipeline.

Conclusion

Smartworks' expected sub-80% blended occupancy is tied to the timing of a 45,000-seat H2 expansion, rather than to a stated loss of demand. The contrast between 81% overall occupancy, 88% mature-centre occupancy and 35% prefill at Eastside and East Bridge supports management's view that the decline will reflect capacity entering the portfolio ahead of full utilisation.

The next developments to watch are the occupation certificate for East Bridge, its estimated three-to-four-month build-out, and whether its revenue starts in the latter half of Q4 as management indicated. Smartworks also targets 12.5 million to 13 million square feet of operational space by March 2027 and expects free cash flow to turn positive when its mature base approaches 13 million square feet in the next few quarters.