Real estate group Unitech Ltd told stock exchanges on Thursday it would contest the compensation claim by Telenor, the Norwegian majority partner of its telecom arm, Unitech Wireless. Unitech is already under stress due to dropping profits, slow pace of delivery, high interest rates, the overall gloom in the realty sector, and the long-drawn 2G spectrum case that its telecom arm has been linked to.
There’s no clear estimate of the quantum of compensation Telenor is seeking. But, analysts point out it would be calculated based on the expected business valuation of Uninor, the brand under which the telecom service of the Telenor-Unitech Wireless joint venture is offered. “The business opportunity lost in India by Telenor will determine the value of the compensation,” said a top executive at an international consulting firm. Neither Unitech nor Telenor replied to a question on the quantum of compensation sought by the Norwegian firm.
While analysts argue Unitech may not have the financial muscle to make any significant payout to Telenor, they point out that getting a civil court order for damages would take a long time. A telecom sector observer at a research firm, while admitting he has not seen the shareholders’ agreement, says a warranty against the regulatory environment in another country is unlikely. Telenor had said last night it held Unitech liable for the breach of warranties related to the cancellation of licences. “However, even if there is one, it would be a long-drawn legal battle,” he says, adding, “I don’t see Unitech paying any compensation.”
“Unitech will find it tough to pay compensation to Telenor,” said Anubhav Gupta, analyst at global brokerage firm Kim Eng Securities. While pointing out that it is difficult to ascertain the amount of compensation, Gupta says it is possible Telenor may ask Unitech to buy it 2G licences, which would not be less than Rs 4,000-5,000 crore. But, he adds it is unlikely a payout would happen.
According to Gupta, it will be difficult for Unitech to exit telecom at this juncture. “Who will buy its stake? Ultimately, Unitech and Telenor will have to go for a mutual pact, as Unitech will not be able to compensate,” he notes.
Another analyst says the asking price by Telenor will be very high for Unitech to pay. “It purchased the stake for over Rs 6,000 crore. Even if it asks 50 per cent of that amount, Unitech’s resources will be more than stretched to make that payment,” he says.
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Unitech’s net profit plunged 50.4 per cent during the third quarter of this financial year to touch Rs 55.22 crore, from Rs 111.33 crore in the corresponding period last year.
The company’s net debt rose by Rs 46 crore in the third quarter to Rs 5,190 crore from Rs 5,144 crore in the previous quarter.
"Construction work has slowed down considerably compared to last year. The company is not active in selling its non-core assets and generating cash. Its land banks are not liquid either,” said Sanjay Sharma, managing director, Qubrex, a real estate consulting firm.
Of its projects launched after March 2009, Unitech handed over just 0.2 million sq ft in the first nine months of the year, against the total deliverable area of 21.9 million sq ft.
Of the projects launched before March 2009, Unitech delivered just 1.3 million sq ft in the nine-month period ended December, and 12.2 million sq ft still remains to be handed over against the total of 24.2 million sq ft.
Referring to the impact of the 2G case and the subsequent cancellation of licences by the Supreme Court, Samir Jasuja, founder and chief executive officer, PropEquity, said, “The impacted companies may face a stricter due diligence process from banks and private equity investors. That may further increase fund-raising challenges for these realtors, leading to execution problems."
When asked whether Unitech was in a position to pay a compensation to Telenor, the company sent out a statement posted on the exchanges, saying it was “surprised to receive the indemnity claim from Telenor Group taking a plea of the order passed by the Supreme Court”.
According to Unitech, Telenor violated the confidentiality covenants agreed in the shareholders' agreement and also that its action was meant to “malign the reputation of Unitech”. It would contest the claim, Unitech said.
Telenor did not reply to a questionnaire sent by Business Standard on the matter.