Can Unitech's Sanjay Chandra put his company back on track?
“If you get emotionally attached to a hotel, you will never make money. Build in a down cycle and sell when the market is up,” Peter Barge, the well-regarded former chairman of Jones Lang LaSalle Hotels, had advised Sanjay Chandra in 2006 when he was in two minds whether to sell his stake in the Delhi Radisson or retain it.
With the same advice ringing in his ears, the 36-year-old managing director of real estate developer Unitech has put the upcoming Marriott Courtyard at Gurgaon on the block. With hotel valuations in a free fall, the timing may not be perfect, as Barge would have liked it, still Chandra hopes to shortly net up to Rs 250 crore from the sale. “We are in the business of selling assets,” he says candidly.
Unemotionally and in a severe down cycle, Chandra wants to set his house in order. He has put assets up for sale, scrapped some projects and slashed price tags mercilessly. He is negotiating with bankers as well as private equity investors to raise money and is lobbying hard with state governments to allow him to build low-cost affordable houses. To survive the crisis, the one-time builder of luxury homes is more than willing to slide down the value chain.
Till a year ago, Chandra, like most other real estate developers, had not anticipated the crisis. Unitech bought land wherever it was available and built a land bank of 14,000 acres across the country. To bankroll these acquisitions, Chandra says, the company planned to raise $1.5 billion (around Rs 7,000 crore at current exchange rates) by listing some prime assets in a real estate investment trust in Singapore. Another $1 billion (Rs 4,700 crore) was to be raised from investors.
Before the company could make the first moves, the markets went into a tailspin. The plans to raise money had to be shelved. And Unitech ended up with debt of over Rs 8,000 crore on its books. Most of this debt is short-term, while all projects will take six or seven years to complete. There is, therefore, a huge cash-flow mismatch which needs to be addressed.
That’s just one of the several problems Unitech is up against. The company owes Rs 1,000 crore to various states where it brought land. On the other hand, sales have taken a hard knock. Buyers for houses, offices and retail space overnight turned bearish. House sales, which account for almost 85 per cent of Unitech’s business, are down as much as 70 per cent.
Debt trap
Chandra’s first priority is to reduce the debt. On an average, it carries interest of about 14 per cent. This makes the quarterly interest burden on the company almost Rs 300 crore — not very different from its consolidated real estate income of Rs 375 crore for the quarter ended December 31, 2008.
Chandra has deftly capitalised a large chunk of this payment — the interest will be paid when the asset for which the loan was taken is sold. Thus, Unitech paid interest of just Rs 97 crore during the quarter. In other words, the company has deferred almost two-thirds of its interest liability. Still, the principal and the interest need to be cut. “We want to bring down the debt by 60 per cent,” says Chandra.
Chandra says that debt worth Rs 1,200 crore will get transferred to his new telecom venture, Unitech Wireless, in which Telenor of Norway has taken 60 per cent. Unitech Wireless will pay Unitech another Rs 900 crore for the investments it has made so far. Thus, it will reduce Unitech’s debt by Rs 2,100 crore.
On January 1, the Unitech board passed a resolution enabling the company to mobilise up to Rs 5,000 crore in equity capital. Chandra says he is in talks with some private equity funds focused on real estate to sell some stake.
This is easier said than done, say investment analysts. One, the Unitech share price has taken a real beating in the stock market, indicating scant appetite for any fresh paper from the company.
It has fallen well over 90 per cent from Rs 430 in February 2008 to around Rs 30 now. The Chandras (father Ramesh and his two sons, Sanjay and Ajay), who had made it to the coveted Forbes list of billionaires in 2007 with a personal wealth of $ 11.6 billion, are worth a fraction of that now. Two, foreign investment is not allowed in some projects of Unitech.
Chandra is aware of these problems. “We can raise only a fraction of the capital authorised by the board,” he admits. About the glitch regarding foreign investment, he says the all-powerful Foreign Investment Promotion Board has recently cleared a similar proposal put up by a Mumbai developer and is, therefore, likely to take a positive view of the Unitech application. “We have discussed the matter with the officials. The key is how to monitor the use of money received from abroad,” says he.
In addition, Chandra says he is negotiating with some private equity funds to invest in some of his projects. Before the September 2008 crash, a fund managed by Lehman Brothers had invested $150 million (Rs 700 crore) in a Unitech project. “Some funds dedicated to India are sitting on $6-7 billion,” he claims.
Industry insiders doubt if Chandra will find ready buyers for his projects. The Lehman-managed fund, for instance, was supposed to invest in three more projects. But it has since pulled out. “There is a huge mismatch in valuations. It will be a miracle if Unitech can pull off these deals,” says a rival who does not wish to be named.
Chandra also plans to sell two hotel projects, the Marriott Courtyard at Gurgaon and another one in Delhi, and an office complex in South Delhi to cut his debt. “I have got a buyer for the Gurgaon hotel. The market has put a value of Rs 200-250 crore on it,” says he. The land for the hotel was bought for just Rs 8 crore, so there are handsome profits to book. Chandra is also hopeful of wrapping up the office complex deal too within a month for Rs 450-600 crore.
Chandra says he is negotiating with some banks so that he can replace short-term debt of about Rs 1,000 crore taken from mutual funds with long-term money. This should even out some cash-flow mismatch and also reduce his interest payout by up to 350 percentage points.
Bottom of the heap
“When the market tanked, none of us had the right products for the housing market,” admits Chandra. As developers like Unitech had focused on the luxury end of the market, where the profit margins were hefty, they had nothing to sell once easy money vanished.
Housing finance companies became reluctant to lend and customers lost their appetite, thanks to fears of joblessness. Chandra’s first reaction was to cut the ticket price by as much as 50 per cent. Not only did he drop the rates but also cut floor space. At Nirvana in Gurgaon, for instance, Unitech started selling floors instead of standalone villas at one-third the price. “While we were selling not more than a dozen villas earlier, we sold 300 floors in a month,” says he.
This obviously hasn’t shown up in the company’s results. Net consolidated sales slumped 57 per cent to Rs 489 crore in the quarter ended December 31, 2008. Clearly, Chandra needs to do more if he has to revive sales.
To rescue the situation, Chandra wants to come out with flats priced below Rs 30 lakh. State-owned banks have opened a concessional window for buyers who take loans of up to Rs 20 lakh. Several real estate developers have, therefore, come out with price points around this figure. Unitech too wants to sell homes at these prices.
For instance, at the ambitious Unitech Grande at Noida, where all flats are currently priced above Rs 1 crore, new flats will be built at below Rs 30 lakh. “Almost 80 per cent of our new homes will be in this bracket,” says Chandra. But time is running out: The concessional finance window closes in June. Analysts give their thumbs up to the switch in priorities. Says Shailesh Kanani of Angel Broking: “The shift from luxury housing and commercial real estate to affordable housing is a step in the right direction as low-priced and mid-sized houses are the only segments of the market that are seeing some movement today.”
The downturn in the commodity cycle has helped Unitech and other builders to rein in their construction costs. Chandra says he has been able to knock off about a quarter of his costs because of the crash in steel and cement prices and the contraction in contractor margins. In addition, Unitech has decided to keep the frills (Italian marble, Jacuzzi and so on) out of its homes. Architects and designers have been put on a tight leash.
Chandra has another ace up his sleeve. “The biggest advantage with Unitech is that a large part of its land bank was bought when prices were low. This will enable it to drop prices in this market,” says Gaurav Dalmia, the chairman of Landmark Land Holdings, which has invested in a score of real estate projects across the country.
The average cost of land for Unitech, according to Chandra, is just Rs 100 per square feet. In tony Gurgaon too, Chandra says his cost is Rs 120-130 per square feet. “Even if we take the cost of construction at Rs 1,500 per square feet, I can easily drop prices of flats from Rs 3,500 per square feet now,” says he.
Unitech, unlike some other developers, made it a point to always buy farm land directly from farmers and not through middlemen. Though it took more time, it has helped the company keep its costs low. “We bought land at Mohali in Punjab at Rs 60 lakh per acre. Someone else recently bought at Rs 5 crore per acre in an auction,” says Chandra.
Still, the population density norms have kept Unitech from building small houses at Gurgaon in Haryana and Noida in Uttar Pradesh, its principal markets. Thus, Chandra and other developers are lobbying with states to ease the norms.
Scale back
Like residential real estate, the commercial market too has fallen on bad times. Information technology companies, which till recently gave future commitments for office space (and locked prices in the bargain), have turned to ordering just-in-time. Office rentals are down 20 per cent. Payments from mall tenants, especially the smaller ones, have turned erratic.
As a result, Chandra has decided to scale back some projects. Two information technology parks, on in Gurgaon and the other in Greater Noida, now look uncertain.
A multi-product special economic zone in Haryana has been shelved. “Almost 70 per cent of the information technology parks announced in the country will not come up,” says Chandra.
Of course, the company is no longer acquiring real estate. “The 14,000 acres we had bought about a year ago looked good enough for 12 or 13 years. Now, it appears that this will last us for 16 years,” says Chandra.
Analysts as well as industry experts give Unitech a fair chance of sailing through the current crisis. The question uppermost in everybody’s mind is, will the Chandras be able to retain control of Unitech? The family is known to have pledged a large chunk of its stake (67.5 per cent at the end of December 2008, down from 74.5 per cent a year ago) to raise money. With Unitech shares down, don’t they run the danger of losing the company? Also, any new infusion of equity capital will dilute their stake further in the company.
Chandra admits that a large number of shares were indeed pledged to raise money and new investors could dilute the family’s control over the company. But some of these pledged shares, he says, have been brought back from the creditors. Recently, the family sold 2.5 million shares in Orissa Sponge Iron for Rs 23 crore to Bhushan Steel. In another deal not reported to the stock exchanges, it sold 3.5 million warrants to Bhushan Steel. Chandra says the family will liquidate some more investments to reclaim the pledged shares. Without emotion, just like Barge had advised.
