‘Unitech will halve debt in 6-8 months’

It is not easy to be Sanjay Chandra these days. It is very, very difficult. The 37-year-old Massachusetts University MBA, the managing director of Unitech Ltd, India’s second-biggest realtor, is at the epicentre of an unprecedented real estate stock meltdown.

Exuberant expansion during the realty bull run has left Unitech with a gigantic debt of more than Rs 8,500 crore. Not surprisingly, there has been trenchant criticism of the company from analysts. He was just three when his father Ramesh Chandra, 70, forayed into realty in 1974. The promoter-family’s wealth peaked on January 2, 2008, when its net worth touched Rs 65,144 crore. Guess what was the net worth on Friday? Rs 3,135 crore, or down 95%, as the share price fell from Rs 538.20 to Rs 25.90. Raj Nambisan & Vivek Seal of DNA Money met the young scion on Monday night at the Shangri-La Hotel in New Delhi, in a bid to persuade him to come clean on both the realty and telecom side of Unitech’s businesses. In this first part, Chandra talks of Unitech’s core business:

What is the exact status of the Courtyard Hotel sale?
It will be completed in the next 15 days.

And the Saket office sale?
There is a lot of confusion on this sale. See, in Saket (south Delhi), Unitech has had its registered office for about 26 years. We are not selling that because that’s just a mail box, a mailing office (laughs). There is one other building in Saket, which admeasures about 220,000 square feet. We are looking to lease or sell this outright to an end-user.
We are in talks with 2-3 parties.

There is talk this sale could fetch about Rs 500 crore…
It should be more than that.

There are rumours HDFC is planning to buy it…
Not at all. HDFC will never buy a building of that size. Not even a portion, because it will be sold to a single user. It is on sale like any of our commercial assets. We are asking for a decent amount, which is significantly more than the Rs 500 crore that is being talked about. My cost for it was … land for about Rs 130 crore plus stamp duty of Rs 20 crore, and construction on that would be Rs 45-50 crore, so about Rs 200 crore. And in any case in proper Delhi, there is no Grade A office building with contiguous space, and that is the advantage that we have.

What is contiguous space?
A long time back, realtors did not have much cash. So when we were building buildings, we used to divide the floor into small offices like the whole of Nariman Point is structured in Mumbai, Nehru Place and Connaught Place in Delhi. Then we sold the units to individuals. But lately, developers have matured and now offer whole premises to institutional buyers and also hold it as REIT (real estate investment trust) assets.

But in the current situation, are such huge properties even looked at?
You would be surprised. We will make an announcement (of sale) hopefully in a month. A large transaction like this takes a little more time to achieve financial closure. We used to sell our land to individuals, so after capital markets matured in the last 2-3 years and investment bankers came to us and told us about real estate investment trusts etc, we thought about selling space to institutional buyers. Then a lot of us changed our business model, which became more capital intensive

Till 2005-06, about 40% of our revenue came from selling “strata titles” (small units) to sellers, like 1,000-2000 square feet units. If you look at Hong Kong, 85% of the buildings there are still strata titles, and these are old.

Now, you would see many developers churning out properties and selling them rather than waiting for lease income. It doesn’t make sense for us to hold on to assets for lease at 10% when we are borrowing at a higher rate, so you will see people sell assets.

How much cash do you expect to generate this fiscal?
We are working on a few asset sales, with many office space... We were waiting to sell through REIT, so we could sell all that together.

What is happening to your REIT plan?
It is deferred till markets are at a sensible level. The situation was good till January where there was listing or new infusion of assets on a weekly basis. But the good part is people still want rented assets.

What is the plan with the AIM-listed entity?
We have received money from that already. That company was supposed to sponsor the REIT.

What about Unitech International Real Estate Fund?
That is a private equity fund that would start pushing down funds shortly. We have raised about $230 million, which is a 10-year fund... originally 7 years, but can be extended by additional 3 years. Our team is on a roadshow now, and the money is mostly from pension funds, so it’s a long-term fund. And today people will make an effort to raise that kind of a capital.

What is the coupon you are offering?
There is no coupon, you offer a “hurdle rate,” which is a basic 10% return. For any return above 10%, we will get 20% of that as an incentive.

Where do you think Unitech has gone wrong, looking at the way the markets have pounded the share?
I don’t understand it very well, but among the couple of things, I think the perception of the sector has taken a beating…

Aren’t realtors squarely to blame for the wrong perception?
No, there was an asset mismatch and that happened because of the stance of the government. At that time last year, the government thought there was an asset bubble, which in my view had more to do with commodity inflation. So the government put restrictions on lending to curb inflation. Lending to the real estate sector was totally stranded. This has now been opened up, but it will take time to trickle down.

Coming back to your share… it has been  flogged black and blue...
There is some criminal element to it. Also, the realty market always engenders extreme behaviour, both when valuations are going up and when going down. If one has to look at the market cap, my telecom venture is more than Unitech’s market cap. Does this mean the value of all the millions of square feet of land we have bought has become zero? The market cap erosion is strange.

Another perspective I can share is on our amusement park in Noida. In one of the two properties, we own 40%, while another 40% is owned by the owners of Appu Ghar; 11.5% is with IDFC Private Equity and 8.5 % is with ILFS Private Equity fund. Overall, our cost of the land was Rs 108 crore, but the last private equity placement we did about a year ago valued the land at Rs 1,400 crore. The point is, our assets have not disappeared.

You have increased your land bank by more than 50% in the last one year. That would have been expensive buys considering land prices were soaring then?
Most of our assets have been bought cheap. This includes the Saket land, which was bought 14 months ago. The Courtyard Hotel land cost Rs 50 crore. The construction cost was about Rs 85 crore. The market expects us to sell it for about Rs 200 crore, so we are making profits on that.

How does it feel to have fallen from being one of the richest families in the country? As promoters of Unitech, you have lost 95% from peak wealth?
When he (Ramesh Chandra, Sanjay’s father) was the fourth- or fifth-richest man in India, his lifestyle did not change. He has lived in the same house since the 1970s in south Delhi. If you recollect, five years ago, Unitech’s market cap was Rs 50 crore. At that time, we knew we were substantially undervalued. At that time, we owned Radisson Delhi, and that was sold at multiples of our market cap.

Does any category in realty worry you?
Retail malls. I have been publicly saying that for the last few years, we have not made many malls after Great India Place Mall. We have made one small one in Gurgaon, which has been completely leased out to Kishor Biyani (of the Future Group), that is a nice building admeasuring 1,10,000 sq foot.

Does Unitech have an issue of too much exposure to residential properties?
That is the best exposure you can have at this juncture, if you talk to any analyst, though we have shifted our focus to small-ticket homes.

Was it a mistake not to focus on affordable housing earlier?
Yes, though you must remember, earlier affordable housing was not selling that well because most of the buyers were real estate investors rather than end-users. Our mix was 50-50, because investors used to come early. We used to sell villas in Gurgaon for Rs 2 crore, and now we have made them into three flats, ground, first and second floors. Sales have significantly picked up for such offerings.

Would you say the realtor’s back was broken by fleeing investors?
Partly yes. The other part is that we pre-poned our sales. What happened was there were always investors lining up to buy properties. After a few months into the project, they would sell the property to end-users, asking for a 20% profit. So what happened was all of us were actually competing with our own products. That very few people understand. 

What is happening with Mumbai realty?
The case in Mumbai is different. Now 90% of the media and financial sector talks about real estate keeping in the mind the Mumbai mindset. The average organised high-rise real estate price in India is about Rs 2,700 per square feet. In Mumbai, you have to add one extra zero. Now tell me, are salaries in Delhi one-tenth of that in Mumbai?

But land is in perennial shortage…
No, there is more land available in Mumbai (than Delhi) and cheaper. The land use issue is also manageable. Developers are making houses in suburbs. Property in the city is owned by individuals and they are not selling.

There is room for Mumbai prices to fall?
Yes, absolutely. In any case 90% of individual users are not selling their properties, they are just evaluating their net worth. No one is selling.

Do you expect prices to come down?
Depends. In South Delhi I do not think it will as there is no supply. In Mumbai, it needs to come down by at least 30%. The suburbs have to be more affordable. Rental expectations in Mumbai are much more realistic now. I think south Mumbai would not come down as they are not desperate sellers yet. In Parel, there is a case for lower rates. Mumbai depends on the financial sector, but in Delhi, government has spent a lot on infrastructure.

Till what time can realtors hold on to prices in Mumbai?
The key would be to create a product which the end-user wants and not investors. I was talking to a couple of guys there, and they are reducing prices especially after Credai’s suggestion to cut.

What is happening with Lehman Brothers’ investment in the Santacruz project?
That money is in, and in any case that is not Lehman’s money.

Looking at your debt, which is about Rs 8,500 crore, what is going to happen with that number after the Telenor injection?
The Telenor money will certainly reduce our debt-equity ratio. About Rs 800 crore will come in and would be consolidated. About one-fifth of the debt would be reduced.

Does Unitech have enough cash-flows to service such humongous debt?
Yes. The asset sales, which we were postponing earlier, is happening now because there is no guarantee on floating the REIT.

What is your debt reduction target in terms of timeframe and quantity?
Total debt would halve by June-July. We will get money from Telenor, the Saket office sale, the Courtyard Hotel sale without even considering any operational business and also from some infusion through a private equity fund. All this is already in the bag. The first hotel would open in January, everything is in place.

What would be your gearing once that is all done?
The gearing will become about 0.6/0.7. Right now it is about 1.7. Remember, when we sell these assets, the money will be pure profit.

Would Unitech have to dilute stake to ease the pressure at some point?
No. There is a lot of interest from parties, but we will not. We will sell assets. The other things we are doing now — cost-benefit analysis and cost cutting. With slowdown, we are also looking at standardisation in construction processes such as on windows etc. This effort will help us by 3% on margins, but remember, our business is on the day we sell the property. We have defined standards for everything.

So, essentially, construction is going modular?
No, apartments cannot be modular as prefab has a problem; anything that you do prefab is factory manufactured and we have to pay excise on that. So, everything is made at the site itself. Now, we have standardised column blades, steel weight is also standardised. So, like to like, we can save 18-20% costs; we have started this activity about 10 months ago and results have started to pour in in the last
3-4 months.

Are you still aggressive on buying land?
We were, but now we are buying only to fix the jigsaw puzzles, the contiguity issues. I do not think land prices are going down as individuals like farmers do not care about markets, they want to have more money than their neighbour or their kin.

Are satellite townships the only way for congested cities?
Depends on where we are talking about. Satellite townships work as part of major metros where there is employment generation. For example, the habitat part of Gurgaon has not come down. Interestingly, rentals in Gurgaon have gone up with people preferring to rent than buy properties.

Where do you see Unitech in six months?
We see us less leveraged, concentrating a lot on residential sales.

Affordable housing?
That would be about 75%-80% of our sales. We have already achieved that. In any case, there is no definition of affordable. Delhi’s luxury is Mumbai’s affordable and vice-versa. It’s very localised.

Do you look at the stock ticker everyday?
While passing through, yes. And that is the disadvantage of being a public firm, and that’s the sad part as people do not understand our business.

n_raj@dnaindia.net,
vivek_s@dnaindia.net