‘Drop’ in Unitech Parks assets roils investors

Investors of Unitech Corporate Parks Plc (UCP), the London Stock Exchange-listed company, lambasted the company’s management’s claim of a 40% drop in the value of its assets during an analyst call on Thursday, three people who were present at the call said.

It all started on on July 28 this year when the promoters of Unitech, India’s second-largest realtor by market capitalisation, approached UCP investors with an offer to buy back shares at 31 pence apiece or at a premium of 22.77% to the then market price.

The major shareholders of UCP are ABN Amro with 20.7% stake, HSBC Global with 15.9%, Roveda Holdings with 9.2% and Morgan Stanley Securities with 7.4%.

Before the buyback notification was sent to the London Stock Exchange, the stock was trading at 25.58 pence and rose to 30 pence after the announcement.

Unitech is seeking to buy 94.5% stake in UCP. It currently owns 4.52%, while the Chandras, the promoters of Unitech, personally own another 0.22%.

The issue snowballed on Thursday when UCP chairman Atul Kapur told investors there was a difference in two valuation exercises conducted by Knight Frank India — one on March 31 this year and the other on July 31.

“Knight Frank completed an independent valuation of the portfolio being developed by UCP on March 31, 2010. It valued the properties on that date at £457.4 million. But in a revised valuation exercise undertaken by them on July 31, 2010, the properties have been revalued at £281.3 million,” Kapur said.

UCP’s share of the market valuation of the assets as on March 31, 2010, representing 60% of each project, stood at £274.4 million.

Says an analyst who was at the conference call: “UCP has said that its NAV has dropped and it has changed the valuation methodology. In March 2010, they said the portfolio of 21.4 million square feet was valued at Rs3,300 crore. Now they are suddenly saying it’s Rs2,000 crore or a drop of 40%. They are citing the land’s historical value and driving down the valuations now that they want to buy the investors out. Clearly they are looking to buy things cheap.”

When investors sought a copy of the Knight Frank report, the management declined to share it, one of the analysts said.

The UCP board is taking advice from consultants PricewaterhouseCoopers, Arbuthnot and Skadden, and others to review the Unitech offer.

The company was listed in December 2006, floating shares at 100 pence apiece and had raised €360 million.

In its financial performance report, UCP also said there are changes in the goodwill valuation.

“The board reviewed the potential impairment of goodwill as on March 31, 2010, and has accordingly written down the valuation by £44.2 million to zero. Goodwill originally represented the difference between the price paid for the special purpose vehicles and the underlying asset value,” the company said. 

Analysts also contest UCP’s claim of being unable to lease the property it has built.

UCP has a 60:40 joint venture with Unitech to develop six special economic zones and information technology parks in India, spread across 21.4 million square feet.

It has constructed 5 million square feet but could lease out only 2.1 million square feet.

“Even though the domestic Indian stock markets and the Indian real estate sector have shown signs of strength, the demand for commercial real estate continues to be soft,” Kapur said.

But a report by institutional brokerage IIFL on Friday contested this.

“Leading real estate developers have seen a pick-up in leasing volumes post March 2010. UCP has pre-leased 0.8m sq ft area in this period—the strongest seen over the last 8 quarters. Also, peers such as DLF have reported a sharp pick-up in leasing in the first quarter,” the report said.

The UCP management said due to excess ready space available in the market and the cautious approach by UCP’s target tenants when committing to space, absorption and rental rates are likely to remain under pressure in the short to medium term.

“Recently released draft guidelines of the direct tax code, which mentions rollback of tax incentives available to SEZs are also likely to slow down space take up in SEZs besides putting further pressure on the rentals paid by IT/ITES businesses.”

Said another analyst who was present at the meeting: “All the investors were very angry, most of them were international funds. One of them alleged that the UCP in collusion with Unitech is driving down the value of the company and making it look like an attractive offer for UCP investors so that they can buy it back cheap. Whether these investors will sell is a very big question in the circumstances.”

The new direct taxes code (DTC) norms state that all special economic zones (SEZ) that have been notified before end of fiscal 2012 get tax incentives. UCP has received SEZ-notifications from government for all its five projects..

The analysts, however, remain positive about the mothership Unitech because “a successful buyout would mean they receive the assets cheap”.