"Now we think of housing as manufacturing"

After a bruising year, an aggressive disposal of assets and going beyond non-premium housing helped Unitech bounce back.

The main problem with the real estate industry was that we were borrowing short term to invest in longterm projects. We were always so confident of having access to capital. At Unitech, we had not raised capital in 18 years; we had just Rs 36 crore of equity.

Our return on equity was very good because it was on a very thin equity base. So the main lesson learnt was that recapitalisation is important if you have ambitions to grow. Think a hundred times before you take any debt. If you take any debt, it has to be very self-sufficient and debt-equity ratios have to be monitored very carefully.

More important, we (in the realty business) were all working for a very tiny segment of the market in terms of our target. In the urban areas probably only 3-4 per cent of the population could afford us. We all got carried away by the estimated size of the growing Indian middle class becoming upper middle class. We had to refocus and expand our market base.

Another reason why we faced so many challenges was that we went into multiple markets. And we underestimated the regulatory process in each market. In hindsight, we should have started out with two new markets at a time, because (beyond that) your efforts get diluted at the senior management level for regulatory approvals.

Everyone in the industry faced issues, but we faced them more publicly. I guess we got the worst of it because we were the first ones with big (debt) maturities coming up. (There were around Rs 2,600 crore of debt maturities in the October '08-March '09 period. The first big one of Rs 900 crore to mutual funds came up on January 19, 2009.

Eventually Unitech paid up Rs 400 crore and rolled over the balance for three months.) In balance sheet metrics, we were not worse off than anyone else. We were the first to admit it and then focus on getting out of the woods. We sold our assets and at that time only prime assets would sell.

We sold our hotel, our office and other assets. Now we are building a new office in Gurgaon. I met some investors who had not sold their stock when the market crashed. Their view was that rather than buying the stock from the open market, which would not help infuse cash into the company, they could buy it from the company.

That would help the perception issue, and the stock would get re-rated, increasing the value of their investment. That is exactly what happened. We issued the stock at Rs 38 a share and within a week of issue it had risen to Rs 61.

Prior to our institutional placement in mid-April 2009, there had been almost no capital-raising in India for 18 months. When we hired bankers they said it was impossible to raise funds. Very few promoters like to dilute at the bottom of the market. We too did not like it.

But that is exactly what brought the company back on its feet. Last year, (at the) same time we were in the ICU. But the media really worsened the situation. The worst was when news began doing the rounds that we had defaulted on our payments to the Greater Noida Authority, even though its CEO went on television to say that we had not defaulted.

That was the day (October 24, 2008) the stock crashed over 50 per cent. Fortunately, all three of us (father Ramesh Chandra and brother Ajay Chandra included) were totally focussed on the job. We knocked all doors, went to every lender, every regulator.

The frustration with lenders was also huge because they were the same people who would come to you analysing your balance sheet, analysing your assets and lend you money. They came back to you after just three months and wanted to recall their money because the market perception had changed. And these were relationships which we had for years. We had a sanction of Rs 700 crore from a large public sector bank.

The loan was very heavily collateralised, they were happy with the structure, but one board member objected saying that "if this comes into the papers tomorrow we will be in trouble". So, the approved loan was not disbursed. Everyone asked for their money back—some nicely, some not so nicely. You learn not to expect anything. It was not the Indian institutions but the large FII shareholders who had more faith in us and participated in our QIP (qualified institutional placement) sale.

In between all this, we also had our telecom venture launch where we were talking to potential partners. The (payment) default news hit days before our deal with Telenor. We signed the deal on Diwali night at 3.00 a.m. In the morning, the markets reacted adversely. Our partner's stock fell sharply, and there were rumours that they wanted to pull out. We just were caught with wrong timing. Ideally, we should have found our partner 3-4 months earlier.

We were thinking of retaining a majority stake and have a minority partner. We thought there was enough capital available. Our market cap was over $20 billion, so raising money seemed easy. But we did not have the bandwidth and we could not have done it in today's times. We should have realised that a few months earlier.

It would have saved us a lot of pain and value loss. In the short term telecom gave us some pain, but it is already showing benefits. It is important to have diversified earnings. Real estate is too much of a cyclical business.

Right now, our debt-equity ratio is the best in the industry. Through aggressive sales we have brought it down to 0.6 from 2.4 at the peak of the crisis. Now, cash flows are more important than even value creation. So, we have a diverse product base. We should not be dependent on the high-end market, or the commercial segment.

The moment we turned our products to match the broader market, volumes shot up. Just to give you a perspective, our peak year of sales was 2007 when we sold seven million square feet. In 2008, in the first-half of the year, we did half a million square feet and in the second-half we did around 1,00,000 square feet. And in 2009, till September 30, we had already done over 10 million square feet. So, in volume terms, we have surpassed our best year by tweaking the product mix.

What's more, every project was getting dragged earlier because we were all overdesigning and over "spec'ing", and as a result, costs were going up. Now we think of housing as manufacturing— standardising of the product whether that is windows or door frames. We have been able to cut down our time to launch the product.

What we realised in the downturn is who the people standing by you are, both externally and internally.

— Sanjay Chandra, 37, Managing Director, Unitech

(As told to Shalini S. Dagar)