Business Today

Living on the brink

Shalini S. Dagar        Print Edition: April 3, 2011

The chairman's message in Unitech's annual report for 2010-11 could read like a thriller, instead of the usual talk about land banks and project launches. Look at what happened to the company: conversations between a lobbyist and her clients were leaked, its fledgling telecom venture was accused of getting licences unscrupulously and the Central Bureau of Investigation or CBI now wants "clarifications" from Chairman Ramesh Chandra. The ending could be a court scene, with the CBI announcing that it would file a chargesheet against the company.

Way back in 1972, when Chandra and some civil engineers set up the soil testing company, they could have hardly imagined their entry into real estate. As in any business, they would have factored in growth and a stock market listing (1986), business cycles, and housing booms and busts. They even had a wild ride, when foreign direct investment was allowed in construction in 2005 and realty stocks zoomed. In the first half of 2006-07, Unitech's average market capitalisation shot up to Rs 14,786 crore from Rs 645 crore the previous year. It issued bonus shares twice - in 2006 and 2007. It also raised over Rs 3,000 crore from London's Alternate Investment Market.

Unitech ups and down

2006 Dec
Sponsored Unitech Corporate Parks on AIM; raised Rs 3,000 crore

Leverage building up; raised Rs 1,700 cr from Tata Realty; applied for telecom licence

Got 2G licence but had to cancel fund-raising QIP as markets fell

Lehman collapse. Telenor entered Unitech's telecom unit with 67% stake

Unitech exits telecom operationally; Liquidity low and debt at close to Rs 9,000 crore

Unitech raises $900 million and launches affordable housing; cash comes in

Tries to cut further debt and improve margins on realty

2G scam heats up; share price plummets; gets into a legal dispute over pledged shares

Company back on track; but future still uncertain
Capital was plentiful and cheap. Nearly $18-20 billion in equity funds were looking for opportunities in Indian real estate in 2007. But, the Chandras, like many real estate promoters, preferred debt. Fuelled by an almost tripling of debt over a couple of years, Unitech went on a land acquisition spree (See debt timeline). It entered the markets of Chennai and Mumbai. For a real estate company, the number of its subsidiaries is an indicator of its land bank, as the law caps the amount of land a company can own. Unitech's subsidiaries rose from 68 in 2005-06 to 351 by March 2009. At its peak, Unitech's land bank had over 14,500 acres (it is down to around 7,500 acres now). As the land bank increased so did Unitech's stock market valuation. The share price at its peak after the bonus issues was over Rs 600.

In late 2007, Unitech was already highly leveraged. In the annual report for 2007-08, the chairman boasted, "Over the years, Unitech has been very efficient in utilising capital and has grown to become a $6 billion market cap company with a cumulative external equity capital of under $10 million!" Towards the second half of 2007-08, two things happened.

Unitech's promoters applied for the 2G telecom licences . They wanted a new business that would help offset the cyclicality of real estate. Unitech had a small business in transmission towers in which South Korea's Hyundai had been a partner until 2004-05. Around the time, Unitech also took an advance of Rs 1,700 crore from Tata Realty ostensibly against a large land transfer. Unitech later paid a nearly similar amount for the acquisition of telecom licences across 22 circles via eight subsidiaries. This transaction has become highly contentious, and several agencies including the CBI are investigating it in the context of the allocation of licences by then telecom minister A. Raja. Managing Director Sanjay Chandra , the promoter's son, however, says the transaction was business as usual (see Sanjay Chandra's interview).

Mounting debt
By March 2008, the company's debt levels had climbed close to Rs 8,500 crore. Earlier in January, the company's plans to raise over $1 billion in equity through a private placement to institutional investors in what is known as a QIP or qualified institutional placement had to be aborted as global stock markets fell. The decline affected the issue's pricing. Over the next few months, Unitech continued to look for a partner for its telecom venture and for a suitable opportunity to raise equity.

Probably spoilt by the valuation expectations of the past year, the Chandras failed to close both the transactions. Chairman Ramesh Chandra observed in the annual report for 2007-08 that the downturn would separate the wheat from the chaff. "Those who understand and prepare for the innate cyclical nature of this business will succeed. Those who have execution excellence will succeed. Those who purchased sufficient land at attractive prices will succeed. Those who have enjoyed the trust of customers will succeed. Those who kept their powder dry - and didn't waste shareholders' funds chasing their enlarged dreams - will succeed. The years have shown that your company has all these attributes," he wrote with confidence.

Come September and that confidence would seem misplaced. With the collapse of Lehman Brothers the global financial markets froze. That was when leveraged expansion came to haunt many Indian promoters. Unitech's share price that year dropped from over Rs 400 per share to a low of even Rs 21.80.

For the Chandras, the pain was acute as their core business, real estate, got affected by this negative sentiment and sales dropped. In 2007-08, the company had sold seven million sq ft. In the first half of 2008-09, sales dropped to half a million sq ft, and in the second to around 100,000 sq ft. Even as the cash flows fell, Unitech's cash and other commitments did not.

Its debt levels at the end of December were Rs 10,900 crore. There was talk of default on payments. It came to a point where the promoters had to pledge their shares as additional collateral. Sanjay Chandra had in an earlier interview recalled those days as "we were in the ICU."

In the midst of this mayhem, the company managed to rope in Norway's Telenor as a strategic partner for its telecom venture in late October 2008. Telenor committed Rs 6,120 crore to pick up a 67.25 per cent stake in Unitech's telecom subsidiary, Unitech Wireless, which was formed by the merger of eight subsidiaries and later renamed Uninor. Though the money came in installments, the deal ensured that Unitech's obligations and debt and guarantees adding up to Rs 2,100 crore were transferred to the subsidiary. Further, Unitech's residual 32.75 per cent stake was valued at around Rs 3,000 crore based on Telenor's entry valuation.

Sanjay Chandra
'A question of Rs 1,700 crore'

Sanjay Chandra's 2011 calendar entries afford a study in contrasts. If they showed a trip to Davos for the World Economic Forum where he was hailed as a Young Global Leader, they also included a visit to the Central Bureau of Investigation headquarters in Delhi where he was questioned in a serious corruption case. Chandra, 38, however, takes it all on the chin and says, "It certainly is not fun." Here he speaks candidly to BT. Edited excerpts:

Why were the promoter shares pledged?
During the crisis, promoter shares were offered as secondary collateral. For Unitech's own restructuring and refi nancing at that time, the promoters had to provide additional collateral and guarantees. Most of these were to Unitech's lenders. We provided guarantees for over Rs 1,000 crore of loans.

When do you think you will be able to redeem these pledged shares?
You will see a substantial reduction over the next six to seven months without further capital raising, just with internal cash fl ows. Unitech itself will either repay a lot of its debt or refi nance. Once the project fi nancing takes over and we take back those loans, it (the situation) improves. That has been happening over the past year and a half. The focus is to use your cash fl ows sensibly to repay the more expensive and the more heavily collateralised loans.

Is the kind of large advance that you got from Tata Realty, a normal practice?
We entered into an agreement with Tatas to sell them land in Gurgaon in an area where we had 700 to 800 acres. The entire transaction did not get consummated because of contiguity issues. We sold them land worth Rs 700-800 crore and refunded the rest. It was not a loan. The transactions started in October 2007. Most transactions were done by June-July (2008).

Why is there such a close correlation between this advance and the money that went into the telecom subsidiaries?
At the same time (when we were investing in telecom), we invested about Rs 500 crore of equity in Mumbai and in other businesses and also received various other monies from different sources of cash fl ows, including our customers. There is no linkage from our side between these transactions.

What if the telecom licences are cancelled?
Firstly, I do not think the government can just cancel without any legalities. We have replied to the show-cause notices issued against our eligibility with utmost thoroughness. The replies run into thousands of pages. Even on the rollout issue, we have approached TDSAT. Unfortunately, everyone is being clubbed as 'new' licencees, whereas some of them have not really done a rollout. Everyone is not in the same boat. I do not anticipate any issues on cancellation.

Given the trouble you faced in telecom, do you think the diversification was worth it?
At that time it seemed so. With hindsight possibly not.

Many people saw Unitech as a conservative company, and then an aggressive chasing of market cap..
Not market cap but growth. In terms of market cap our peak year was 2007 but in terms of sales the last two years have been our peak years. We have had very high leverage for around a year. If you look at our balance sheet today also it is a very conservative one.

In late 2009, Sanjay Chandra was to tell BT, "We did not have the bandwidth and we could not have done it [run the telecom venture with a minority partner] 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." Even so, Unitech had to sell prime assets such as its corporate office in Saket and a hotel in Gurgaon. The Rs 750 crore it raised was not enough to balance its debt-equity ratio, which at its peak was 4:1. Notwithstanding the poor sentiment in the capital market, in April 2009 Unitech was the first issuer to test the markets with another QIP. This issue sailed through and the company raised Rs 1,621 crore worth of equity.

Other real estate companies followed suit to raise desperately needed funds. DLF's promoters sold nearly 10 per cent of their stake to raise Rs 3,850 crore, days before the Lok Sabha election results were announced. As the decisive political mandate improved the market sentiment, Unitech went in for another QIP in June 2009 for Rs 2,789 crore, all together raising $900 million or almost Rs 4,400 crore and ending up diluting the promoter holding to 43.84 per cent from a high of almost 74 per cent in September 2008.

At the same time, the promoter group company Harsil Projects was issued share warrants with conversion rights available right up to December 2010. This issue of shares was to increase the promoters' holding by around five per cent.

In the first quarter of 2009, Unitech launched several affordable housing projects that raked in more cash. Unitech exceeded the sales volumes of 2007. The revival continued till late 2009 and early 2010, before rising property prices and increasing home loan rates dampened demand. (See Unitech's sales)

While 2009 was a sort of resurrection for the company, the past caught up with the promoters in 2010 when the 2G licence scam became public. The stock market became their worst enemy. Unitech's share fell below Rs 50 by end-January 2011. This created another problem: the promoters had pledged nearly a third of their shares against loans and had to cover the value loss either with cash or more shares. The promoters staved off a sale of the pledged shares by securing a court order. The case is still in court, although they have paid off the dues. This event yet again highlighted the fragility of Unitech's promoters.

Another recent downside was the limited review report by the company's auditors of nearly two decades, Goel Garg & Co. This has a disclaimer on the shareholding pattern.

Touch and go
Though the initial pledge of shares was done at the peak of the 2008 crisis, the promoters pledged more shares to raise money for the conversion of warrants into shares. Unitech's debt and equity position improved further. Unitech's spokesperson says: "It was important to give confidence to the lenders as well as the shareholders about the intrinsic value of the company." Yet, it seems a curious case of conversion of at least a part of the company debt into personal debt of the promoters.

Meanwhile, the company seemed to have bought fresh parcels of land in the October-December quarter of 2010. Religare Securities noted: "Increase in deferred land liability by Rs 540 crore suggests land purchases during the quarter."

 Way forward for Unitech

Scenario 1: No penalty for those who got 2G spectrum from Raja Result: Unitech's stake of nearly 33% in Uninor will be valued at market prices. Right now, the investment is being valued at zero.
Possibility: Low

Scenario 2: A fi nancial penalty is imposed on the 2G allottees. Result: Good for the company as clarity will emerge, but there will be a fi nancial downside.
Possibility: High

Scenario 3: Licence cancelled and spectrum re-auctioned Result: The value of Unitech's stake in the telecom subsidiary will be negligible. The ensuing clarity will still be positive. But if promoters' involvement is proved, then it could be disastrous.
Possibility: Medium
Worryingly, the auditor's review report also notes that the provisions against receivables are not "adequate". Today, the debt-equity ratio is 0.4:1, against 4:1 earlier, with total debt down to Rs 4,617 crore. But any drop in sales realisations will impact cash flows. A real estate investor points out that the problems are "only cash flow problems. I understand their assets and they are good". Yet he was wary of investing at the corporate level. "I can readily invest at the project level," he says.

Part of the wariness comes from the fact that Ramesh Chandra's sons have gradually taken over the reins, with the younger one, Sanjay, being the face behind the aggressive expansion of the past decade. Said a Unitech financier: "Unitech was one of the first builders we worked with and the experience was wonderful. Sanjay has just killed the company - over-aggression.

Once you start playing the market-cap game you are dead." Ask Sanjay about Unitech's troubles being associated with him, and he is unfazed. "It is good to be a troublemaker," he says. Sanjay, who joined the company in 2001 followed by brother Ajay, denies talk of any rift between them. "We are together. That is how we came out of the crisis," he says. BT contacted many people for comments, but not many responded. Most requested anonymity or did not say anything.

Those who spoke on record were guarded. "We are tenants at their malls. Our experience with Unitech has been good. They were the first ones to believe in us," says Kishore Biyani of the Future Group.

There are many who vouch for the senior Chandra, though. A real estate investor says, "Ramesh Chandra is a man of his word and he does not need to do anything wrong to make money, but I cannot say anything about the others." Sanjay's response: "Our father is still very much involved with the company."

Unitech faces its toughest test yet.
Unitech faces its toughest test yet.
So where will it end? Prashant Bhushan, advocate and counsel of the Centre for Public Interest Litigation, which has filed a public interest litigation in the Supreme Court in the case, is clear that such tainted telecom licences should be cancelled and a re-auction held. While there is skepticism about the cancellation of the licences per se, it is clear that there will be some liability attached.

No surprise then the Unitech stock is trading at what Nomura analyst Aatash Shah calls "liquidation value" in his mid-February report. He believes the market is imposing a "penalty" of Rs 7,600 crore for Unitech's involvement in the 2G scam. The share price closed the second week of March 2011 at around Rs 38. Many analysts, either out of habit or out of genuine appreciation of the company's intrinsic worth, have maintained a buy on the stock.

The company will, of course, survive, but the whole saga has immeasurably dented the image of the company and the promoters. "Unitech has lost its sheen. The involvement in the scam is not just a financial loss but a huge reputation loss as well," says Arun Kejriwal, Founder of Kejriwal Research & Information Services, a market advisory firm.

For Unitech and its 'troublemaker', it is one long summer ahead.

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