All is not well for Unitech and Chandra

On April 2, when the whole country was watching the cricket World Cup final in Mumbai, the Central Bureau of Investigation filed a charge sheet against nine individuals and three companies for their alleged involvement in the 2G spectrum case.

One of them is believed to be Sanjay Chandra, Managing Director of real estate developer Unitech.

Chandra is also the chairman of mobile telephony operator Unitech Wireless, which is one of the companies that are said to have made a windfall in the allocation of 2G spectrum.

It is owned 67.25 per cent by Telenor of Norway and 32.75 per cent by Unitech.

Chandra has been the public face of Unitech for some time now.

The charge sheet ought to have crashed the Unitech share price.

Instead, Unitech rose from Rs 41.85 on April 1, the day before the charge sheet was filed, to Rs. 45.25 on April 6 on the Bombay Stock Exchange.

In fact, in the last four months, the Unitech stock had fallen from close to Rs. 80 to Rs. 32 on fears that there could be a financial liability on the company once the 2G investigations are over.

The charge sheet has ended the uncertainty. Perhaps that's why the share price has moved up in recent days.

The company chooses to think the worst is behind it.

Had there been a severe downside, why would Platinum Investment Management of Australia have raised its stake in Unitech from 4.93 per cent to 5.16 per cent, it argues.

A recent JP Morgan report found the company undervalued. The report valued its two primary land banks - 900 acres in Gurgaon and 350 acres in Noida - at  Rs. 19,200 crore (Rs. 192 billion).

Net of liabilities, this translates into Rs. 62 a share, which is above its current share price.

The company claims that cash flows from sale of property remain steady. Unitech is no stranger to crises. In 2008, when the real estate market had gone into a tailspin, it was stuck with a debt of Rs. 8,000 crore (Rs. 80 billion) on its books.

The company had plans to raise $2.5 billion (around Rs. 11, 700 crore then) from the market but investors had lost all appetite for real estate.

The Unitech share price fell over 90 per cent from Rs. 430 in February 2008 to around Rs. 30 in February 2009.

(The Chandra family had made it to the 2007 Forbes list of billionaires with personal wealth of $11.6 billion. The wealth melted away in the span of a year.)

That is when Chandra sold assets, scrapped ambitious projects, halted all new land purchases and cut price tags on his houses.

He capitalised large chunks of the debt, which meant that he would pay interest only when the project for which the loan was taken got sold.

This way, he was able to cut his quarterly interest outgo from Rs. 300 crore (Rs. 3 billion) to under Rs. 100 crore (Rs. 1 billion).

Since then, Unitech has brought down its debt to below Rs. 4,500 crore (Rs. 45 billion) with two qualified institutional placements and internal accruals.

The company is focused on residential real estate, and not commercial real estate, because it requires no debt - the sale of flats and houses funds the construction.

Commercial real estate, on the other hand, gets sold only after the construction has been completed.

The self-imposed ban on big-ticket land deals continues. Small land purchases are being done only where it is necessary to develop ongoing projects.

Of course, the revival in the real estate market has helped.

The average cost of land for Unitech is just Rs. 250 per square foot. This, according to experts, is among the lowest in the industry.

However, real estate brokers say the 2G controversy has impacted the image of the company and it's not so easy to sell its properties.

Does it mean all is well for Unitech and Chandra? Not really. One, the Chandra family has pledged over two-thirds of its 48.57 per cent stake in the company.

Any sharp fall in the share price from here could precipitate a crisis. It is learnt that the family paid extra money to the lenders to ensure that none of these shares reached the market when the stock had fallen to Rs. 32.

Now that the share price has recovered, the family can afford to breathe easy.

Two, ruptures have emerged in Unitech's relationship with Telenor in Unitech Wireless.

To expand the mobile telephony business, Telenor wants a rights issue. Unitech, on its part, feels the rights issue is not in the best interests of the shareholders, and instead wants the expansion to be funded out of debt.

Of course, Unitech's stake will come down if it can't find the cash to subscribe to the rights issue.

Telenor is also aware that the controversy can impact its growth in India - the biggest market for mobile telephony anywhere in the world.

Soon after CBI filed its charge sheet, Telenor said: "This was a period prior to Telenor Group entering India. Unitech Wireless will argue its case in court, and we expect Chandra to do the same."

The writing on the wall is clear.