Unitech is facing a severe liquidity crunch and needs to repay about Rs1,000 crore debt in FY13. With severe funding constraints, the real estate company is assuring huge “sure shot” returns, advertising a carefully chosen past period. Why are SEBI and exchanges quiet?

Real estate giant Unitech is in dire need of cash flow as it faces a severe liquidity crunch and has to pay about Rs1,000 crore debt in current fiscal, out of its total debt of over Rs5,100 crore. In order to garner cash, the company has come out with a “Invest in Sure Shot Money Gainers” scheme, which promises huge returns on investments on some of its sold-out projects.

According to an email campaign launched by Unitech, the difference between launch prices and current resale market prices of some of its projects ranges from 88% to 127%. The company claims that its projects launched in 2009 have given huge returns for the buyers in just three years.
 
Its project ‘Vistas’ was launched with a price tag of Rs2,765 per sq ft in 2009 and the same property is now sold at Rs5,200 per sq ft, giving a return of 88.1% in just three years. Similarly, the company claims that its projects, ‘Residences’ and ‘Gardens II’ have given returns of 112.4% and 127.1%, respectively on their launch price. 

  
Citing a great returns on investment made in 2009, Unitech is now asking people to invest  in its new projects “South Park”, “Crestview” and “Anthea Floors”. The price for a flat in these buildings starts from Rs72 lakh onwards.

The problem with this pitch is that it highlights the excellent returns of just one specific three-year period. This is pure mis-selling since returns carefully chosen for a self-selected period and that too starting with 2009 when values were extremely depressed is a false pitch. The Securities and Exchange Board of India (SEBI) insists on making mutual funds and others write that past performance is no guide to the future. Without this, fund companies would misuse past returns, highlighting the self-selected best periods (as L&T Mutual Fund was doing in 2009) while investors would unquestioningly be enticed by such selective performance. SEBI has since plugged this kind of sales promotion. Without a real estate regulator in place, Unitech of course can claim that it is not violating any law. But SEBI and the exchanges regulate listed companies and can easily pull up Unitech—if they want to.

Unitech is also offering a zero pre-EMI facility for 18 months from leading banks. The zero pre-earnest monthly instalment (EMI) offer is nothing new but is used by several realty players. The scheme also known as EMI subvention scheme or 80:20 scheme is quite simple. The buyer pays 20% amount of the total agreed price, while bank or financial institute provide loan for the rest 80%. While the buyer needs to pay the EMI as soon as he gets the loan, in this scheme, the developer takes care of the EMI for agreed period. In Unitech’s case, the buyer will not have to pay EMI for 18 months and instead the company will pay it to the lender.

For the fourth quarter to end-March, Unitech’s consolidated net profit fell 97.8% to Rs2.26 from Rs102.5 crore, a year ago period. The real estate company’s total revenues, including sales, also fell to Rs716.1 crore from Rs1,054.3 crore in fourth quarter last year.

Ajay Chandra, managing director, Unitech, had said, “Financial year 2011-12 was a very challenging year particularly in terms of availability as well as cost of funding for real estate projects. The company has a healthy balance sheet and it has been continuously reducing its debt by utilizing cash flows from operations.”

During the fourth quarter Unitech managed to re-finance about Rs500 crore of repayment for FY12. This has led to temporary respite and its impact can be seen in the form of a sequential improvement of around 33% in revenue booking from its real estate projects.

“While the management has hinted at strong execution ramp-up in FY13, we believe the ability to manage liquidity would be the most crucial factor, especially given that the company has higher repayment of over Rs1,000 crore scheduled for FY13. We expect near-term outlook for Unitech to remain challenging due to liquidity headwinds adversely impacting execution ramp-up and cash conversion cycle,” said Motilal Oswal Securities in a report.

Due to severe liquidity pressure, Unitech’s project execution, cash flow and revenue bookings were adversely affected in FY12. This resulted in lower booking run-rate of about Rs400-Rs500 crore per quarter in FY12 from sales run rate of Rs900-Rs1,000 crore over the last eight quarters. Similarly, its average cash-flow from sales declined to Rs600-Rs700 crore per quarter in FY12 to normal run-rate of Rs900 crore per quarter in FY11.

According to media reports, during FY11, there were about 1.02 lakh units that remained unsold just in Delhi-National Capital Region (NCR), while the same for Mumbai was 90,512 units.