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Unitech to Repay Debt to Mutual Funds After Raising Revenue

Unitech Ltd., India’s second-biggest property developer by assets, will repay all the money it owes to mutual funds for the first time since 2001 after boosting revenue from homes sales.

Unitech has cut loans from mutual funds to 600 million rupees ($13 million) and expects to repay the rest this month, Managing Director Sanjay Chandra said in an interview in New Delhi. That’s down from 30 billion rupees during the financial crisis, the company said.

Unitech shares fell about 50 percent in one day in October 2008. Three months later, Fitch Ratings cut the company’s credit worthiness by six levels after Lehman Brothers Holdings Ltd.’s collapse seized credit markets worldwide. Twenty eight of the 35 analysts who track Unitech now recommend investors buy or hold the stock after Chandra more than halved debt and lifted residential sales.

“We burnt our fingers very badly with foreign banks and private Indian banks by borrowing short term, now we would stay away from that temptation,” Chandra, 38, said. “The asset liability mismatch, which the whole credit crisis brought in, is what hurt us.”

Accelerating growth in Asia’s third-biggest economy is driving the region’s fastest pace of wage increases, while a stock market at a near 34-month high generates funds for real estate investment. Unitech expects high-end residential properties to account for a quarter of sales in the next couple of years from a fifth now, Chandra said.

Confidence Returns

“The economy is growing, jobs and bonuses are back since the credit crisis and people have the money and the confidence to now go out and buy a house,” said Anshuman Magazine, managing director for South Asia at the Indian unit of CB Richard Ellis Group Inc.

Prices in Delhi and neighboring Gurgaon have climbed by an average of 30 percent over the past nine months, Magazine said.

Unitech shares have gained 6 percent this year, giving the company a market value of 219 billion rupees. The stock’s still down 84 percent from its January 2008 peak of 546.80 rupees.

The developer’s long term debt was rated LBBB- by ICRA Ltd. in July. Fitch last rated the developer in June 2009 assigning it a B- rating.

Unitech’s average cost of debt has declined to 12 percent, from a peak of 14 percent in 2008, Chandra said. Mutual funds charged between 16 percent and 19 percent, CLSA Asia-Pacific Markets said in a note dated Sept. 1. The developer repays about 10 billion rupees a year, Chandra said. Net debt will decline marginally this year, he said.

State-Run Banks

The New Delhi-based developer has switched to borrowing from state-run Indian banks that extend loans with longer maturities, Chandra said. The average tenure of its loans has risen to three years from two years during the crisis, he said.

Unitech, which had a peak debt of 109 billion rupees in December 2008, has reduced liabilities to about 60 billion rupees, Chandra said. Net debt levels have declined to about 52 billion rupees, he said.

Chandra says the crisis was a missed opportunity in terms of acquiring distressed assets. DLF Ltd., India’s largest developer, shares the view.

“To prepare for any downturn we will look to build our balance sheet to a level that will weather the next downturn so that we are the first guy buying out the assets,” said Saurabh Chawla, executive director for finance at DLF.

Cost of Debt

DLF’s average cost of debt peaked at 12.6 percent during the crisis, Chawla said. Its average cost of debt is about 10.5 percent and the average tenure of loans is almost four years, he said.

Unitech will generate cash of between 22 billion rupees and 23 billion rupees this year after deducting interest costs, Chandra said.

Rising residential sales lifted net income 25 percent in the first quarter. Profit rose to 1.78 billion rupees in the three months ended June 30 from 1.43 billion rupees a year earlier. Total income climbed 64 percent to 6.97 billion rupees.

Salaries in India will increase by an average of 10.6 percent this year, the fastest pace in Asia-Pacific, Lincolnshire, Illinois-based human resources adviser Hewitt Associates Inc. said in March. The economy will expand 8.5 percent in the year ending March 31, the fastest in the world after China and Brazil, according to India’s finance ministry.

Home prices in India range from about 2 million rupees to 8 million rupees in the mid-income segment and can be as low as 1.2 million in the affordable housing area, he said.

“There is a huge demand for residential in India at the right price,” Chandra said. “If the sector gets greedy though, it will totally kill the market.”

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