Emaar grapples with worries on delays, debt

This is Gupta’s second attempt in two years to tap the IPO route. His first attempt in February last year failed due to lack of investor interest.

Things have improved for the property sector since then, but only just. Valuations have moved south globally and there are enough experts who see red whenever prices go up a bit.

So, Gupta is trying hard to convince prospective investors but, like any other real estate developer, has a tough task ahead. Property sales saw their lowest levels during the September 2008-May 2009 period, after global economic slowdown forced buyers to postpone home buys to save cash. This led to slower growth and project delays impacting the profitability of companies in the sector.

Emaar MGF reported losses, too. The net loss before tax for FY 2009 was Rs 166.3 crore, says the latest draft red herring prospectus (DRHP) filed by the company. The company also saw many of its 29 projects getting delayed. For instance, the project named The Views in Mohali was supposed to be completed by this financial year, by the previous DRHP. It is now postponed to 2011-1012, a delay of over a year.

The job loss and economic slowdown in the country also saw buyers cancelling bookings in Emaar MGF’s premium projects. Mohali Hills, where the developer is selling plots, witnessed the number of units sold coming down to 1,681 as on August 31, 2009 from 1,723 as on August 31, 2007, with the difference reflecting cancellations. The company had started construction on this site in 2006-07.

This trend is seen across all sectors of real estate. These include residential projects at Gurgaon and Chennai. The completion date for their only ongoing retail project, The Central Plaza, in Mohali Hills, has been extended to the next financial year from the current one, according to the new DRHP.

The company was developing IT office spaces in various cities such as Gurgaon, Chennai and Hyderabad, said the earlier DRHP. Projects in the latter two cities are excluded from the recent DRHP. The Gurgaon IT project is now split in three commercial spaces, with IT occupying only 4.2 acres as compared to 15 acres earlier.

To adjust to the new market demands, the company has started making changes to its projects. Just like other large developers ventured into affordable housing, Emaar MGF resized its new launches to make these more affordable—Emerald Hills and Emerald Estates in Gurgaon, for instance. Sources said this strategy has started paying and the company has seen sales picking up.

But the biggest concern for investors putting money in the realtor’s IPO is the debt of Rs 5,807.8 crore. The company’s debt-to-equity ratio is 1.2:1. If the IPO goes through this time, it plans to pay off Rs 1,972.1 crore of debt from the Rs 3,850 crore it will garner. This will take care of 46 per cent of the loan the company had taken till March this year.

It remains to be seen if Emaar MGF will pull it off this time, especially with the ‘modest’ valuations it has put to its business, compared to the last attempt. In February last year, the company had proposed to sell 10.4 per cent of equity at an aggressive Rs 6,462 crore.

Markets have re-rated the real estate sector. In December 2007, the market participants were so bullish on the sector that DLF’s stock touched Rs 1,073.8 in December 2008 on the Bombay Stock Exchange. This was five months after it listed on stock exchanges at around Rs 570. The company is currently trading even below the issue price at Rs 385.30 a share.