Shaky foundation ups risk :: Business Line

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The attractive interest rates offered by Unitech come with sizeable risks.

Investors are turning to debt and fixed deposits which offer high returns to shield from volatility in the equity market. Unitech, a New Delhi-based real estate developer is currently accepting fixed deposits with interest rates in the range of 11.5 per cent to 12.5 per cent per annum. However, we recommend that investors refrain from these deposits as the risks may be too high for a fixed deposit investor.

THE OFFER

Deposits are on offer for one-, two- and three-year timeframes. The rates of interest offered for these time periods are 11.5 per cent, 12 per cent and 12.5 per cent, respectively. The minimum amount required to be invested in each case is a minimum of Rs 25,000, and in multiples of Rs 1,000 thereafter.

Investors have the choice between a cumulative and non-cumulative option. For the former, interest will be calculated on monthly periods and paid on maturity, along with the principal.

For the non-cumulative option, interest will be paid on a quarterly basis. The company is giving out all the quarterly interest cheques (i.e. post-dated cheques) for the financial year 15 days prior to the due date of the first interest cheque. The rate of interest offered across timeframes is higher than most public sector banks (around 9 per cent) and private banks such as City Union Bank, Karur Vysya and Lakshmi Vilas Bank which offer around 9.5 per cent. However, while bank deposits are safe and are insured up to Rs 1 lakh, corporate deposits carry higher risks to both interest and principal. Risks in the case of real estate majors such as Unitech are particularly high as profits are lumpy and sensitive to swinging interest rates, volatile property prices and demand in the target markets.

For three-year deposits, non-banks such as Dewan Housing Finance and Shriram Transport Finance offer 10 per cent and 10.75 per cent, respectively. Although the returns offered by Unitech are higher than these options, there is no credit rating for the Unitech deposit.

High risk

Unitech was one of the realty majors to be hit quite sharply by the 2009 liquidity crunch. That year, the company had re-scheduled payments on a large portion of its corporate debt when they became due. The company’s debt to equity ratio has since improved from 2.38 in FY10 to 0.43 in FY13, due to debt repayments from sale of land banks and other assets. But its core business has continued to be under pressure.

Unitech’s revenues and profits have fallen at a compounded rate of 6 per cent and 33 per cent, respectively, in the last three years. Additionally, profit margins have fallen from over 23 per cent in 2009-10 to around 8 per cent in 2012-13. The company has been experiencing delays in project completion. It had launched projects totalling 24.9 million sq ft prior to 2009, but has so far only delivered 14.3 million sq ft. In June this year, Unitech was directed to reimburse nearly Rs 14 lakh to a customer due to delays in hand over. If this sets a precedent, delays in completion may lead to escalating expenses in addition to higher interest costs and input cost escalations.

The company currently has no active credit rating. ICRA’s rating for Unitech’s long term debt as on April 2011 was LBBB-, which implies a higher than average credit risk. The last rating from Fitch for Unitech’s debt as on December 2011 was B-, indicating speculative quality investment.

The company had fixed deposits of Rs 582 crore as on st March 31, 2012. In view of the high operating risk, we recommend that investors consider other options for investment.