Acres of redemption: Asset stripping as the last resort

Corporate India has begun to capitalise increasingly on its ‘land-bank’ for shedding its mounting high-cost debt and for implementing its future plans. Simply put, the land has become a new ‘El Dorado’ for companies who had this asset in their balance sheet all along, but seldom paid any, or scant, attention to it.

However, with an expected turnaround in the realty market, companies find it handy to reduce their high-interest loans piled up in their books during the last few years by selling or developing lands originally bought for their own future use (read: expansion plans), procured by and large from the government.

For instance, state-run telecom service provider Mahanagar Telephone Nigam Limited (MTNL) is all set to finalise the appointment of consultants to explore options such as leasing of space or sale and development of land in Mumbai and Delhi. Even as analysts estimate MTNL’s city-centric assets to be worth over Rs 5,000 crore, no official confirmation was forthcoming on this count.

When asked, MTNL Chairman and Managing Director A K Garg reportedly said, “It (monetisation) is always a good proposition. Anything that is not giving returns is a liability.”   He further explained that it may decide to develop some plots on their own with partners to help. “And the capital generated from it will be used for the company’s operational purposes too and not just to reduce debt,” he added. 

MTNL was not the lone PSU to pitch for land sale. Another PSU Air India – having a total debt of Rs 47,226 crore on its balance sheet as on July 31, 2012 – has appointed DTZ International Property Advisors to advise on renting, selling or redeveloping its properties across cities including the leasing out of floors in its iconic headquarters at Nariman Point in Mumbai. In this context, it may be recalled that HMT was the first to set the trend of selling lands way back in 2010 to retire some of its debt which then stood at Rs 1,300 crore. HMT and its subsidiaries hold 200 acres in Bangalore and about 1,500 acres across Hyderabad, Pinjore in Haryana and Kalamassery in Kerala. 

Especially, HMT’s land parcel in Jalahalli in Bangalore fetches huge premium, which has attracted realty developers like Tata Housing Development Company and Prestige Estate, who have developed several premium apartment projects in that area. 

Things went awry after a while and HMT’s land sale process - a part of 631 acre campus - is now in the middle of a Rs 3,000-crore scam. A BJP corporator, N R Ramesh, in Bangalore told media recently that although the defunct PSU was barred from selling the land, it sold as much as 202 acres to as many as 22 entities between 2000 and 2006 without seeking the state government’s permission. So, he has demanded a CBI probe into the alleged land scam.  

Stable market for realty

Keeping the land scam aside, many PSUs like MTNL and BSNL, once counted as the country’s most valuable companies, are making losses and they are now looking at selling their real estate assets as plausible solutions to overcome their financial difficulties and funding new projects.

The trend is catching up. Even private companies are keen to deploy lands for productive use as they see it as a good time (now) to sell such assets. Brokerage firm Ambit Capital’s head of equities, Saurabh Mukherjea, points out that companies have been looking to monetise their real estate assets for the past two years. There could be a pickup in actual deals now, adds Mukherjea, saying, “Since we are towards the end of a downturn and the beginning of an upturn, there is greater parity between the price expectations of the buyer and the seller.”

Echoing similar views, DTZ director Rajeev Bairathi says, “This is a stable market to sell land because prices are going up and companies are increasingly focusing on core activity and also want to reduce their debt overhang, if any.” Also monetising assets now is good, Bairathi feels: “Because fair market prices are available and there is no desperation.”

It is interesting to note that domestic companies borrowed heavily before the global depression of 2008-09 mostly to expand, and have since struggled with mounting debt with the economy still hobbling. A Credit Suisse report issued in August points out that the combined debt of 10 large business groups in India jumped five-fold in 5 years to Rs 5.39 trillion at the end of March 2012.

These 10 groups, Adani Enterprises, GMR, GVK, Vedanta, Videocon, Essar, Jaypee, JSW, Lanco and the Anil Ambani-led Reliance Group, accounted for 20 per cent of all bank loans in the country, said the Credit Suisse report.

Diversifying land use

Mounting debts apart, corporates who procured land from the government on concessional rates on the pretext of generating more jobs and for future plans, found it expedient to shift the focus of land-use from core industry to lucrative real estate business as lands deployed for housing fetches premium prices.

In December, Anil Ambani’s Group announced a joint venture with China’s Dalian Wanda Group Corp to develop land it owns across India. This JV will develop integrated townships within Reliance Communications’ 135-acre Dhirubhai Ambani Knowledge City in Navi Mumbai and on 80 acres owned by Reliance Infrastructure in Hyderabad. 

The above two proposals could fetch the Anil Ambani group up to Rs 7,500 crore. This group has an outstanding debt of Rs 86,700 crore at the end of March 2012 which is seven times its earnings before interest, taxes, depreciation and amortisation (EBITDA), Credit Suisse said in its report, while pointing out that a major chunk of this debt emerges from R-Com’s books.

That apart, Tata Communications (formerly known as VSNL) plans to sell properties across Delhi, Mumbai and Chennai to raise more than Rs 2,500 crore to raise capital in the wake of continuing losses, according to reliable sources in the company. So much so, Tata Group’s telecom arm, which reported a net loss of Rs 201 crore for the third quarter ended December 2012 has identified land parcels valued at over Rs 2,500 crore in these metros for monetisation. Sources aver: “The firm owns prime plots of over 1 acre each across these cities.”

Elaborating, sources at Tata Communications maintain that the company has formed a leasing committee under the existing board of directors, which also include two government nominees. “The leasing committee gives nod on the land monetisation but these land parcels are not part of surplus land identified by the government for monetisation, though they originally belong to VSNL. This was mainly done to help the company financially,” sources aver.

In first of the deal in the pipeline, Tata Communications is expected to sign a transaction through e-auction with Chennai-based VGN Developers to sell a 1.5-acre plot in Chennai’s Nungambakkam road for Rs 195 crore.

Former PSU long-distance telephone service provider VSNL currently owns 773 acres of surplus land spread across five locations in Delhi, Kolkata, Chennai and Pune which is valued at Rs 6,156 crore, or Rs 8.31 crore an acre.

Realty firm DLF completed the acquisition of 17-acre land parcel in Mumbai to Lodha Developers for Rs 2,727 crore in November 2012 with the sole purpose of utilising the entire proceeds to reduce its Rs 22,000-odd crore debt. In August, DLF had announced the sale of this land parcel, which it had purchased in 2005 for Rs 703 crore.

It may be noted that the country’s largest real estate developer has been selling its non-core assets such as hotel plots and IT Parks/SEZs since last couple of years to reduce its debt and also keep focus on real estate business only. So in the current fiscal, DLF had raised Rs 5,213 crore from sale of non-core assets till June and with the closure of the Mumbai land deal, the proceeds from divestment of such assets has reached to nearly 8,000 crore.

Smaller firms too have more modest plans of deploying lands they own to productive use. For instance, auto maker Premier Ltd in January announced that it had inked a pact with realty firm Runwal Group to jointly develop 150 acres of land in Dombivli, an adjoining Mumbai suburb. This will fetch Premier Rs 220 crore and also get a share of the built-up area at a later stage.

TVS Motor is set to monetise a 20-acre land parcel, which may fetch the company about Rs 150 crore, maintain property analysts. The coming fiscal beginning April 2013 could pave way for a surge in such corporate land deals, says Sanjay Dutt, Executive MD at Cushman & Wakefield, a property consultancy, adding, “These lands would be bought by developers, private equity funds and even HNIs (high-networth individuals).”