<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[A Lot At Stake: The 10,000-acre Lavasa project in Maharashtra is India’s first privately developed hill station
From the chopper hovering above the Lavasa Valley, the sight is quite spectacular. The Warasgaon lake, stretching 26 km between interlocking hills and valleys, is a startling, vivid blue. Hotelier Amit Saraf, one of the passengers in the helicopter, is visibly impressed. He is evaluating whether it makes sense to build a hotel in the Lavasa project and so far, he likes what he sees. “It is still early days to decide about investing; but HCC (Hindustan Construction Company — the principal promoters of Lavasa) seems to be delivering,” he says. Meanwhile, ITC Hotels has made up its mind — it is giving final touches to its 60-room ‘Fortune’ property in the valley.
If and when Lavasa gets completed — and there is still a question mark on the execution of the full project — it will be a spectacular achievement. It will be a spanking built-from-scratch hill station created by a private developer spread over 10,000 acres. If HCC manages to pull it off, it will catapult the company, which is currently a mid-sized construction player with a turnover of Rs 3,500 crore, into the big league.
But before Lavasa can be completed, it will require money — lots of money. By some estimates, it will soak in Rs 40,000 crore before it is completed. So far, HCC has only managed to put in Rs 2,000 crore into the project — Rs 800 crore as equity, and Rs 1,200 crore as debt. And while phase I is almost complete, it now needs a lot more cash to start work on phase II. HCC has just taken board approval to raise Rs 1,500 crore through the qualified institutional investor (QIP) route, a favourite with cash-strapped real estate players. While it doesn’t say that it is raising this money only for Lavasa, CFO Praveen Sood admits the money will largely be for infrastructure projects, including the hill station.
The problem is this is a pretty tough market to raise money in for a real estate gamble as big as Lavasa — and investors are turning skittish. But HCC chairman Ajit Gulabchand is going to push ahead nonetheless. This is HCC’s biggest gamble and he cannot turn back now.
The Two Icons
To understand the importance of Lavasa for Gulabchand, one needs to realise how much is at stake. For years, HCC has been a middle-of-the-rung construction player — an EPC (engineering projects company). It is neither much better, nor much worse, than most of its peers. (see ‘Peer Parallel’). But for some time now, it has been trying to break into the big league.
Its first big attempt to move up the chain came in when it bid and won the Bandra-Worli sea link project. The eight-lane, cable-stayed bridge connecting Bandra to Worli was the first part of the proposed Western Island Freeway system. It is a spectacular project in its conception — a bridge over the sea, connecting the western suburbs to central Mumbai, bypassing the congested roads. The sea-link, completed a full year behind schedule, will finally cost Rs 1,600 crore — three times the original budget of 2001.
But if the Bandra-Worli sea link project was a big bid for HCC, the Lavasa project is gargantuan in comparison. Lavasa Corporation, a 65- per cent subsidiary of HCC, is currently the apple of Gulabchand’s eye. “It is not just a real estate project; it is an entire town that we are developing,” he says. Gulabchand sees Lavasa as an experiment in some ways. He is not just constructing the city — his plan revolves around running it once it is constructed and occupied. He has already built a ‘Town Hall’, and European lake-side promenade with cafes and sidewalks, and his villas and chalets are also taking shape.
The Maharashtra government’s decision to declare 25,000 acres as a hill station with a statutory Special Planning Authority has helped his cause by fast-tracking clearances through a single-window, five-member authority. “It would have otherwise taken us 10,000 years to build the town,” says Gulabchand.
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HCC entered real estate development in 2001 when it kicked off land acquisition for the Lavasa project. Today, it has power projects in Kargil and Ladakh, and is also executing irrigation and water supply schemes from Godavari river in Andhra Pradesh to the Vaitarna lake, near Mumbai. But it is the Lavasa project that has taken centre-stage in the company’s business plans; and it is evident that HCC’s future is dependent on the fate of Lavasa Corporation.
The commitment is humungous: HCC has acquired 10,000 acres, and aims to push up the resort town’s sprawl to around 13,000 acres spread over seven hills and involving the construction of 15 dams. Of the land acquired, it has mortgaged 7,694 acres to raise Rs 1,200 crore in debt so far. And now HCC is hoping to raise money through the QIP route while Lavasa Corporation itself is trying to interest new investors.
High Stakes In Lavasa
Lavasa seems to have had a good start. The first phase of the project around Dasve Village has sold out. A recent presentation to analysts by HCC claimed investors and home buyers had snapped up 395 villas and 420 apartments at around 3,000 a sq. ft. This has generated a revenue for FY2009 of Rs 212 crore. Rajgopal Nogja, president of the subsidiary, HCC Real Estate, said possession for the first residential homes is targeted for next year.
“Sale of villas and apartments is only one part of the business. We will also have a stake in various business enterprises in Lavasa,” Nogja emphasises. “For example, we will have a 19 per cent stake in Nasa Space World (Nasa’s tourism chain) and 26 per cent in the 200-room Hilton Hotel.” Thirdly, the town’s management will be with Lavasa Corporation that will provide civic and other services and generate taxes. This will include a theme park that is expected to host two million tourists a year, he says.
But can Lavasa weather the current downturn and generate the massive funds the project will need in the years ahead?
The looming cash crunch for the project is apparent. Lavasa Corporation was looking at generating Rs 1,500 crore by divesting about 10 per cent of the equity through an IPO. This has been now postponed and this door may remain closed for at least a year. Raising private equity for what is primarily a real estate project is not going to be easy, while any further debt, when the debt-equity ratio is already a high 2:1, is also a tough call.
“Our second phase opening October 2009 is expected to generate Rs 1,000 crore,” says Nogja. He says over 2-3 years 6-8 million sq. ft would come up for sale that would translate into Rs 2,000-3,000 crore. Such projections were not ambitious when the real estate market was booming last year, but in the current scenario, finding buyers is a tough proposition.
Investment banking sources say Lavasa Corporation is scouting for funds. An investment banker, who does not want to be identified, says investors have been taken on site visits to Lavasa and “a placement is expected by June”.
Kumar Gera, president of the Confederation of Real Estate Developers Association of India (CREDAI), however, judges Lavasa as “ambitious”, but well positioned. “Unlike Sahara’s Amby Valley that was marketed as a luxury project and was overpriced at Rs 8,000-10,000 per sq. ft, Lavasa is relatively more affordable.”
Others are, however, sceptical about Lavasa’s high-investment, high-risk game. Says Angel Broking’s Sailesh Kanani, who heads infrastructure practice: “Though HCC has a good order book position, the debt-equity ratio on account of Lavasa is nearly 2x. It is too big, too long-term for a market that thinks only one year ahead.”
Concurring with Kanani, Jagdish Malkani, vice-president and country head of TAIB Capital Corporation, points out: “What HCC went ballistic about Lavasa — that it was a huge project — in boom times, is now a disadvantage considering that both the debt and equity markets are virtually frozen.”
Company officials concede that land acquisition is costing Rs 9 lakh an acre compared to Rs 1 to 2 lakh in the initial stages. As it is, the company is in a face-off with the residents of Mugaon village after Lavasa Corporation refused to buy their land at the rates they had set.
With few options for external funds, the crucial test will be whether Lavasa’s second and third phases sell to generate the targeted Rs 2,000-3,000 crore over the next 2-3 years. As Pranay Vakil, chairman of Knight Frank Property Consultant, says, “Lavasa is only saleable as a second home. Besides, will people be willing to buy into a resort town in a downturn?”
Playing To Win: HCC Chairman
Ajit Gulabchand is confident
that the Lavasa project will be
a roaring success
(Pic By Bivash Banerjee)
Real Estate Play
Why has HCC diversified into real estate? The company claims an order book backlog of Rs 16,600 crore. Yet, it has signed an MoU with the Gujarat government for the development of a Rs 40,000-crore waterfront city near Dhulera. It is also developing a financial services park called ‘247 Park’ in Vikhroli, Mumbai, apart from other real estate projects.
For FY2008, HCC concedes its profit margins have been under severe pressure despite topline growth due to rocketing steel prices. The fourth quarter results for FY 2009 were a disappointment with a topline contraction to Rs 980 crore compared to the previous year’s Rs 1,054 crore, a de-growth of 7.1 per cent.
However, profit-after-tax for FY2009 beat analyst’s expectations on margins and showed a healthy 15.4 per cent growth to Rs 125 crore from the previous year’s Rs 109 crore.
However, the future is not rosy for the construction sector. For instance, a recent CMIE report says the top eight construction companies announced new orders aggregating Rs 17,906 crore for October-December 2008 — just half of Rs 34,246 crore of the previous quarter. The CMIE report also points out that though the sector clocked a robust 40 per cent growth last quarter, “the sector’s PBDIT and PAT margins declined by 100 basis points”. In this situation, HCC hopes real estate development will bring in larger and continuous returns.
Lavasa is still a blip on HCC’s balance sheet. It has a lot going in its favour, but the fact is there is little sign of the realty market regaining ground. What there is little dispute about is that Lavasa has become crucial to HCC’s future.
gurbir dot singh at abp dot in
(Businessworld Issue Dated 2-8 June 2009)