Will Emaar MGF be fourth time lucky in IPO efforts?

Will Emaar MGF be fourth time lucky in IPO efforts?

Mumbai/Bangalore: Emaar MGF Land Ltd, the real estate company which built the athletes’ village for the Commonwealth Games, has filed a prospectus for the fourth time in four years to raise money from the equity markets. The company wants to raise some 1,600 crore to repay and prepay loans, pay for development charges, and redeem preference shares.

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Many of the problems that bedevilled its fund-raising efforts in three aborted attempts so far find their way into the latest draft document too, which Emaar MGF filed on 4 October.

Emaar and its subsidiaries had a debt of 5,499 crore at the end of fiscal 2010 on a net worth of 4,805 crore. But it has to pay back 4,000 crore of debt this fiscal, some which it had to restructure earlier in the year.

For fiscal 2010, the company made interest payments of 666.3 crore, according to its cash flow statement. This is more than its operating profit (before interest, taxes, depreciation and amortization) of 405.4 crore for the same year. While Emaar turned profitable in fiscal 2010 because it could book more revenue as projects neared completion, its outstanding debt is a burden on its finances.

The initial public offering (IPO) will only help partially solve the problem, say analysts. Of the 1,600 crore it wants to raise, the firm has earmarked 83.6 crore for development charges and 614 crore for part-paying loans taken from UTI Mutual Fund, Royal Bank of Scotland NV (RBS) and Housing Development Finance Corp. Ltd, among others. Another 626 crore will go towards paying for the redeemable preference shares (RPS) to Horizon India BV.

That amounts to some 1,323 crore (the rest being kept for other corporate expenses) and still leaves Emaar MGF with a large debt to pay this year.

“We would like to clarify the amount 4,161 crore includes certain revolving facilities of 622 crore, which as a matter of routine get rolled over based on operational requirements," the firm’s spokesperson said.

The company has so far “paid debt aggregating to 457 crore till 30 September 2010 and further FCDs (fully convertible debentures) aggregating to 629 crore have been converted into RPS and maturity of the same extended by six years," she added in an emailed response.

“We are not sure how comfortable Emaar would be if at all they manage to raise the IPO money, because not many of their projects are generating liquidity and their debt obligations would still remain high," said an analyst at a Mumbai-based brokerage who didn’t want to be named.

The 1,600 crore which Emaar wants to raise is the smallest of its IPO efforts so far. The first time, it filed a prospectus in February 2007 to propose an issue of approximately 117 million equity shares to raise about 4,000 crore, but that didn’t take off. Then, in February 2008, it came up with a revised offer to raise some 7,000 crore. But despite lowering the price band by 15% and extending the offer by five days, the company had to call off that issue due to poor investor response.

The third attempt was in 2009, when Emaar wanted to raise some 3,000 crore at a time when a lot of realty firms had raised money from the capital markets. Despite getting Securities and Exchange Board of India approval, Emaar did not go ahead with the issue and waited—as did many other realty firms.

These repeated failures have hurt Emaar.

In August, Citi Venture Capital International (CVCI), the private equity (PE) arm of Citigroup Inc., exited Emaar MGF by selling its 1% stake back to the promoters. The PE firm and the promoters had a put option whereby the latter would buy back CVCI’s stake by 30 June 2010, if Emaar had not floated an IPO by then. CVC had invested 228 crore in November 2006, it sold to the promoters in August for around 277 crore.

“Emaar has substantial debt, which is not getting serviced due to little cash generation. Though their Gurgaon project is selling, there are delivery and execution concerns that remain," said Amit Goenka, national director (capital transactions) at Knight Frank India Pvt. Ltd, a property advisory.

The company, which is owned by Dubai-based Emaar Properties PJSC and its associates, and the Guptas of the MGF Group, has only completed one project so far—the Commonwealth Games village in New Delhi. It is working on 38 other projects, the spokesperson said.

But the going may not be easy. About 60% of Emaar’s 11,365-acre land reserves is classified as agricultural land. The firm is mum about conversion costs for this land in the prospectus. Also, about 16% of Emaar’s land reserves are under litigation. The company refused to divulge the value of these disputed parcels of land.

“Just like any other larger real estate firm, Emaar too has acquired massive tracts of land under a fleet of subsidiaries," said an analyst at another Mumbai-based brokerage, who didn’t want to be identified because he isn’t authorized to speak to the media. “There are two concerns over Emaar’s land, though. The first is to estimate the cost of conversion of the land from agricultural to commercial use, but the more serious concern is if all of the land is eligible for conversion at all."

“Conversion of land for intended use is a continuous process based on our development schedule plan. Costs vary from state to state and is part of our overall project development costs," Emaar’s spokesperson said. “All details with respect to litigation by or against the company/subsidiaries forms part of the DRHP (draft red herring prospectus)."

But the prospectus addresses this query in an obscure manner.

“Loans and Advances include 65,902.13 million as at March 31, 2010....paid to certain parties (including the subsidiaries) for acquiring land/land development rights for development of real estate projects, either on collaboration basis or self –development basis, including in some cases, for land under litigation for which necessary legal proceedings are on," the prospectus said.

If all this 6,590 crore was earmarked for land under litigation, then the disputed land is worth 90% of the 7,310 crore Emaar paid for its land reserves.

Yet, another concern is that the company had given preferential treatment to its Dubai-based parent Emaar Properties, by guaranteeing a 10% return on two projects where the latter has invested some $50 million (Rs 222 crore today) each. Emaar Holding II, had invested a sum of $50 million each in Shrestha Conbuild and Smridhi Technobuild, two projects of the local company.

However, the guaranteed return has been discontinued since these investments were converted into equity shares in March 2009, the company spokesperson said.

The bankers to the issue are Kotak Mahindra Capital Co. Ltd, Deutsche Equities India Pvt. Ltd, UBS Securities India Pvt. Ltd, Credit Suisse Securities (India) Pvt. Ltd, HSBC Securities and Capital Markets (India) Pvt. Ltd, ICICI Securities Ltd and RBS Equities (India) Ltd.