Unitech's 2nd-Quarter Net Falls 12% on Slowing Demand

By Sumit Sharma and Debarati Roy

Nov. 1 (Bloomberg) -- Unitech Ltd., India's second-biggest developer, said second-quarter profit fell 12 percent as rising borrowing costs and faltering economic growth curtailed demand for homes and offices.

Net income declined to 3.59 billion rupees ($73 million) in the three months ended Sept. 30, from 4.1 billion rupees a year earlier, the Gurgaon-based company said in a statement e-mailed late last night. The profit was lower than the 4.12 billion rupee median estimate in a Bloomberg survey of five analysts.

The faltering profit growth may undermine Managing Director Sanjay Chandra's ability to boost investor confidence in Unitech, the third-worst-performing Indian realty stock this year. Investors have shunned the developer and its rivals on concern that a five-year rally in property prices and borrowing costs that had climbed to a seven-year high may curb demand.

``This sector is out of favor and in the short term it's unlikely that we can expect earnings to improve,'' said Sanjay Makhija, zonal head, institution sales at Fortune Financial Services India Ltd. in Mumbai.

Revenue fell to 10 billion rupees in the quarter to Sept. 30, from 10.64 billion rupees a year earlier, Unitech said.

``In an increasingly challenging business environment, the company has been reorienting its product portfolio toward mid- income housing to boost sales,'' Chandra said in the statement. ``Keeping in view the tight liquidity conditions, the company is allocating a higher share of its financial resources to pre- committed projects.''

Home Prices

India's central bank cut its benchmark interest rate on Oct. 20 for the first time since 2004 to ease borrowing costs. It has also pumped 1 trillion rupees into the financial system since Oct. 11 by reducing lenders' reserve requirements by 2.5 percentage points.

Unitech gets about 70 percent of its earnings from selling homes, according to Chandra, in a nation that faces a shortage of 25 million housing units. Home prices in smaller towns such as Agra, Ludhiana and Kochi dropped an average 15 percent to 20 percent, according to Jones Lang LaSalle Meghraj Property Consultants (India) Pvt.

Rental prices for offices and malls also fell by as much as 20 percent across India in the quarter, the firm estimated. Developers in bigger cities such as Mumbai and New Delhi are holding prices steady, Jones Lang LaSalle said.

Unitech, which had more than doubled last year, after climbing more than 2,900 percent in 2006, is down 90 percent from its record closing price of 538.25 rupees on Jan. 2. The Realty Index of the Bombay Stock Exchange has shed 84 percent this year.

Criminal Speculators

Unitech plunged by a record 50 percent on Oct. 24 on concerns that real estate companies face a shortage of funds. The developer hasn't defaulted on any loan payments, and malicious rumors spread by criminal speculators led to the plunge, Chandra said on Oct. 26. His comments helped the stock recover almost 38 percent on Oct. 27.

Still, the current cost of borrowing for the company has risen to between 15.5 percent and 16.5 percent, compared with 12.1 percent for the year ended March 31, Chandra said.

The company this week sold a 60 percent stake in its new mobile-phone unit to Telenor ASA, the largest Nordic phone company, for $1.07 billion. That values Unitech Wireless, which has licenses in all of India's 22 designated telecommunications zones, at about $1.8 billion, or more than the $1.6 billion market-capitalization of the parent company.

To contact the reporters on this story: Sumit Sharma in Mumbai at sumitsharma@bloomberg.net; Debarati Roy in Mumbai at droy5@bloomberg.net.