Pune, in the early 1990s, had transformed from a pensioner’s paradise to a metropolitan city, and the construction industry was booming, writes Suhas Mantri in ‘The Comeback: A story of bankruptcy and survival’ (www.harpercollins.co.in). Harsh, a protagonist in the tale, heading Mehta Housing, finds that his pitches to prospective clients pay off, his ideas are successful, and there are exciting and innovative designs to work with.
“Within three years of starting Mehta Housing, Harsh had ten projects in hand. The company became well known for its customer-friendly service and was talked about in business circles; its potential and profitability made for serious discussions during cocktail parties and conferences.”
Each year new projects were added to the company’s list, Mantri narrates. The company continued to acquire land, but since the funds were limited, making payments on land deals took greater priority over completing projects. “As a result, existing projects were delayed, as were the payments to suppliers and contractors.”
Public offering
The cash crunch became so debilitating that the company lost out on two prime land deals because of inability to pay, the author notes. “It is time to make a public offering. Since we can’t generate finance on our own, we must enter the market and attract funds from outside investors. That is our only option,” proposes Shailesh, brother of Harsh.
Should we not consolidate our strengths before taking such a big step, Harsh fears. For, going public would invite bigger challenges, greater responsibilities and additional risks. “Our learning curve hasn’t peaked yet and we need to establish ourselves before taking the jump. If we complete the projects we have in hand, our reputation will grow and we will be able to command a better premium on the shares we float in the market.”
Shailesh insists it will be too late to wait any longer. “There is a positive mood in the market and we must take advantage of it. An opportunity like this one may not come our way again. People are eager to invest in the right companies, and we are one of the best. We have an impressive portfolio so there will be no problem getting a lead manager to handle the complete account…”
Revaluation option
Harsh voices a nagging doubt – how will we raise the funds necessary to buy our equity in the company? Shailesh has thought about that. We won’t invest actual money since we don’t have funds to spare at the moment, he explains. “What we will do is revaluate our projects at substantially higher rates. These will be offered to the new public company, and we will take equity in lieu of money.”
Revaluation involves recalculating the costs of current projects with value additions in a dynamic way, instructs Mantri. “If a project started a year ago was tagged at a certain price, its elements would be reassessed at current rates so as to get a higher price tag. The newly formed public limited company would then have to buy these projects at the revised higher rates.”
CFO’s view
With the brothers having divergent views, the CFO Vikas Joshi is invited for his views. “How much do you think the total equity and public issue will yield,” he asks. “About six crore,” says Shailesh. “The problem here is that the total amount of equity you are offering does not comprise a very large base. When it comes to such an offering – a medium-sized equity – you have to market it well and for the public issue you have in mind, you will need to spend a lot of money, close to 20 per cent of your total equity. So, you’ll be left with less than five crore for actual use.”
Of that, three crore is by revaluation, so the net liquid inflow will be less than two crore, hardly sufficient to settle old debts and invest in new projects, computes Vikas. Once you take a company public there are a lot of legal formalities that have to be taken care of; are you sure you want to take on all the legal hassles if the financial benefit is not impressive, he queries.
Six years later, Harsh wonders if the decision to go public was the right decision…
Useful lessons.
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