Identified 5-6m sq ft for large format retail: Ansal Prop

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With the opening of the India retail sector, companies like Ansal Properties stand to benefit, with investment in infrastructure set to increase. Speaking to CNBC-TV18, Dinesh Gupta, chief operating officer of Ansal Properties, says that they have identified 5-6 million square feet across various townships which can be used for large format retail. "We will move ahead with negotiations provided policy matters and other things are clear," he added.

However, the company may be at a disadvantage because almost 3 million square feet is currently in Uttar Pradesh, which is currently against FDI in retail.

Gupta goes on to say that they are looking at reducing their promoters' pledge to 50-60% from the current level above 90%.

Below is an edited transcript of his interview with Sumaira Abidi and Reema Tendulkar. Also watch the accompanying video.

Q: We understand that your current exposure in retail sector is not very big, I suppose its only limited to the Bharti-Walmart. Could you tell us how you will be looking at this space and if you have any plans to ramp up your exposure going forward?

A: Ansal Properties is primarily into build and sell models which cuts across residential, retail and of course commercial. So in all our townships that are currently under development, we have stock close to about 40-45 million sq. ft of commercial and retail which account for about 20% of our saleable inventory.

As I mentioned, it's mostly build and sell, but with FDI opening up it also gives us new opportunity to relook at our business plan in certain townships where we have seen interest from larger players. As you just mentioned, Bharti-Walmart has already opened cash and carry in a wholesale format in our Lucknow township which is already operational, so we will see some interest coming at from these players to setup retail.

We are also looking at increasing our regular income stream from these rentals or joint venture projects which we can look at retail. According to management estimate, we have identified close to about 5-6 million sq. ft across townships in Haryana, Punjab, Rajasthan and even Uttar Pradesh that could be utilized for such large format retail and the company intends to benefit from it. Provided the policy matters and other things are clear, we will move ahead on negotiations with particular parties.

Q: One of the riders which has come in with FDI multi-brand retail is that it allows states with veto power, which perhaps UP might go against it. So could you tell us what is your commercial real estate broken up currently?

A: 75% of our commercial and retail real estate is in UP itself, but commercial also includes office space so there is no problem. As I mentioned just now, approximately 5-5.5 million sq. ft as per management estimate could be utilized for large format retail and our estimate is that 3 million sq. ft will be in UP itself. The rest 2-2.5 million would be in Rajasthan, Punjab and Haryana which don't seem to have any problem.

But as time moves and as the policy matter gets clear, we will put these assets to use and open up discussions. So 40-45 million sq. ft. is a broader asset class which is commercial office space and retail inclusive. We have the flexibility to change the use of the property within the parameters that we have and then put to use as per our needs and requirements.

Q: As far as Bharti-Walmart is concerned, what are the kinds of realizations that you have per sq. ft? Also, when is the lease agreement going to be up and are you looking at hiking the realization then onwards?

A: The lease agreement has already been signed and they have already pulled up the facility. They started operations in October 2011, so that's almost two months now that they have been operating in Lucknow township. The agreement was signed early this year and the total facility that we have provided them is about 70,000 sq. ft of floor space. The terms of the agreement are locked in for next 15 years, with some hike in rentals every three years or so. According to us, the rentals that we are getting are good enough to push the township as well as give us a decent return on these investments that we have made.

The focus is not a short-term benefit because the township needs to benefit in a larger manner. So we are not looking at short-term benefits from these deals, but as time goes by and we get more retail, there will be higher realizations on these. This is a wholesale business, so to get the deal married you have to look at short-term and long-term benefits. So we looked at the long-term benefit in this deal, but even then on cost basis the realizations are pretty handsome and we are very happy about that.

Q: Assuming FDI in retail does come through, in the immediate term how you are likely to capitalize on this opportunity?

A: As I mentioned Haryana has lots of townships that are underdevelopment like Sonipat, Panipat and even in Gurgaon and these are all tier one towns with population of more than 1 million, and they all come under the NCR region. We have already seen lot of interest from these parties, smaller formats and even larger formats but till the FDI policy was clear there were no concrete discussions.

So my guess is in the next one-two months, once the deck is clear for all the policy matters even at the state level, we will see interest coming. Our objective is not to hive off the entire retail or commercial space in one go, but slowly and steadily start making rental income or regular income streams which adds to the profitability and adds to the balance sheet strength of the company.

I think its still early days, but the focus of the management is clear that we will take opportunity of this opening up of FDI in retail.

Q: We understand that a large portion of your promoter holding is pledged in fact almost in the late 90% is what is pledged. Are you looking at changing or reducing it a little bit and what is the kind of timeframe that you would be looking at?

A: It's the top priority of the management and I must make a special note here that these pledged shares are not purely against loan against shares for promoter use. The entire shareholding has been pledged for the loans or collateral security, a large portion of the shares have also been given as a secondary collateral which don't have any link to the mark to market valuation or price increase or decrease.

We have already indicated that by the financial year end we will reduce the share pledged substantially and we have already started the process about two months back. We are expecting substantial portion to get reduced in the next 30-60 days, so let's hope so. I also think that the price increases or decreases is no real danger on the promoter share pledged because more than 60% is pledged as a collateral to the primary loans and the primary security which has been given as land or projects.

So by financial year end 2012, we are looking at reducing it to somewhere close to 50-60% of the promoter pledged and if the opportunity comes we will reduce it further as well.