031208 - Unitech - Indiabulls

8/12/2019 031208 - Unitech - Indiabulls

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Please see the end of the report for disclaimer and disclosures. -1-

UNITECH LIMITED

RESEARCH

EQUITY RESEARCH December 03, 2008

Strong asset base offsets short-term liquidity concerns

Unitech reported a moderate financial performance in Q209 due to the

liquidity crisis and a slowdown in the real estate sector. The EBIDTA

margin improved considerably because of a drop in the construction cost.

We upgrade our rating from Hold to Buy due to the following reasons:

Huge land bank spread across the country: Unitech has 13,923 acres

of land spread across all major cities of the country. Nearly 70% of the

land has been purchased from the government with clear titles.

Approximately 70% of the land bank spreads across the four cities of

Kolkata (35%), NCR (14%), Chennai (12%), and Vizag (9%).

Operating margins likely to fall but remain at higher levels: The

operating margin is likely to decline from the current 59.9% due to the

expected fall in property prices and a shift in focus towards low-margined

middle income housing. However, lower steel and cement prices are

expected to partially offset the decline in the margins.

Short-term liquidity likely to improve:Unitech is struggling with short-

term liquidity concerns due to its high leverage and debt obligation of

Rs. 27 bn due by the end of FY09. We believe that it can tide over the

current situation through the sale and monetization of its assets.

Attractive valuation: Unitechs stock currently trades at a 43.4%

discount to our fair value estimate of Rs. 46, which incorporates the

substantial decline in real estate prices across all segments. We believe

that the stock has a long-term upside potential as the Company has a

huge land bank at diversified locations, a strong asset base, and the

expertise and execution skills.

Unitech Limited Buy

Share Data

Market Cap Rs. 42.5 bn

Price Rs. 26.20

BSE Sensex 8,747.43

Reuters UNTE.BO

Bloomberg UT IN

Avg. Volume (52 Week) 3.3 mn

52-Week High/Low Rs. 546.80 / 21.65

Shares Outstanding 1,623.4 mn

Valuation Ratios (Consolidated)

Year to 31 March 2009e 2010e

EPS (Rs.) 5.8 5.0

+/- (%) (43.0%) (14.5%)

PER (x) 4.5x 5.3x

EV/ Sales (x) 3.7x 3.8x

EV/ EBITDA (x) 6.8x 8.3x

Shareholding Pattern (%)

Promoters 75

FIIs 5

Public & Others 20

Relative Performance

RESULTS REVIEW

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UT Rebased BSE Index

Key Figures (Consolidated)

Quarterly Data Q2'08 Q1'09 Q2'09 YoY% QoQ%

(Figures in Rs. mn, except per share data)

Net Sales 10,135 10,317 9,831 (3.0%) (4.7%)

EBITDA 5,071 6,084 6,092 20.2% 0.1%

Net Profit 4,101 4,233 3,589 (12.5%) (15.2%)

Margins(%)

EBITDA 50.0% 59.0% 62.0%

NPM 40.5% 41.0% 36.5%

Per Share Data (Rs.)

EPS 2.5 2.6 2.2 (12.6%) (15.2%)


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UNITECH LIMITED

RESEARCH


Result Highlights

Unitechs consolidated revenue declined 3% yoy, from Rs. 10.1 bn in

Q208 to Rs. 9.8 bn in Q209, due to the slowdown in the construction and

real estate sales. Construction revenue declined 64% yoy, from Rs. 517.9

mn in Q208 to Rs. 186.7 mn in Q209. However, revenue increased 6.9%

yoy in H109. We expect revenue to fall at a CAGR of 15.4% between

2008 and 2010, due to the liquidity crisis and the slowdown in demand.

In spite of the decline in revenue, the EBIDTA margin increased

considerably to 62% in Q209, from 50% in Q208, due to a drop in cement

and steel prices, resulting in a significant 28.3% drop in the real estate

construction cost. The margin for H109 increased 6.5 pts on a yoy basis,

from 53.4% in H108 to 59.9% in H109. We believe that the margin will

come under pressure due to the expected fall in property prices.

Unitechs second quarter net profit declined 12.5% yoy to Rs. 3.6 bn

(Rs. 2.2 per share) in Q209, from Rs. 4.1 bn (Rs. 2.5 per share) in Q208.

Net profit margin declined by 396 bps from 40.5% in Q208 to 36.5% in

Q209. This was mainly driven by a 69.8% yoy rise in interest expenses,

from Rs.0.79 bn in Q208 to Rs.1.3 bn in Q209. We believe that the net

profit margin will drop further because of the high interest cost and the shift

towards low-margined middle income housing.

Key Risks

Failure to secure private equity deals in projects may result in a lack of

funding and could lead to delays in execution. This may also exert

pressure on funding costs, thereby negatively affecting the net

margins.

Delays in project completion and a slowdown in residential demand

due to high interest rates would hurt the Companys growth prospects.


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UNITECH LIMITED

RESEARCH


Outlook

The real estate market is facing a deep-rooted slowdown due to the

combination of the liquidity crisis and the high interest rates. Residential

prices have declined up to 25% from their peaks in the last few months,

while commercial and retail rentals have declined nearly 20% in some

major metropolitan areas. Besides, banks have tightened the credit and

reduced the loan-to-value amount for home loans. Therefore, we expect

the real estate market to respond with reduced demand and a significantprice downswing over the next 1224 months.

Unitechs second quarter financial performance was adversely affected

due to the liquidty crisis and the slump in real estate demand. The

Company is highly leveraged with a debt-equity ratio of 2.4x and a trailing

6-month interest coverage ratio of 5.0. Its debt stood at Rs. 85.5 bn as of

Real estate prices areexpected to fall in the nearterm due to the liquiditycrisis and high interest rates

TTM Ended TTM Ended

Q2'08 Q2'09(Figures in Rs. mn, except per share data)

Revenue

Real Estate 8,303 9,140 8,077 (2.7%) (11.6%) 39,242 37,331 (4.9%)

Construction 518 316 187 (64.0%) (40.9%) 2,338 1,739 (25.6%)

Consulting 772 251 990 28.3% 294.3% 1,131 1,883 66.5%

Hospitality 26 31 32 26.7% 4.9% 103 132 28.3%

Electrical 140 206 208 49.1% 1.3% 720 790 9.7%

Others 377 373 336 (10.9%) (9.9%) 792 1,294 63.3%

Total 10,135 10,317 9,831 44,326 43,169

EBIT

Real Estate 6,049 6,049 5,257 (13.1%) (13.1%) 27,249 24,769 (9.1%)

Construction 42 42 37 (10.6%) (10.6%) 116 156 34.9%

Consulting 251 251 984 292.1% 292.1% 733 1,789 144.1%

Hospitality 2 2 0 (89.5%) (89.5%) 10 (4) (135.0%)Electrical 8 8 (22) NM NM 45 30 (33.9%)

Others 24 24 7 (72.4%) (72.4%) 96 139 44.4%

Total 6,376 6,376 6,264 28,250 26,880

EBIT margins

Real Estate 72.9% 66.2% 65.1% 69.4% 66.3%

Construction 8.0% 13.1% 19.9% 5.0% 9.0%

Consulting 32.5% 99.9% 99.4% 64.8% 95.0%

Hospitality 7.5% 6.2% 0.6% 10.0% (2.7%)

Electrical 5.6% 3.8% (10.4%) 6.2% 3.7%

Others 6.4% 6.5% 2.0% 12.2% 10.8%

Source: Company data, Indiabulls Research

Note: Figures are presented on a consolidated basis

TTM - Trailing twelve months

QoQ% YoY%YoY%Q2'08 Q1'09 Q2'09Quarterly Data


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UNITECH LIMITED

RESEARCH


March 31, 2008. The Company has a debt obligation of Rs. 27 bn, due by

March 2009. The recent deal with Telenor, a Norwegian-based telecomcompany, to divest a 60% stake in its telecom venture for Rs 61 bn will act

as a small breather, allowing the Company to partially reduce its debt

burden on its balace sheet. We believe that in the prevailing low liquidity

environment, the Company may not be able to mobilise funds from

commercial banks as the latter have stopped lending to realty firms due to

the high-risk weightage of the sector. Therefore, the Company is actively

looking to raise debt through private equity in the current financial year to

fund the ongoing development projects. Further, it is also planning to

reduce its debt burden through the the sale of office space, land, and ahotel in the next 34 months. We expect that the aggressive capital

structure may force it to monetize some of its projects before they become

economically optimal, thereby sacrificing some returns.

We believe that the Companys operating margin will fall from the present

59.9% due to its strategic shift of focus towards the low-margined middle

income housing (affordable homes) and the expected fall in property prices.

In addition, housing projects in locations such as Vizag will further

pressurise the margin. However, construction costs are falling due to the

decline in cement and steel prices. We expect these costs to come down

further as commodity prices are decreasing because of the expected global

recession. Hence, the fall in property prices is likely to offset the gains

expected from the lower raw material costs. As a result, the operating

margin is expected to fall from the current levels.

We have arrived at the NAV per share of Rs. 62, which incorporates the

substantial decline in real estate prices and a 15% dilution of Unitechs

stake at the project level. We have used a 17.2% cost of equity to value

the Company and have arrived at a WACC of 15.4%.

Unitech is one the large listed companies that does not disclose its

quarterly balance sheet and cash flow statement to the investors. As a

result, we have limited visibility of the Companys earnings growth and

current liquidity situation. Considering the weak demand scenario and the

The Company has a debtobligation of Rs. 27 bn, dueby March 2009

EBIDTA margin is likely to falldue to the strategic shift infocus towards low-marginedmiddle income housing andthe expected fall in propertyprices

Unitech is highly dependanton private equity for externalfinancing


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UNITECH LIMITED

RESEARCH


limited financial information available, we believe the stock will trade at a

discount to its NAV, which we have assumed at 25%. Our fair valueestimate for the Company is therefore Rs. 46 per share, which represents

a 76.6% upside to the current share price. Hence, we upgrade our rating

on the stock from Hold to Buy.

Key Figures (Consolidated)

Year to March FY05 FY06 FY07 FY08 FY09E FY10E CAGR (%)

(Figures in Rs mn, except per share data) (FY08-10E)

Net Sales 6,452 9,266 32,883 41,404 30,909 29,635 (15.4%)

EBITDA 779 1,806 20,109 23,687 16,691 13,780 (23.7%)

Net Profit 335 925 12,667 16,619 9,475 8,101 (30.2%)

Margins(%)

EBITDA 12.1% 19.5% 61.2% 57.2% 54.0% 46.5%

NPM 5.2% 10.0% 38.5% 40.1% 30.7% 27.3%

Per Share Data (Rs.)

EPS 0.2 0.6 7.8 10.2 5.8 5.0 (30.2%)

PER (x) 14.2x 40.7x 62.6x 2.6x 4.5x 5.3x


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Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666 -6-

UNITECH LIMITED

RESEARCH


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performance.

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031208 - Unitech - Indiabulls