Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

India I Equities

23 April 2010

Unitech

De-merger approved; maintain Buy

Maintain Buy. Unitech’s board has approved a plan to hive off some businesses into a new entity called Unitech Infra to un-lock value. We see little value addition to our NAV until more progress is made. We maintain our Buy rating and target price of Rs105.

Unitech Infra – the new entity. The new entity would own Unitech’s divisions such as GCC, Towers, IT SEZs, amusement park and telecoms. The advisors have put the new entity’s fair value at Rs49.8bn (approximately 4x actual book value), which after the split would be stated as book value and have debt of Rs3.5bn. We await clarity from the “de-merger” documents and financial re-statements.

Seeking to unlock value. The de-merger is to focus on infra and related verticals and unlock value in them. At present, the largest value (Rs34.8bn) arises from its telecoms stake and share in UCP. We await project progress/details in the construction and BOT businesses before adding value.

For Unitech. Although Unitech would control 35% of the new entity, we would assign a holding company discount (30%), which would add little (Rs3 a share) to current valuations.

Valuation. Our target is on par with the Mar ’11 NAV of Rs105. At the current market price, the stock trades at 1.8x FY11e P/BV.

Rating: Buy Target Price: Rs105

Share Price: Rs84

Key data UT IN/UNTE.BO

52-week high/low Rs118/40 Sensex/Nifty 17461/5230 3-m average volume US$71.4m Market cap Rs199bn/US$4470m Shares outstanding 2386.6m Free float 56%Promoters 45%Foreign Institutions 32%Domestic Institutions 4%Public 19%

Relative price performance

Unitech

Sensex

40

60

80

100

120

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr-1

0

Source: Capitaline, Anand Rathi Research

Key financials

Year end 31 Mar FY08 FY09 FY10 e FY11 e FY12 e

Sales (Rs m) 41,152 28,502 26,906 35,916 49,495

Net Profit (Rs m) 16,362 11,921 7,141 10,473 15,864

EPS (Rs) 6.3 4.6 2.8 4.0 6.3

Growth (%) 151.9 (27.2) (39.4) 46.0 55.9

PE (x) 13.3 18.3 30.1 20.6 13.2

P BV (x) 6.1 4.2 2.0 1.8 1.7

RoE (%) 58.8 27.3 9.1 9.2 13.1

RoCE(%) 24.0 11.6 8.5 9.9 14.3

Dividend Yield (%) 0.2 0.1 0.1 1.2 2.4

Net Gearing (%) 198.4 162.7 47.4 37.8 33.3

Source: Company, Anand Rathi Research

Property

Flash

23 April 2010 Unitech – De-merger approved; maintain Buy

Anand Rathi Research 3

Unitech Infra – the new entity Why the split

Unitech split off five business verticals into a new company Unitech Infra. The proposed “de-merger” would be to focus on the infrastructure businesses, which had been lagging behind the property-dominant company, given financial and execution constraints. Management indicates that the new company would have a dedicated and experienced team. Most of the business vertical heads are already in place, with a new CEO and CFO to be appointed soon. The financial health of the new company will be much better, with only Rs3.5bn in debt and, with the infrastructure verticals would make credit availability easier.

Fig 1 – Unitech Infra – proposed structure

Source: Company

“De-merger” scheme

After the split, Unitech would hold 35% in Unitech infra and act as a sponsor for further activities. The board approved a swap ratio of 1:1; the remaining 65% of Unitech Infra would be divided equally among Unitech’s shareholders.

After the “de-merger” process (of approvals from the board, exchanges, shareholders, creditors and the judiciary), the shares of the new entity would be listed. This would take four to six months. Management has indicated listing in CY10.

Arriving at a fair value

According to provisional 9MFY10 figures provided, Unitech Infra had a net profit of Rs0.5bn on revenue of Rs3.2bn.

Unitech Infra has debt of Rs3.5bn and a net worth of Rs49.8bn. The net worth has been arrived at using the fair-value method, book value being significantly less than the fair value. For most of the assets in Unitech Infra, value unlocking is only on the horizon. Most of the value, though, would be derived from investments in the telecomms venture and in Unitech Corporate Parks (UCP).

Unitech Infra would now focus on infrastructure and related verticals,

which was constrained while part of Unitech

Unitech shareholders would get one share of Unitech Infra (at Rs2 FV)

and Unitech would hold 35% of Unitech Infra

UNITECH

Infrastructure Development Infrastructure Services

General Construction

BOT

Transmission Tower

Investments

32.75% interest in Uninor (telecomms

joint veture with Telenor)

Hospitality

SEZs / IT Parks

Logistics Parks

Facilities and Property Management Services

Industrial Parks

Amusement Parks

Township Management

23 April 2010 Unitech – De-merger approved; maintain Buy

Anand Rathi Research 4

Seeking to unlock value Infrastructure – the oldest arm

Starting in infrastructure, Unitech graduated to a property company in the 1990s. The infrastructure vertical would, to start with, pull together general construction, BOT and the transmission tower businesses. At present, the company continues to contract for construction s abroad though it plans once again to expand its footprint locally. It has Letters of Intent (LOIs) for expected orders of Rs22bn from Unitech.

For the BOT business, the company is looking for a technical partner to start focusing on projects of between Rs20bn and Rs40bn. Given its past execution, it technically qualifies for various categories of projects.

Unitech initially planned to sell its transmission tower business (with a factory in Nagpur). It has an order book of Rs5.1bn (with Rs1.3bn being developed). The business secures margins of 7-8%.

Fig 2 – Infrastructure vertical Value Assigned (Rs bn)

Business Initially Now Remark

General Construction Nil Nil Order book expected based on future sales of Unitech

BOT Nil Nil Looking for a technical tie-up. Some lag till projects received

Transmission tower 1.0 1.5 More clarity on order book. Current order book of Rs 5.1bn

Source: Anand Rathi Research

Telecomms investments and UCP stake

Unitech’s investment in Uninor is ~Rs6bn. The three year lock-in from the license date ends Jan ’11. The acquisition also had convenants that Unitech could not sell its stake for three years from Telenor Investment (1.5 years left) unless there is an M&A.

Unitech holds 40% in UCP (36% in one of six) and also obtains management and sponsorship fees from it.

Fig 3 – Uninor and UCP stake Value Assigned (Rs bn)

Business Initially Now Remark Uninor Investment 21.0 21.0 Valued at 30% discount to deal value UCP Stake 13.8 13.8 40% stake in the UCP assets; UCP listed on AIM

Source: Company, Anand Rathi Research

Amusement Park and the hospitality business

Unitech has two partially operational amusement parks, one each in Noida (148 acres) and Rohini (62 acres). The retail malls and 22 rides each are operational, while water parks at both locations are being constructed.

Fig 4 – Amusement parks: present status Project Area (sq ft) Location Status Great India Place 1,200,000.0 Noida - 148 a Leased and Operational Grand Galleria 350,000.0 Noida - 148 a Under construction Water Park - Noida NA Noida - 148 a Under construction Phases 3,4,5 NA Noida - 148 a Planned Metro Walk 200,000.0 Rohini, Delhi Leased and Operational Water Park - Noida NA Rohini, Delhi Under construction Chandigarh NA Chandigarh Planned, land in possession

Source: Company, Anand Rathi Research

Infrastructure could be a major value driver, but that would depend

on orders

Investments in telecomms and the joint venture stake in UCP put the

maximum value at Rs34.8bn

23 April 2010 Unitech – De-merger approved; maintain Buy

Anand Rathi Research 5

In FY07 the company had divested part of the equity in Rohini and the Noida amusement parks to private equity firms at Rs13.5bn. A third amusement park is planned in Chandigarh over 73 acres.

The company has indicated developing 11 hotels (2,100 rooms) in the the next seven to eight years. Of these, one on NH8, in Gurgaon and another in Kolkatta (Mariott) are being constructed. Given the business downturn and financial constraints, in FY09-10 management had slowed down its hospitality plans. Unitech eventually plans to monetize the hotel properties.

Fig 5 – Amusement parks and the hospitality business Value Assigned (Rs bn)

Business Initially Now Remark Noida Amusement Park 4.6 7.0 Extra FSI of 2.5m sq ft in Noida not valued

initially, some incremental value to rides buss Rohini, Delhi Amusement Park 1.4 1.6 Some incremental value to rides business

Chandigarh Amusement Park Nil Nil Under litigation; to be cleared in due course. Launch 3 years away

Hospitality NA NA Since development plans weren’t fixed, had taken market value of respected land parcel in Unitech

Source: Company, Anand Rathi Research

Logistics and industrial park; property management

The company has one logistics park near Kona, in Kolkata, already launched for lease/sale, to be handed over in phases. Two industrial parks are planned in the NCR, one of 315 acres (could be extended to 500 acres) where Unitech held a 50% stake and the other, over 86 acres, recently acquired. Initially, we had initially assumed only land values for our valuation.

Fig 6 – Logistics and industrial Park; property management Business Area (Acres) UT Stake Remark

Kolkata International Logistic Park 73.0 90% Land Value taken initially

Farukhnagar Industrial Park 315.0 50% To be launched soon; supporting Group housing and Commercial

MewatIndustrial Park 86.0 100% New Land Acquisition; Development post a year

Facilities and property management; Township management

10.3 (m sq ft) 100% Manages Unitech properties

Source: Anand Rathi Research

In property management, the company has 10.3m sq. ft. and manages various townships and golf courses constructed by Unitech.

Value addition

Given clarity in assets to be “de-merged” and some development plans, this would add Rs5bn to the value (from our initial case of Rs45bn). We await further clarity in financials and development/order book of the infrastructure vertical.

23 April 2010 Unitech – De-merger approved; maintain Buy

Anand Rathi Research 6

Unitech – After the split Financials

Given that the current net worth of Unitech Infra is stated at fair value, for the “de-merger” process, Unitech’s books would first have to be re-stated. Indications from the management put the book value at between 20% and 25% of Unitech Infra’s fair value (Rs49.8bn). We await further clarity from the management.

Fig 7 – Financials 9MFY10 Unitech Unitech Infra Remark

Net Worth 101.8 49.8 Fair value of Unitech Infra taken Debt 63.5 3.5 D/E 0.62 0.07 Example - Post Demerger

Net Worth 89.4 49.8 Assuming book value to be 25% of Unitech Infra fair value (current management estimates)

Debt 60.0 3.5 Debt of Rs 3.5bn to transfer D/E 0.67 0.07 Debt / equity to go up slightly

Source: Company

Land bank

Unitech’s land-bank share before the split, according to the last QIP document, was 7,467 acres (of 9,060 acres). The split removes 550 acres from the current share of Unitech land bank. The company has been acquiring small land parcels in Gurgaon for its new township (Nirvana County 2 – 700 acres) to make the land contiguous. Approx. 100 acres is “guided” to be acquired by end-FY11.

Fig 8 – Land bank: before and after the split (in acres) Land Available UT's Share

Land Bank - as of June'09 9,060.2 7,467.0

Noida Amusement Park 148.0 58.5

Rohini Amusement Park 62.2 31.1

Chandigarh Amusement Park 73.7 73.7

Kolkakata Logistic Park 73.0 65.7

Farukhnagar industrial park 315.0 157.5

UCP land bank 197.5 79.0

Hospitality projects 93.9 84.5

Post De-merger UT land Bank 8,096.8 6,917.0

Source: Company, Anand Rathi Research

Value addition

Given Unitech Infra’s book value at ~Rs50bn, with Unitech holding a 35% stake, the value addition after the split would be Rs3 a share, at a 30% holding-company discount.

Fig 9 – Value addition to Unitech Unitech Infra - Net worth (Rs m) 49,795.0 For Unitech - o/s shares for 35% stake (m) 1,408.7 total o/s shares in Unitech Infra 4,024.9 Book value of Unitech Infra (Rs / share) 12.4 35% of BV of Unitech Infra (Rs / share) 4.3 Post 30% holding company discount (Rs / share) 3.0

Source: Anand Rathi Research

At Unitech Infra’s book value of Rs49.8bn, value added to Unitech

would be Rs3 a share

Appendix 1 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures on subject companies Rating and Target Price History (as of 22 April 2010)

Unitech

1

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Date Rating TP (Rs) Share Price

1 1-Dec-09 Buy 127 1

2 5-Apr-10 Buy 105 2

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below.

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 31 Mar 10) Buy Hold Sell Anand Rathi Research stock coverage (118) 61% 12% 27% % who are investment banking clients 8% 0% 0%

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