Accumulate Unitech Limited

India

Unitech Ltd.

Real Estate & Construction

CMP:

Rs. 86

Accumulate Target:

Rs. 140

We initiate a buy on Unitech, with a target of Rs. 120-150, a mild correction up to Rs. 78 is possible in short term, and hence we initiate an accumulate call with a target price of Rs. 140 in next 6 months

Priced on 13th June, 2009 ±% potential

50%

Over last 5 trading sessions share has been consolidating its gains made over last 2 months. Our first call of buying Unitech 35 for a target of Rs.51 with an upward bias was based after discounting all future bad news. Since then dark clouds have passed over and there is a lot of positive news flow in the counter. Unitech touched its peak of Rs. 546.80 in Jan’08 and since then Unitech stock has fallen and is currently trading at discount of 84% to that price.

Market Data Beta 52Wk hi/lo Marketcap, INR Crore Shares in issue (mn.) Reuters Bloomberg

1.53 243.85 /21.80 45374 45374 UNTE.BO UT.IN

One year of global turmoil has taken maximum toll on leveraged companies. Unitech had a total debt of ~ Rs. 10,000 Crore with Debt to Equity Ratio of 2.4 (TTM) Company had to pay 2500 Crore of debt by March’09, global credit crisis squeezed liquidity out of the system, which made it difficult for highly leveraged companies like Unitech pay its short term and long term debt. As a result of major turmoil company had to reschedule and restructure major percentage of its short term debt and some portion of long term debt. Highlights: Company has achieved major breakthrough in terms of handling its liquidity: 1.

shares to so-called qualified institutional buyers, in an attempt to part-retire its short-term debt. Company will reduce its outstanding Debt to 6000 crores by FY2010 from 10,000 crores in 2008.

Share Holding Pattern (%) Promoters FII Domestic Inst. & Corp Body. Public & Others

52% 27% 11% 10%

2. Sold off Hotel property in Gurgaon at around Rs. 250 Crore and commercial 3. 4. 5.

Sovid Gupta [email protected]

0124-3024 840

th

April 16 : Company raised USD 325 million or 1600 crores through a sale of

property Saket at around Rs. 500 Crore. Rolled of 75% of Rs. 2500 crores due by March’09. Company has raised Rs.1000 crores long term debt with maturity of 3-5 years, to replace short term debt. Closed Telenor deal and expecting first payment within this week. Company has declared that this money would be used to pay off debts taken by Unitech for Unitech wireless.

Although money was raised by company at highly discounted value which will dilute company’s future earnings by 25%, as total equity has increase from 162 crores to 204 Crore. These deals have ensured long term sustainability of Unitech which will enable company to payback its debt and help it focus on its core strength of Construction. Company 8000 acres of land bank, which company has said will keep it busy for next 10 years. Company’s has made mistakes in the past for which it has paid the price as stock price are still ruling at more than 80 percent discount to its 2008 high’s, but the fact that with clear focus of promoters to utilise existing land bank and sell assets to achieve financial de-leverage. We believe this along with improved liquidity and increased credibility of it raise long term debt is enough reason to start marking its assets to the prevailing market rates..

Fairwealth Securities

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Accumulate-Unitech

Quarterly Result Round up: Q4 FY09 Net Sales

Q4 FY08

Y-o-Y Growth (%)

Q3 FY09

Q-o-Q Growth (%)

489

1142

-57%

983

-50%

Other Income

18

25

-27%

18

-1%

Interests costs have seen sharp rise as company raised a lot of short term debt at Higher Interest rates(19%) to handle the acute liquidity crises.

Total Income

508

1167

-57%

1001

-49%

Total Expenditure

245

408

-40%

374

-34%

PBIDT

262

759

-65%

627

-58%

Margins have dipped by 1400 bps from 64% in Q3 FY’08 to 50% in Q3 Fy’09. Operating margins will fall further in coming quarters and will settle at around 40% Interests’ costs stand at around 14%. As interests are linked to individual projects, decreased sales will impact profitability.

PBIDT(before OI)

244

734

-67%

609

97

98

-1%

134

-28%

166

661

-75%

493

-66%

Interest PBDT Depreciation Tax Reported Profit After Tax

5

5

-4%

4

37%

21

131

-84%

130

-84%

139

525 Margins

-74%

359

-61%

Interest/Sales(%age) Operating Profits/Sales(%)

20%

9%

(+1300bps)

14%

(-600bps)

50%

64%

(-1400bps)

62%

(-1200bps)

NPM/Sales (%)

26%

45%

(-1900bps)

36%

(-1000bps)

Source: Company Data, Capital Line

Company Description Unitech is one of India’s largest real estate companies with over 3 decades experience in real estate development. India’s second largest real estate company by market cap, with land bank of 14000 acres spread across 15 cities in India. The company, which used to be an NCR developer a few years ago, with over 84% of its land bank in non-NCR regions at present. Unitech is planning to develop its land bank through a mix of 51 projects in the residential, commercial, retail and hotel segments The Company has diversified into residential, commercial, retail, entertainment and hospitality projects

Fairwealth Securities

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Accumulate-Unitech

Outlook and Valuation

Income Statement FY10E FY11E FY12E Net Sales 3600 4500 5400 Operating 1440 1800 2160 Profit OPM(%age) 40% 40% 40% Interest Cost 700 625 675 Depreciation 100 55 35 PBT 640 1120 1450 Tax 154 269 348 PAT 486 851 1102 NPM 14% 19% 20% EPS 2.432 4.256 5.51 P/E* 34.95 19.97 15.43 Source: Fairwealth Estimates Note: Trailing P/E ratio

Company has a debt of around Rs. 7800 crores (May’09) with interest cost of around 14%, however most of the interest payment has been capitalized and the interest will be paid when the asset for which the loan was taken is sold. Thus, Unitech Ltd. paid interest of only Rs 97 Crore during the quarter. This along with delay in projects across the industry at lower expected Operating margins of around 40%. Interest costs will affect NPM which we expect will go down sharply down to around 25% in FY10E. Company’s ability to execute projects timely along with its execution abilities will always provide opportunity to price is properties at a premium to the market. With huge debt problem and ability to pay suppliers and sub contractors taken care of we can focus company’s profitability and ability to churn out products like a factory to have higher sales and consequently much higher cash flows will remain key. With lower margins for low cost projects we expect Operating profit margins to be near 40% as against 60% for last 3 years. Higher interest cost albeit lower overall Debt levels will bring Net Profit margins to be around 25%. We estimate FY12E P/E ratio

Unitech Wireless-Telenor Telecom Deal Unitech has a pan-India GSM license and has already got the crucial spectrum for 22 circles. It had paid Rs 1,650 Crore as license fee for the pan-Indian license, for which Unitech Wireless had received a valuation of more than Rs 11,000 Crore. Unitech has so far invested Rs 138 Crore as equity in the telecom venture. Addition Unitech Telecom has also borrowed around Rs 2,000 Crore from the holding company. Unitech needed a partner for its telecom venture which finally ended with Telenor coming in for 67% stake in the venture by paying Rs 6,120 Crore. As part of the deal: Company has given following details with respect to the Unitech wireless -Telenor Qtr. ended March 31, 2009*

Telenor Cash Injection Cumulative Cash Injection Telenor Ownership

Fairwealth Securities

Qtr. Ended June 30,2009

Qtr. Ended September 30, 2009

1.)Rs.12.5billion

2.) Rs.15.0 billion

3.) Rs.15.0 billion 4.) Rs. 11.2billion

Rs.12.5 billion

Rs. 27.5 billion

Rs. 53.7 billion

33.33

50

67%

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Accumulate-Unitech

Investment Advice: Unitech has a market Cap of around Rs. 15,032 crores. Company has total available land bank at around14000 acres. Company’s MD Mr. Sanjay Chandra recently said in a press interview that land cost for the company remains at around Rs. 100-120 per sq. ft. and available land bank enough to last 15 years. Company will develop 8,000 acres over next 10 years and sell some assets to reduce the debt to a more manageable 6000 crores by FY10.

.

At the beginning of 2008 when all analysts rated Unitech as buy at CMP of Rs. 600 they mentioned following downside risks.    

    

Tightening of Interests rate  Restricted Overseas borrowing and change in FDI regulations,  Rise in steel and cement prices  Delay in completion of planned projects and  Overall decline in Indian Economics 

All the downside risks along with massive unexpected slump in Real Estate markets and tight credit markets got realized as a result of which we saw deep and long correction in Real Estate markets pushing Unitech stock prices down by 95%. Interest rates on Home Mortgage are below 2007 rates.  Government is considering change in current FDI rules to allow Unitech with Overseas borrowing.    Government has been quick to boost Indian Economy through its Fiscal stimulus.    Raw material prices have dropped by more than 50% giving some respite to developers.   Real Estate markets have started looking up with prices settling at 20% discount to Jan’ 2008 prices. 

 

We believe that Real Estate markets in India are yet to bottom out, however we also believe that share markets either discounts or overprice the reality and in this case all bad news has been discounted. The fact is that company holds 14000 acres of land, 8000 acres of which will be developed in next 10 years is enough reason to stay invested and even buy the share at these levels.

TECHNICAL OUTLOOK:



Source: IRIS

UNITECH is in along term bullish trend .The stocks has formed a good support at 67-70 levels .So any correction in the short term in the stock should be used as a buying opportunity in the stock for a price Target of 135 in next 3-4 months. Fairwealth Securities

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Accumulate-Unitech Key Risks:

We believe following risks are already hurting the company’s financials and will continue to do so in coming 2-3 quarters.   Slowdown in employment industry hiring will continue to hurt residential demand and  commercial demand to some extent. 

 Uncertain economic scenario is putting off investors and buyers alike, who are waiting for situation to improve and may be get in at even lower prices. We believe most of this risk has  tapered and demand is seen rising again  Profitability of the company will remain low for multiple reasons  1) Higher Raw material costs. 2) Lower profitabability on existing properties due to lower prices, higher interest costs as it was capitalized. 3) Company’s plans to build low price, lower margins mass market residential properties in future. Main risk that we see will put downwards pressure on the stock price will not be Company risk as was the case with the initiating call at Rs. 35 in March, rather Macro Economic Risks of India as a country and Real Estate as a sector are much greater, thus if India

Price Performance

Unitech is the second largest Real Estate Company in India. With reduction in debt levels, expanded Equity and inflow of cash through sale of Assets and Qualified institutional Placements, we believe long term sustainability of the company is no more a concern. We expect Unitech to outperform Nifty and DLF in the long term. We see valuation of Unitech around Rs. 200 a share. We expect short term correction to Rs.78 after which we share can bounce back to 120-150 levels over next 4 months.

Source: Capital Line

Fairwealth Securities

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Accumulate-Unitech Income Statement Standalone 200803 (12)

Fund Flow Statement:

200703 (12)

BALANCE SHEET CONSOLIDATED

200603 (12)

200803

INCOME : Net Sales Other Income Stock Adjustments Total Income

4115

3290

926

165

98

28

-13 4266

-13 3375

291 1245

Share Capital

325

162

12

3276

1832

247

Total Shareholders Funds

3600

1994

260

116

1

24

1861

1410

1043

6231

3896

956

4235

1722

195

10466

5618

1151

7614

1434

Secured Loans Unsecured Loans

Operating Profit

2405

1964

202

317

165

52

Gross Profit

2088

1799

150

Depreciation

21

7

11

Interest

Profit Before Tax

2068

1792

139

395

483

49

Fringe Benefit Tax

2

1

1

Deferred Tax Net Profit before Minority Interest Minority Interest Net Profit after Minority Interest Extraordinary Items

2

1

1

Tax

Adjusted Net Profit

200603

Reserves Total Minority Interest

Total Expenditure

200703

SOURCES OF FUNDS :

Total Debt Total Liabilities

14182 APPLICATION OF FUNDS :

Net Block

1159

712

444

Capital Work in Progress

2098

215

127

Investments 1416 Current Assets, Loans & Advances

455

14

Inventories

13608

8700

3087

Sundry Debtors

746

146

103

1669

1306

87

Cash and Bank

1408

1023

390

7

0

3

Loans and Advances

2944

1840

286

1661

1306

84

Total Current Assets

18706

11708

3866

8256

4898

2916

37

23

-4

Less : Current Liabilities and Provisions

1625

1283

88

Current Liabilities

Source: Company Report, Capital Line

Provisions

935

578

87

Total Current Liabilities

9191

5476

3003

Net Current Assets

9515

6232

863

-6

0

-15

14182

7614

1434

1599

2144

838

Net Deferred Tax Total Assets Contingent Liabilities Source: Company Report, Capital Line

CONSOLIDATED CASH FLOW 200803 Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year

200703

200603

1022.73 389.94 -975.03 2074.49 3187.44 -725.46 4548.01 3432.74 385.54 632.79 1408.27 1022.73

271.76 224.67 308.28 651.13 118.18 389.94

Source: Company Report, Capital Line

Fairwealth Securities

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Accumulate-Unitech

Coverage: Our Stock coverage and Returns:

BUY REPORTS: Stock

Target

Set Date

Price as on Call date

Target Price

Stock

Sensex

Price on 26th may

Stock

% return absolute

Stock

% return Relative to Sensex

Sensex

Educomp

22-Jan-09

2750

1715

8814

2,861.10

66.83%

57.85%

8.98%

Havells

30-Jan-09

280

115

8325

281

144.35%

67.12%

77.22%

Jaiprakash Associates

12-Feb-09

110

73

9466

185.6

154.25%

46.98%

107.27%

Lupin

03-Feb-09

780

630

8607

862.6

36.92%

61.65%

-24.73%

Tata Steel

06-Mar-09

250

152

8325

368.7

142.57%

67.12%

75.44%

M&M

12-Mar-09

440

345

8344

633.8

83.71%

66.74%

16.97%

Unitech

25-Mar-09

51

34

9667

77.15

126.91%

43.92%

82.99%

Punj Lloyd

30-Mar-09

120/145

85

9549

179.8

111.53%

45.70%

65.83%

Sintex Industries

16-Apr-09

240

137

10,947

218.5

59.49%

27.09%

32.39%

26-Apr-09

28

14

11,371

21

50.00%

22.36%

27.64%

Alok Industries

SELL REPORTS: Stock

Bharat Electronics Ltd

Target

21-May-09

Price as on Call date

1059

1319

Price on 26th may

% return absolute

% return Relative to Sensex

13,736 1,343.55

Note: Based on 25th May 2009 Sensex closing of 13,913 Note: All calls are initial/ first time calls Note: All reports can be accessed on our website under http://www.fairwealth.in/Research.aspx

Note: Fundamental and Technical reports are independently given and investors are advised to take their decision based on their investment profile and holding periods.

Fairwealth Securities

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Accumulate-Unitech

Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While The information contained therein has been obtained from sources believed to be reliable; investors are advised to satisfy themselves before making Any investments. Fairwealth Securities Pvt Ltd does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information Updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is in circulation.

Fairwealth Securities

Page 8