Buy Unitech - Target 51

th

25 March, 2009

Unitech Ltd.

India Construction

CMP:

Sovid Gupta +911243024840 Equity Analyst: Fairwealth Securities Private. Ltd.

Rs. 33.90

Target:

Rs. 51

We initiate a buy on Unitech, with a target of Rs. 51. Yesterday share closed up by 16% to close at 33.90. 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 94% to that price. One year of global turmoil has taken maximum toll on leveraged companies. Unitech has a debt of ~ Rs. 10,000 crore and 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, have made it difficult for Unitech to pay its short term and long term debt. However company has made huge efforts to solve the current liquidity crisis. Highlights: Company has achieved major break through in terms of handling its liquidity:

Priced on March’25, 2009 ±% potential Target set on

50%

1) 2)

25th March

3)

4)

Market Data Beta 12M hi/lo Market cap, INR Crores Shares in issue (mn.) Reuters Bloomberg

1.53 338/21.9

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 to pay off debts taken by Unitech for Unitech wireless. Sold off Hotel property in Gurgaon at around Rs. 250 crore and is in advanced talks for to sell office property in Saket at around Rs. 500 crore.

Future Estimates: Income Statement (Standalone Rs. Crore)

45374 UNTE.BO UT.IN

Net Sales Stock Adjustment

6.3% 13.5% 13%

3290

Na

-13

-13

4101

3276

Operating Profit

1815

2240

1866

550

317

165

1265

1923

1799

Depreciation 67.5%

FY07

4115

3300

Gross Profit

Promoters FII Domestic Inst. & Corp Bod. Public & Others

FY08

3300

Total Interest

Share Holding Pattern (%)

FY09E

Profit Before Tax before OI Other Income PBT Tax Net Profit EO Items & Min. Interest Adj Net profit EPS

20

21

7

1245

1903

1792

80

165

98

1325

2068

1890

265

399

486

1060

1669

1306

8

44

22

1052

1581

1261

6.8

10.2

8.0

Source: Fairwealth Securities Research Estimates, Company data

Fairwealth Securities

Page 1

Unitech- Buy

Quarterly Result Round up: Q3FY’09

Q3FY’08

489

1142

-57%

983

-50%

Other Income

18

25

-27%

18

-1%

Total Income

508

1167

-57%

1001

-49%

Total Expenditure

245

408

-40%

374

-34%

PBIDT

262

759

-65%

627

-58%

PBIDT(before OI)

244

734

-67%

609

97

98

-1%

134

-28%

166

661

-75%

493

-66%

5

5

-4%

4

37%

21

131

-84%

130

-84%

Reported Profit After Tax

139

525

-74%

359

-61%

Minority Interest After NP

3

-1

136

526

-74%

359

2

0

0

0

134

526

-74%

359

-63%

Net Sales

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

Interest PBDT Depreciation Tax

Net Profit after Minority Interest Extra-ordinary Items Adjusted Profit After Extraordinary item

VAR %

Q2FY’09

VAR %

1 -62%

Margins Interest/Sales(%age)

20%

9%

(+1300bps)

14%

(-600bps)

Operating Profits/Sales(%)

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

Page 2

Unitech- Buy

Valuations: Company has a debt of around Rs. 8000 crores 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. With delay in projects across the industry at lower expected Operating margins of around 40%. Interest costs will effect NPM which we expect to go down sharply down in FY10E. Considering all the mentioned factors we still believe that company’s ability to execute projects remain strong and with huge land bank of 14000 acres we woud value the share price of the company at Rs. 50 per share, even if property value further moves goes down. Key to valuations at this point in time is not the profitability or debt, but how fast the company is able to reschedule its debt, able to get enough funds to restart stalled projects by injecting liquidity and how quickly it will sell completed units even if at lower profitability. At the CMP of Rs 34, Unitech is trading at 3.3x FY08 EPS of 10.2 and 5x FY09E EPS of Rs 6.8. We believe most of the concerns are already priced in, and recommend a BUY with a target price of Rs.51, a 50% upside from here. At the target price the stock would be valued at 7.3x FY09E EPS of Rs 6.8, implying an upside potential of 50%.

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 injections Cumulative Cash injection Telenor Ownership

Qtr. Ended June 30, 2009

Qtr. Ended September 30, 2009

Rs.15.0 billion

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

Rs.12.5 billion

Rs. 27.5 billion

Rs. 53.7 billion

33.33

50

67%

1) Rs.12.5 billion

2)

Note: Changed according to latest announcement of increased dilution from 60% to 67%.

According to the deal Telenor will inject Rs. 5370 crore of new Equity in 4 tranches for 67% partnership. Telenor will maintain ownership share when Unitech limited converts Rs. 500 crore of share holder to equity. Telenor will put additional funds of Rs. 750 crore in Unitech wireless, taking its total investment to Rs. 6120 crore in 2009. Additionally Unitech Wireless will use Rs. 400 crore of cash received to payoff debt to Unitech Ltd. Debt and Guarantees totalling Rs. 2100 crore will be transferred to Unitech Wireless.

Fairwealth Securities

Page 3

Unitech- Buy

Key Risks: According to our estimates Unitech will see an immediate jump in share prices as soon as it is out of troubled waters or in other words as soon as it gets enough financing to pay off short term debts and enough capital to fund its expansion over next 4-6 months. Another major risk to company’s growth is slow down in Real Estate markets led by Flattish to negative growth in IT sector. Company has huge capacities coming up in both residential and real Estate segment, however Company is even struggling to sell current capacities. We believe following risks are already hurting the company’s financials and will continue to do so in coming 2-3 quarters.  Slowdown in IT hiring will continue to hurt residential demand.  Job losses/ pay cuts across sectors is putting off investors, also buyers are waiting for developers to cut prices further, although demand has started picking up investors are awaiting a momentum in Indian Real Estate Sector.  Companies have stalled expansion process, industry confidence suggests demand is picking up however if that doesn’t happen it could delay commercial lease agreements and put additional pressure on company’s commercial sales.  Unitech similar to other players in the segment was building capacities for the SEC A segment, which has higher margins. However real demand lay in the growing Indian middle class. Going forward as company’s build apartments with lower built up area and lower persq. Ft. area margins will most definitely fall in future.  Higher raw material prices will put pressure on margins.

Share prices of Unitech have dropped by around 90% over last year while other players in the sector have fallen between 70% and 80%.

Source: Capital Line

Fairwealth Securities

Page 4

Unitech- Buy

Investment Rational Unitech has a market Cap of around Rs. 5500 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 also has plans to raise USD 500 million through PE’s at project as well as company level.

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 borrowning and change in FDI regulations, Rise in steel and cement prices Delay in completion of planned projects and Overall decline in Indian Econmics

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%. 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. Millions of square feet of developement in various stages, and ownership in a telecom company valued at over Rs. 3000 crores We do not believe Unitech is out of blues as yet, however most of the above factors have revised themselves, which should reflect in stock prices of Unitech.     

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

TECHNICAL OUTLOOK: Unitech UNITECH has given a good breakout above 28 levels. The stock has seen a good support around levels 25-28 .One could buy the stock on very declines for Target of 50.

Fairwealth Securities

Page 5

Unitech- Buy

Annexure: 1. Income Statement:

Fund Flow Statement: 200803

Income Statement (Standalone Rs. Crore) 2008(12)

2007(12)

2006 (12)

4115

3290

926

-13

-13

291

4101

3276

1218

Raw Materials

78

118

146

Power & Fuel Cost

54

4

32

Employee Cost

96

64

42

1505

1156

759

103

57

50

INCOME Net Sales Stock Adjustment Total Expenditure :

Other Manuf. Expenses S&A Expenses Miscellaneous Expenses Total Expenditure Operating Profit

24

25

33

1861

1410

1043

2240

1866

175

317

165

52

1923

1799

150

Interest Gross Profit Depreciation Profit Before Tax before OI

21

7

11

1903

1792

139

Other Income PBT

Share Capital 325 Reserves Total 3276 Total Shareholders Funds 3600 Minority Interest 116 Secured Loans 6231 Unsecured Loans 4235 Total Debt 10466 Total Liabilities 14182 APPLICATION OF FUNDS : Net Block 1159

162 1832 1994 1 3896 1722 5618 7614

12 247 260 24 956 195 1150 1434

712

444

Capital Work in Progress

2098

215

127

Investments

1416

455

14

13608

8700

3087

Current Assets, Loans & Advances Inventories Sundry Debtors

746

146

103

Cash and Bank

1408

1023

390

Loans and Advances

2944

1840

286

Total Current Assets

18706

11708

3866

8256

4898

2916

Less : Current Liabilities and Provisions

165

98

28

1890

167

935

578

87

399

486

52

Total Current Liabilities

9191

5476

3003

1669

1306

87

Net Current Assets

9515

6232

863

44

22

-1

Net Deferred Tax

-6

0

-15.08

1581

1261

88

14182

7614

1434

1599

2144

838

EO Items & Min. Interest Adj Net profit

200603

2068

Tax Net Profit

200703

SOURCES OF FUNDS :

Source: Company Report, Capital Line

Current Liabilities Provisions

Total Assets Contingent Liabilities

Source: Company Report, Capital Line

2. Cash Flow Statement: 200803 Cash Flow Summary Cash and Cash Equivalents at Beginning of the 1022.73 year Net Cash from Operating Activities -975.03 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

389.94

271.76

3187.44 4548.01

2074.49 -725.46 3432.74

-224.67 -308.28 651.13

385.54

632.79

118.18

1408.27

1022.73

389.94

Source: Company Report, Capital Line

Fairwealth Securities

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Unitech- Buy

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

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