>UNITECH (IDFC SSKI)

Unitech is leaving no stone unturned to survive the ‘crisis of confidence’. Having stretched its balance sheet in unremitting good times, Unitech is sorting out the ‘nasty shock’ brick by brick. With no takers for premium projects currently, Unitech has slashed prices and unit sizes across projects to suit customer budgets. Also, debt restructuring and asset monetization have helped Unitech repay/ restructure the debt due by March 2009. We estimate Rs21.5bn to be raised via sale of non-core assets over FY10-11E, to be used to deleverage. We expect 19% and 14% CAGR in revenues and earnings respectively over FY09-11E through cumulative sale of 35msf (~8% of total land bank). We expect the stock to be re-rated as the market prices in Unitech’s survival and begins valuing its ‘land bank’. However, a prolonged economic downturn and rising interest rates could hit incremental sale of flats, and thereby warrant further restructuring.

Demand does exist but at affordable prices: The uncertain economic environment and elevated prices have turned buyers away from real estate. However, we believe that structural demand, based on favorable demographics, low penetration and rising prosperity, is intact. Going forward, while falling real estate prices and benign interest rates will trigger a revival in demand, we believe buyers are currently takers only for ‘affordable’ properties.

Caught in the “perfect storm”…: Unitech has availed of short-tenure borrowings (debt of Rs84bn) to create a massive 9,845-acre land bank and fund development activity as also the telecom foray. However, a sudden demand slump and capital constraints have turned the land bank illiquid – thereby creating a huge asset-liability mismatch. To preserve cash, Unitech has stalled land accretion and is monetizing non-core businesses (including 67% stake sale in Unitech Wireless to Telenor). While debt restructuring/ asset monetization has helped Unitech manage debt obligations due by FY09, we expect the company to monetize ~35msf of saleable land bank over FY10-11E at prices that the market can take.

…rebuilding – brick by brick: Deleveraging is at the core of Unitech’s medium-term strategy as cash flows from property development and non-core asset monetization are used to repay debt. The stock currently trades at near-bankruptcy valuations, which offer comfort. While resumption of construction activity in full swing is some time away, we see the market valuing Unitech’s land bank as it gets monetized.

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