>UNITECH LIMITED (MORGAN STANLEY)

Stock Is at the Crossroads of Demand; Moving to EW

■ Investment conclusion: We are upgrading our rating on Unitech to Equal-weight in view of initial repair of the balance sheet (182% net gearing in F09 could drop to 84% in F10) and improving macro (India F10 GDP growth upgraded to 5.8%, better foreign capital flows, and prospects of pro-market policy actions). Worst may be behind us, but not yet out of the woods, we believe.

■ Several challenges remain: 1) Portfolio of ongoing projects (27 msf) appears weak (since 80% is completed and recognized). 2) Therefore, reliance on new launches and sales to generate earnings/cash is high. 3) Even after significant fund raising (Rs24 bln odd), B/S will remain stretched (84% F10E net gearing and low interest coverage of 2.5x incl interest cost capitalised).

■ Where we differ: Valuations appear rich (16% discount to F10 NAV, 18x F10 EPSe, 1.9x F10 P/B) and seem to be already discounting revival in business cycle. Nearer term, we see downside risk to the stock price. Our new PT is Rs60 (at 30% discount to F10 NAVe of Rs85), and we would take profits on stock price appreciation.

■ Something for the bulls: Early monetization (regulations/Telenor permitting) of balance stake
(32.75%) in telecom business could further fix the b/s. We see deep value in Mumbai projects, though given the task of slum rehab, we expect slow delivery of land parcels (1-2 msf launches in F10, 50% share).

■ Something for the bears: There may be more equity dilution (preferential warrants to promoters, another QIP), economic recovery might be elusive, and low (YTD 2.5 msf) sales contracted (versus 18 msf at Rs3000 ASP to meet our F10 EPSe).

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