>UNITECH (CITI)

Sell: Core Business Picking Up; But Valuations Rich

■ Poor 1Q, though better than est. — Rev fall of 48%, was greater than expected; while earnings decline of 63% was better than our estimated fall of 73% - this was due to higher EBITDA margins of 63%, largely driven by profits (Rs800m) from sale of Saket Off in the qtr. Lower interest costs of Rs926m also helped. Going forward we expect another qtr of higher margins as hotel assets will be booked subsequently; post which we see margins correcting to 40% levels.

■ Comfortable on liquidity — Unitech’s ~US$900m QIP in two tranches along with Rs11.5b warrant issue to promoters over the last four months has made the company comfortable on liquidity. Leverage is down to 0.57x, net debt levels down to Rs76bn in Jun’09 (vs. Rs109bn in 3Q) and post 2nd QIP this is targeted to reduce less than 50 billions. That said, its ~37% dilution does offset some of the benefits.

■ Aggressive plans in residential business — Targeting to launch ~30msf and pre-sell ~20msf in FY10 – 90% being resi project with focus on affordable housing priced in range of Rs1-3m under its ‘Unihomes’ brand. The initial start is encouraging, with ~16.5msf launched and ~6.9msf pre-sold as of Jul’09 with its first Unihome launch in Noida having done well – we believe sustainability and timely execution will be key for operational cash flows.

■ Rich valuations — With the stock having outperformed the sensex by 56% over the last three months, we believe the improvements in business seem largely priced in. Further, with the stock already trading at a premium to our NAV of Rs88, we believe valuations leave no room for error.

To see full report: UNITECH