>UNITECH (ICICI SECURITIES)

OVERSHOOTING VALUATIONS

We raise our FY10E NAV estimates for Unitech to Rs238bn or Rs91/share from Rs126bn or Rs66/share on the back of: i) pick-up in volumes due to revival in midincome housing, ii) reduction in WACC to 14.6% from 16.1% and iii) Rs40bn fall in net debt. Unitech has raised Rs54bn from QIPs and warrants and another Rs10bn from asset sales; this has resulted in a clean balance sheet, decrease in interest burden and better funding for project launches. However, we believe these positives are factored in current stock price and, hence, downgrade Unitech to SELL from Hold with target price of Rs73/share (20% discount to NAV of Rs91/share). We believe Unitech’s execution ramp up is aggressive and, given its past execution record, difficult to achieve. Further, the company’s net debt has reduced Rs29bn despite Rs54bn capital infusion, implying working capital requirement remaining high. Unitech trades at FY10E & FY11E P/E of 21.7x & 18.9x respectively and P/BV of 2.2x; downgrade to SELL.

■ Expensive valuations. We raise FY10E NAV to Rs238bn or Rs91/share from Rs126bn or Rs66/share owing to pick up in volumes (revival in mid-income housing), 150bps reduction in WACC to 14.6% from 16.1% and decrease in net debt by Rs40bn (the company raised Rs54bn from QIPs and warrants). Unitech’s FY10E BV increased to Rs40.5/share; the stock trades at P/BV of 2.2x.

■ Aggressive pipeline. Unitech plans to launch 30mn sqft in FY10E (90% residential & 10% non-residential) across 40 projects in 22 cities, including ~100 acres/year in Mumbai. We believe the plans are aggressive, given Unitech’s past execution track record and difficult to achieve.

■ Easing liquidity. Post QIPs, warrants issued and asset sales, Unitech raised Rs64bn; we expect the company’s FY10E net debt to reduce to Rs50bn from Rs90bn. We believe that Unitech will continue to raise further cashflows through asset sales (hotel/office properties) going forward.

■ Unitech’s Q1FY10 results in line, but below Street. Revenues rose 34% QoQ to Rs5.1bn (I-Sec: Rs4.8bn); but, PAT dipped 44% QoQ to Rs1.6bn (I-Sec: Rs1.5bn). YTD, Unitech has sold 7mn sqft and launched 16.5mn sqft; it plans to launch 30mn sqft (40 Projects across 22 cities) in FY10. Unitech is focussing on mid-income housing (ticket size of Rs1-5mn) under the brand name Unihomes; the company expects the segment to contribute 70% to revenues going forward.

To see full report: UNITECH