>UNITECH (RBS)

Unitech, one of the largest pan-India residential developers, continues with its aggressive growth plans raising execution concerns, in our view. While it has largely addressed the leverage issues, we expect margin pressure on lower monetising opportunities in near term. We initiate with a Rs72 target price. Sell.

Execution remains a challenge

■ Pan-India residential real-estate developer focused on affordable housing
Unitech is one of the largest pan-India residential developers. When the market was buoyant, the company shifted its focus to the higher-margin, non-residential segment and monetised some of its IT parks/SEZs. However, the change in demand caused by the economic downturn prompted Unitech to return its focus to its forte of developing residential projects.

■ Aggressive growth strategy raises execution and marketing concerns, in our view
In FY10, Unitech plans to launch 30m sq ft (launched 24m sq ft in 9MFY10), despite already having 17m sq ft of past projects under construction. We believe its potential pipeline of about 47m sq ft is aggressive, given its average annual execution run-rate of 7m-9m sq f even in buoyant markets. While Unitech is now focusing on executing its past projects, we are concerned that its recent aggressive launches might result in execution delays for upcoming projects. Furthermore, while Unitech's project launches in metros have been successful, the poor response in non-metro areas raises concerns about marketing, as about 44% of the company's land bank is in tier-II cities.

■ Expect margin pressure due to lack of significant near-term monetisable opportunities
While Unitech has successfully reduced its net gearing from about 160% in March 2009 to 59% now, its net debt is still high (US$1.3bn) as only about 58% of its US$900m QIP was used to repay debt. This could lead to continual high interest outgo (about 47% of our FY11 EBITDA estimate). We expect margin pressure due to Unitech's changing product mix and lack of near-term higher margin monetisable assets (unlike about 40% of revenue in FY07-09). With demand for IT Parks/ SEZs yet to show significant revival and such projects owned by Unitech and UCP being in initial stages of development and leasing, we do not expect monetisation in the near term. Also, Mumbai slum-rehabilitation projects should add significant value only in the medium to long term.

■ We initiate coverage with a target price of Rs72 and a Sell rating
We value Unitech on a SOTP-based target price of Rs72, comprising: 1) Rs62 end-FY11F DCFbased NAV for real estate (at a 15% discount to GAV); and 2) Rs10 for Unitech's stake in telecom unit, Uninor (at a 20% discount to Teleno's acquisition price). With our target implying 19% potential downside from the current price, we initiate coverage of Unitech with a Sell rating.