>UNITECH: 3QFY10 results (MOTILAL OSWAL)

■ 3QFY10 results below estimates: Revenues were up 58.3% YoY at Rs7.7b (v/s our est. of Rs7b) and PAT was up 29.4% YoY at Rs1.7b (v/s our est. of Rs2.1b). EBITDA margins declined by a sharp 25.9pp to 24% v/s 49.9% a year earlier and 58.4% in 2QFY10. The management explained that this was driven by cost revisions undertaken for old projects, where they had earlier charged cost on the POCM method at a lower rate, but had to revise it as construction costs has increased.

■ Execution scale up during 3QFY10 impressive: Unitech, which constructed ~35msf of residential projects since its inception, launched ~24.4msf in the first nine months of FY10 and plans to launch a total of ~30msf in FY10, leading to concerns about its ability to carry out its plan. However, despite a challenging outlook, the company has scaled up and the progress of execution is impressive. Construction has begun at almost 53% of the recently launched projects, and pre-construction and site development activity are underway at another 30%.

■ Leverage decline: Total reduction in gross debt until 9MFY10 has been Rs28.5b. Unitech has ~Rs6b payable to mutual funds. Gross debt decreased 7% YoY to Rs62b and net debt was down 6% YoY at Rs56b. Leverage fell to ~0.55x v/s ~0.59x in 2QFY10.

■ Valuation and view: We have rolled our NAV one year forward to FY12, resulting in an NAV of Rs106/share. The stock trades at 1.5x FY12E BV of Rs46/share and ~28% discount to its NAV of Rs106/share. We believe re-rating of the stock will continue to remain contingent on 1) continued visible progress on the execution side, 2) further clarity on the Mumbai market potential, and 3) ability to monetize non-strategic assets.

To read the full report: UNITECH