>UNITECH (HSBC)

■ Q3 PAT was 5% below estimates; EBITDA margin halved on higher costs. Unitech’s reported PAT of INR1.8bn (+30% y-o-y) was 5% lower than our estimate, despite net sales of INR7.7bn (+58% y-o-y) 17% higher than estimates. While strong sales growth reflects improving execution, EBITDA margin halved from 50% in Q3 FY09 to 24% in Q3 FY10 as Unitech adjusted for construction cost growth on old undelivered space of 17m sq ft.

■ Business momentum maintained, though well reflected in share price. During 9M FY10 sold 10.7m sq ft of residential space (2.8m sq ft in Q3 FY10), and 2.4m sq ft of commercial space (0.3m sq ft in Q3 FY10). Volume growth was in line to meet our FY10 estimate of 13.5m sq ft residential and 2.8m sq ft commercial space. However we believe the market is factoring in the good volume growth and current valuation leaves limited room for upside.

■ Execution and higher than estimated volumes to act as catalysts. Unitech improved its execution pace (57% y-o-y sales growth) during Q3 FY10. However it will need to sustain the momentum, to allow delivery of 17m sq ft of old presold inventory by FY11. We believe sustained execution momentum and higher than estimated volume growth would act as key drivers for a valuation upgrade and vice-versa.

■ Lower TP to INR83 (INR 85) as we cut NAV by 3%. We lower earnings by 14% in FY10 to INR6.8bn, 18% in FY11 to INR8.9bn and 7% in FY12 to INR14.3bn to factor in escalation in project costs on old undelivered projects. However the impact on our NAV is limited to 3%. In line we cut our target price to INR83. We retain our valuation at a 10% discount to our FY11 NAV, along with INR8 for Unitech Wireless and INR6 for terminal value.hsbc

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