>UNITECH: Triple Treat Ahead

Unitech (UT) has been successfully implementing its revamped business strategy, thereby showing continued momentum in new launches and bookings. The company has also been successful in lowering debt from peak levels. Looking ahead, we see three more drivers for the stock performance which may help bridge the discount to NAV – these include: 1) development of key land parcels; we estimate that over 25% of the land bank accounts for ~55% of UT’s GAV – such concentration makes valuations more tangible, 2) Once listed, Unitech Infrastructure should further help unlock value in non-real estate businesses, and 3) UT’s proposal to purchase Unitech Corporate Parks Plc (UCP) (60% stake in six IT Parks/SEZs in India) may add 4-5% to our NAV. We maintain Buy with a price target of Rs.100

■ Driver 1 – Value concentration in a few land parcels: We note that ~55% of the GAV for UT’s real estate business is contributed by a cluster of five key properties in Gurgaon, Noida and Mumbai. In our view, such concentration makes the valuation more tangible considering high visibility. Further, all of these are prime properties with high development potential and hence form part of the management’s key focus for value generation. We reckon that progress in development of these land parcels will increase cash flow visibility and hence valuations, thereby bridging the discount to NAV.

■ Driver 2 – Unitech Infra demerger: UT’s plan to demerge the infrastructure business should unlock value considering efficiencies coming from the separate management control and low-cost debt available to infrastructure projects. At the same time, value accretion from the infrastructure demerger will depend upon the on-ground performance (in terms of new contracts, etc). We note that at a value of 1.5x P/B for the infrastructure business UT’s NAV increases by 9%.

■ Driver 3 – UCP merger: Recently, UT offered to purchase 100% stake in UCP at 31pence/sh (£112mn) as against the CMP of 28pence/sh (£101mn). The offer is for the same assets which were sold by UT in FY07 at a total valuation of £317mn. Based on our current valuation of 90pence/sh, the proposal offers a significant value accretion for the company. Although we do not rule out a further increase in offer price, we see value accretion of 4-5% even if the price is escalated by 50%.

■ Valuation – maintain Buy: We revise our revenue and PAT estimates for FY11/12/13 by -1%/-2%/-5% and -2%/0%/-3% respectively as we realign our model to include improved realisations in select properties and lower volume assumptions. UT is our top pick in the large cap real estate space.

To read the full report: UNITECH

>HINDUSTAN NATIONAL GLASS: Profitable Growth

■ Proxy to high growth segments in FMCG: Hindustan National Glass and Industries (HNGI) is the largest container glass manufacturer in India with 85% of sales volumes from the FMCG sector and 15% from the pharmaceuticals sector. We expect sustained volume growth of 12-15% in the segments to which HNGI supplies - IMFL (52% of volumes), Beer (13% of volumes), Food & Beverages (17% of volumes) and Personal Care (4% of volumes). We expect HNGI's growth to accelerate post FY12, following 40% capacity increase.

■ New capacities to enhance growth further: HNGI's growth has been lackluster in the past couple of years due to lack of capacity addition and volatile input costs of fuel (power and fuel costs constitute 27% of sales). The company will expand capacity from 2,780tpd currently to 3,775tpd in CY12, which also includes 100tpd capacity for the high margin cosmetics glass segment. This will lead to further acceleration in volume/revenue growth post FY12.

■ Production efficiencies, switchover to gas to boost margins: HNGI has consolidated the container glass industry through three acquisitions in the last decade. This has increased its pricing power and provided economies of scale in sourcing, production and customer service. The company has increased draw efficiency from 64.5% in FY07 to 85% while its pack efficiency has also increased to 87%. We expect 7% increase in draw efficiency and 5% increase in pack efficiency over FY10-12, lowering operational costs. It plans to shift to using LNG as fuel in its Neemrana unit from July 2010 and in its Nashik unit from FY12, which will lower costs. We estimate 250bp increase in gross margin and 440bp increase in EBITDA margin over
FY10-12.

■ A play on float glass, as well: HNGI has 65% share of the container glass market in India. It also has 37% stake in a 600tpd float glass venture. It intends to increase its stake in this venture to 51% by September 2010 and add a further 800tpd float glass capacity. The float glass venture will start contributing positively to the consolidated numbers from FY12. We value the stake at Rs32/share.

■ Initiating coverage with a Buy rating: We estimate 16% PAT CAGR over FY10-12. The stock trades at 7.5x FY11E EPS of Rs28.6 (adjusted for treasury stock) and 7.4x FY12E EPS of Rs29.2. We initiate coverage with a Buy rating and a target price of Rs325 - a 51% upside.

To read the full report: HNL

>BGR ENERGY: BTG JV with Hitachi supports growth prospects; maintain Buy

What's changed
BGR has signed today two JV agreements with Hitachi for design and manufacturing of Boiler-Turbine-Generator (BTG) sets for Thermal power plants in India. These JV’s would involve a total investment of Rs4,400cr (BGR’s share at Rs3,200cr) and would have capacity of c.4,000MW starting from end-2012. This arrangement is on expected lines in terms of total project costs and planned capacities, but slightly ahead of our expectations in terms of aimed commissioning.

Implications
The signing of the JV reiterates our view on the company’s ability to secure such a partnership and also its ability to win future orders in the super-critical thermal sets category. However, the impact of any such orders on revenues would only be visible starting FY13E as most of these orders will be for commissioning of plants in the later half of XIIth five-year plan (2012-2017). So, our current 12m TP of Rs874 (based on 18.6X P/E on average of FY11E and

FY12E EPS) does not include these subsidiaries.
BGR’s share of investment would mean an equity capex of Rs960cr (assumed 70:30 D/E) spread across three years. Based on our cash flow estimates, we believe the company is adequately funded to make this capex from internal accruals without need for external fund raising.

Valuation
BGR currently trades at FY12E P/E of 14.8X, still at significant 33% and 26% discount to FY12E P/E of bigger peers like BHEL and L&T. Given our expectations of better growth and margin profile for BGR, at 39% EPS CAGR over FY10-12E, vs. 2-yr median EPS CAGR of 17% for its Indian peer group, we continue to view current valuations as attractive and reiterate our Buy rating. We fine tune our numbers for FY11E-FY13E on the back of earnings.

Key risks
1) Relatively new business in BTG space, 2) aggressive bidding for orders.

To read the full report: BGR ENERGY

>INDIA CEMENTS: 1QFY2011 Result Update

India Cements’ net sales de-grew by 8.1% yoy during 1QFY2011 on account of the substantial decline in prices in Andhra Pradesh, which contributes around 45% of the company’s overall revenues. The net plant realisation NPR) for the quarter stood at Rs2,501/tonne, down 21% yoy. The management indicated that it is looking at increasing the proportion of its sales volume from Tamil Nadu and Kerala to 60% (from the current 50%) to achieve better realisation. We maintain a Buy on the stock.

■ Operating profit down 71.2%: On the operating front, the company’s margins fell by 2,244bp yoy to 10.3% (32.7%) on account of the fall in realisations and increase in raw material and freight costs. The company’s operating profit stood at Rs91cr, down 71.2% yoy. Net profit dropped 82.7% yoy to Rs25cr primarily due to the poor operating performance. Bottom-line was however, bolstered by the Rs26.4cr of profit booked from the stake sale in Bharati Cement. Adjusting the foreign exchange translation loss of Rs11.6cr (Rs21cr gain in 1QFY2010) and exceptional income from stake sale, net profit stood at Rs Rs10.2cr.

■ Outlook and Valuation: We expect the pricing pressure in the southern region to continue over the next few quarters on the back of excess capacity and lack of demand particularly in Andhra Pradesh due to reduced government spending on infrastructure and housing projects. We maintain a Buy on the stock with the SOTP-based Target Price of Rs139.

To read the full report: INDIA CEMENTS