Thursday, April 22, 2010

>UNITECH: Non-core spin-off to unlock value (RELIGARE SECURITIES)

Unitech plans to spin off its non-core businesses (construction, telecom, power, SEZs and amusement parks) and focus entirely on real estate. We believe the objective behind the de-merger is to create two separate listed entities that will allow for a sharper business focus. The move will also enable the management to raise funds more easily in the non-core entity as compared to the real estate business. We see value-accretion for investors from the spin-off and hence maintain a Buy on Unitech with a target price of Rs 101.

Non-core line up: We believe the proposed non-core entity would comprise the company’s 40% stake in Unitech Corporate Park (UCP), 50% stake in Unitech Amusement Park, 32.5% holding in Uninor Wireless (telecom), and the in-house construction and power transmission divisions.

Unitech Corporate Park – the SEZ vehicle: UCP – an AIM-listed entity – operates in India’s commercial real estate segment with a focus on IT and IT-enabled services. The company has six properties (five SEZs and one IT park) in the national capital region (NCR) and Kolkata with a total development potential of 21.4mn sq ft (1.05 msf leased out). UCP is a debt-free company with cash of £ 48.3mn as on December ’09. Knight Frank has valued the company’s six assets
at £ 517.7mn; we have built in this figure for our best-case valuation of UCP. Accordingly, the value of Unitech’s 40% stake stands at Rs 14bn (Rs 68/£). Amusement parks: Unitech holds a 50% stake in Unitech Amusement Park which owns two parks, one in Noida and another in Rohini (Delhi). The Noida amusement park is spread over 148 acres in Sector 38. Phase I has been concluded and comprises 20 rides along with 1msf of operational retail space.

The park in Rohini called ‘Adventure Island’ covers 61.7 acres and has 22 rides and 0.2msf of retail space operational under the first phase. We have valued this business based on the leased portfolio, at Rs 5bn in the best case scenario.

Telecom, construction and power: Unitech holds a 32.5% stake in its telecom business – Uninor Wireless, which we have valued at Rs 29.6bn (based on Telenor’s 67.5% stake acquisition in Uninor for Rs 61.3bn). We value the construction business at 4x Market cap/EBITDA (~Rs 1bn) and power at Rs 1bn.

De-merger to be value-accretive for investors: Including subsidiaries and JVs, we arrive at a value of Rs 19.5/share for the de-merged entity in the best case and Rs 12.9/share in the bear case at full dilution (see Fig-1). We expect the spin-off to unlock value for investors and hence maintain our Buy rating on the stock with a target of Rs 101. We reintroduce a discounted value for the realty business on concerns of rising interest rates and escalating realty prices, which affect volumes.

To read the full report: UNITECH