Monday, August 9, 2010

>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