Saturday, January 30, 2010


Unitech, one of the largest pan-India residential developers, continues with its aggressive growth plans raising execution concerns, in our view. While it has largely addressed the leverage issues, we expect margin pressure on lower monetising opportunities in near term. We initiate with a Rs72 target price. Sell.

Execution remains a challenge

Pan-India residential real-estate developer focused on affordable housing
Unitech is one of the largest pan-India residential developers. When the market was buoyant, the company shifted its focus to the higher-margin, non-residential segment and monetised some of its IT parks/SEZs. However, the change in demand caused by the economic downturn prompted Unitech to return its focus to its forte of developing residential projects.

Aggressive growth strategy raises execution and marketing concerns, in our view
In FY10, Unitech plans to launch 30m sq ft (launched 24m sq ft in 9MFY10), despite already having 17m sq ft of past projects under construction. We believe its potential pipeline of about 47m sq ft is aggressive, given its average annual execution run-rate of 7m-9m sq f even in buoyant markets. While Unitech is now focusing on executing its past projects, we are concerned that its recent aggressive launches might result in execution delays for upcoming projects. Furthermore, while Unitech's project launches in metros have been successful, the poor response in non-metro areas raises concerns about marketing, as about 44% of the company's land bank is in tier-II cities.

Expect margin pressure due to lack of significant near-term monetisable opportunities
While Unitech has successfully reduced its net gearing from about 160% in March 2009 to 59% now, its net debt is still high (US$1.3bn) as only about 58% of its US$900m QIP was used to repay debt. This could lead to continual high interest outgo (about 47% of our FY11 EBITDA estimate). We expect margin pressure due to Unitech's changing product mix and lack of near-term higher margin monetisable assets (unlike about 40% of revenue in FY07-09). With demand for IT Parks/ SEZs yet to show significant revival and such projects owned by Unitech and UCP being in initial stages of development and leasing, we do not expect monetisation in the near term. Also, Mumbai slum-rehabilitation projects should add significant value only in the medium to long term.

We initiate coverage with a target price of Rs72 and a Sell rating
We value Unitech on a SOTP-based target price of Rs72, comprising: 1) Rs62 end-FY11F DCFbased NAV for real estate (at a 15% discount to GAV); and 2) Rs10 for Unitech's stake in telecom unit, Uninor (at a 20% discount to Teleno's acquisition price). With our target implying 19% potential downside from the current price, we initiate coverage of Unitech with a Sell rating.


Biocon’s results surpassed our estimates by a comfortable margin, as the contribution from Axicorp increased by a robust 67% YoY. The biopharma business also followed with a strong 33% growth, surprising us positively as it touched new highs in the last 15 quarters. The base business too logged a healthy growth of 29% during the quarter. The company also registered its highest ever licensing income during any quarter at Rs 175mn in Q3FY10. The performance of the research services business, however, was marginally below our estimates as it managed to post a modest 13% growth. We maintain our positive stance on Biocon. Buy.

Axicorp, biopharma forge ahead

Net sales up 46% YoY: Biocon’s net sales jumped 46% YoY during Q3FY10 as contribution from Axicorp skyrocketed 67%. The company also saw increased traction in its licensing income that touched its highest ever quarterly mark of Rs 175mn (vs. Rs 28mn in Q3FY09). Even after excluding the growth in Axicorp and licensing income, the underlying base business posted a healthy 29% growth – this was driven by a 33% and a 13% growth in the biopharma and research services businesses respectively.

Base business margins contract: The EBITDA margin for Biocon’s base business (excluding Axicorp and licensing income) contracted 188bps YoY to 32.6% for 9MFY10 (vis-à-vis 28% for FY09) on higher raw material costs. Axicorp’s margin, however, improved sharply to 7.2% vs. 2.7%. Biocon’s overall margins for the quarter dropped to 21.5% from 23.1% in Q3FY09.

Adj. PAT grows 26% YoY: The company’s adj. PAT surged 26% driven by strong growth in the EBITDA and lower interest costs during the quarter. Licensing income soars: Biocon generated a licensing income of Rs 175mn during Q3FY10 – its highest ever during any quarter. Earlier, the company’s licensing income stood at Rs 450mn in FY08 but plunged more than three times to Rs 122mn in FY09. The jump in the licensing income in the current quarter signals a revival in the company’s research partnerships.

Maintain Buy: We have marginally revised our revenue estimates for the next two years to factor in the stellar performance of Axicorp and the biopharma business. We, however, have pruned our earnings estimates for FY11 on expectations of lower other income. We maintain our positive stance on Biocon due to the company’s improving performance across business verticals and the continued strength in its balance sheet. Currently, the stock trades at a PER of 17.6x FY11E and 16x FY12E, and an EV/EBITDA of 12.3x FY11E and 11.2x FY12E. Buy.

To read the full report: BIOCON

>DOCOMO can get controlling stake in JV if TTSL fails to meet targets

Shareholders’ Pact Requires TTSL To Meet Profit Margin & GSM Tower Targets By ’15

Rohini Singh NEW DELHI
January 29 2010

JAPANESE telecom major NTT DOCOMO could acquire a controlling stake in Tata Teleservices (TTSL) in which it has a 26% stake, if the latter is unable to meet some performance benchmarks, according to the shareholding agreement between the two, details of which are available with ET. These benchmarks may account for the aggression with which TTSL, which operates GSM services under the brandname Tata DOCOMO, has been increasing its subscriber base and market share, said an industry source. GSM is the dominant technology standard underpinning mobile telephony in India. The shareholders’ agreement gives DOCOMO the right to increase its stake in TTSL to 35% by March 2012 by infusing fresh equity at what document describes at fair market value, though without any premium to the valuation at that point in time.

By March 2015, DOCOMO can further raise its stake in TTSL to 51% and take control of the company by subscribing new shares at fair market value plus a 30% control premium. But these options get triggered only if TTSL is not able to meet the aggressive performance criteria set out in the agreement. These targets include reaching a minimum operating profit (EBIDTA) margin of 15% and rolling out 20,000 GSM towers by March 2012. By March 2015, TTSL has to increase the number of GSM towers to 26,000 and further hike its EBIDTA margin to 25%.

Currently, DOCOMO has a 26% stake in TTSL, which it bought in 2008 for $2.7 billion that valued the loss-making TTSL at over $10 billion. A Tata spokesperson responded to ET’s query by saying, “We do not comment on speculative queries or those related to our partners and shareholders.” DOCOMO also has the option of selling back its entire stake in the company to the Tatas at 50% of the value it paid to pick up the initial 26%. But this option cannot be exercised, if DOCOMO exercises the option of hiking its stake to 35% in 2012. TTSL’s operating profit margin for FY08-09 was 3.4%. A person close to the company told ET that the low margin is because the company is currently in the process of building its network throughout India. The operating profit next year would also be low, this person said. The changes that Tata DOCOMO have introduced in the market, include per-second billing that saw tariffs falling sharply, as other companies responded. The price-war has seen margins shrinking with even market leader Airtel reporting EBIDTA margins of 30%, last quarter down more than a percent. According to information available with ET, TTSL posted a loss of Rs 2,505 crore in FY09, excluding one-time gains. The loss widened from Rs 1,814 crore in the previous year even as the company recorded a robust growth in subscriber base in FY09.

TTSL is the majority shareholder in Tata Teleservices (Maharashtra), which offers landline services in Maharashtra and Goa. Besides GSM services offered under the Tata DOCOMO brand, it also operated a CDMA-based mobile phone service under a brand called Tata Indicom and is one of the two leading CDMA operators in India, apart from the Anil Ambani-controlled Reliance Communication. CDMA is a rival to GSM.

By March 2015, DOCOMO can further raise stake to 51% and take control of the company by subscribing to new shares But these options get triggered only if TTSL is not able to meet the aggressive performance criteria The targets include reaching a minimum operating profit margin of 15% and rolling out 20,000 GSM towers by March 2012 By March 2015, TTSL has to increase the number of GSM towers to 26,000 and further hike EBIDTA margin to 25%


First full quarter of crude oil production from Rajasthan field translates into 135% yoy growth in revenues.

Realization for crude oil was higher by 42% yoy, while that of natural gas was up 12.5% yoy.

OPM jumps 25ppts yoy on account of higher inventory available of crude oil for sales

Higher exploration write-offs, increase in interest costs and lower other income restrict net profit growth

Rajasthan sales volume ramp up slower than our earlier estimates, lowering estimates and factoring DCF value.

To read the full report: CAIRN INDIA