JPMorgan: Unitech: No tick up in demand despite an improved leasing outlook

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Unitech Ltd
Neutral
UNTE.BO, UT IN
UCP conference call: No tick up in demand despite an 
improved leasing outlook


UCP hosted a conference call today to discuss the operational performance 
for Sep-Q. Key takeaways: 
1. Reported Sep-10 NAV/share of 50p was down 31% over Mar-10.
The decline is primarily on account of a change in valuation
methodology. The new methodology uses: 1) DCF for committed
leases; 2) Land value for undeveloped projects (~Rs440psf); and 3)
under construction projects (not leased) on cost basis (~Rs1,740psf).
This is against a full DLF method used earlier.  Cap rates used are at
11.5-12% and WACC varies between 15 and 17.5%. This, in our view,
is a bit too conservative. UCP’s stake in the overall portfolio (21.4msf)
is currently valued at £171.4M, down 38% since Mar-10. Refer to the
table below for valuation details.

2. Leasing yet to pick up substantially  – The company currently has
lease commitments in place for 3.3msf, or 66% of its ongoing portfolio
of 5msf. Of the total lease commitments, 2.2msf of office space is
already leased and operational; while the remaining 1.1msf is expected
to be operational over the next 12 months. Overall, this has potential to
generate an annualized rental  of £17m (UCP stake-£10.2mm),
assuming an average rent of Rs30psf pm. In 1HFY11, the company
generated rental income of £6.5m.
3. Net cash (£30M as of Sep-10) has come down by £8m since Mar-10
primarily due to construction financing of its ongoing portfolio.
Construction spend for 1HFY11 stood at £11.2m (cumulative spend of
£117.5m). While UCP has already completed 3.5msf of space or ~80%
of ongoing projects; buildout of future projects remains on hold and
will be taken up depending on the progress of leasing activity.  
4. Management commentary remains  cautious on demand outlook,
given oversupply concerns and slow leasing progress on its projects.
However, this is surprisingly at odds with other commercial developers
(DLF/Raheja) who are witnessing strong leasing momentum and are
guiding to an improving outlook. While leasing for UCP too has picked
up at the margin (0.9msf leased in 1HFY11), it still remains slow
relative to the overall market. Among the key markets, leasing in
Gurgaon is progressing well (0.7msf leased in 1H); however, it remains
considerably slow in Noida/Kolkta (0.2msf leased in 1H).  
5. UCP’s board has rejected Unitech’s proposal for an open offer at 31p;
however, management indicated that they are open to looking at other
means of asset monetization or any revised offer from Unitech