UBS: Unitech - In the ‘value zone’

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UBS Investment Research
Unitech
In the ‘value zone’

􀂄 Correction overdone
Unitech’s 33% share price drop over the past two months was primarily due to
controversy arising from the 2G licence allotments to it in 2008 as well as negative
sentiments on the property market. We think the correction was overdone and there
is value in the stock at a 47% discount to a revised NAV estimate of Rs123.00
(excluding a sum-of-the-parts value of Rs12/share for the 32.75% telecom stake),
which seems to have eroded amid rising penalty risk on the telecom venture.

􀂄 Concerns about telecom exposure, but these appear to be priced in
Management suggests investigations on the 2G licence allotments to its telecom
venture are going on, but that it has abided by all policy guidelines. Given Unitech
has: 1) brought in foreign direct investment (FDI) following its tie-up with Telenor
rather than selling its stake; 2) rolled out commercial services in 13 of 22 circles,
we believe the probability of large penalties following the investigations is low. In
the worst case scenario, its telecom venture might face higher
penalties/cancellation of non-rolled out services. However, we think these concerns
have been priced in.
􀂄 No issues on core real estate business; healthy balance sheet a strength
With presales of around 5m sqft in H1 FY11, around 40m sqft under construction,
and H2 likely to be better, we see no issues. Its balance sheet is healthy with a
0.53x debt/equity ratio, net debt at Rs58.4bn and Rs5bn payable in H2 FY11. We
expect stronger cash flow.
􀂄 Valuation: lower price target from Rs108.00 to Rs86.00
While 2G investigations remain an overhang, we think there is good risk-reward
potential, even as we lower our price target on a higher 30% discount (20% earlier)
to NAV, building in risks from its telecom exposure and weak sentiments.