Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech (UT IN)
Margin fall and a high tax rate will keep Q3 FY11 earnings growth
muted. We expect new volume sales to disappoint during Q3
Cut earnings 6-15% during FY12-13 to factor in weak demand
environment. High property prices unlikely to offset lower volumes
Downgrade to Underweight (V) from Neutral (V) and lower TP to
INR50 from INR87, as we factor in downcycle valuation
3Q FY11 outlook:
We expect Unitech to report soft revenue growth
of 12% y-o-y but show a huge sequential jump of
35%, reflecting our expectation of a pick-up in
execution. In Q3 FY10, Unitech reported the
weakest EBITDA margin of 24% as the company
accounted for increased construction cost on old
undelivered projects. While the impact of the cost
escalation on those projects will be seen during
3Q FY11, the impact will be limited as their share
of total revenue comes down. Hence, while we
expect a 1,200bp y-o-y EBITDA margin
expansion, in sequential terms we expect it to
come down 320bp, to 36%.
We expect profit growth to remain muted, at 5%,
on account of a higher tax rate of 28% during 3Q
FY11 (21% in 3Q FY10). Unitech is expected to
release volumes and sales data a few days before
the 3Q FY11 earnings release and we expect new
sales volumes of 2.5m sq ft, at an average
realisation of INR4,600 psf.
Investment summary
Shift of focus towards high end product will
hurt business growth. Unitech’s strategy to
refocus on the luxury/ high income residential
segment in our view will hurt business volumes.
Additionally, the company has focused on
liquidating existing inventory at higher prices by
reducing new launches. Hence, while realizations
might move up, they are unlikely to compensate
for the fall in sales value (Product * Price). We
lowered our volume estimates after Q2 FY11 for
FY12 by 41% and for FY13 by 45%. We believe
there is an elevated risk to our current volume
estimates as well, though we would look at
reviewing them after Q4 FY11.
Despite comfortable leverage, tight liquidity and
rising interest rates pose a risk to execution and
earnings. Unitech’s debt-equity position at 0.6x
remains comfortable. While the company needs to
refinance only INR1.2-1.3bn of debt during FY12
(20% of the outstanding debt), tight liquidity in the
system and the Indian central bank’s cautious view
on the property sector suggest adverse policy
measures could affect the sector. This, in our view,
could impact Unitech’s earnings growth through
increased borrowing cost and also affect execution in
the near to medium term.
What could change our view? Refocus on midincome housing. Unitech has a land bank of
c10,000 acres. Hence, we think the company
should change its strategy to focus on a build and
churn model to sustain cash flows and earnings
growth. This could be done through more new
project launches in the mid-income category.
With a very low land cost, Unitech is in a good
position to launch projects using a competitive
pricing strategy.
Key earnings changes
We have made marginal changes to our top line
growth to adjust for revenue mix changes. Our
EBITDA margin estimate is lowered by 60-80bps
for FY11-12 and c420bps in FY13, primarily due
to the increased construction cost factors for
project launches during FY12 and some revenue
mix changes. In line with this we cut our earnings
forecasts by c3-15% over FY11-13e (figure C.2).
Valuation
We calculate Unitech’s Net Asset Value (NAV)
using a discounted cash flow method based on its
real estate project realizations. We value Unitech on
a net asset value approach using discounted cash
flows of its real estate projects (WACC of 15%,
which includes COE of 15.7%, risk free rate of
8.0%, market risk premium of 5.5% and cost of debt
12%). We have lowered our target price to INR50
(INR87 earlier) to reflect our weak volume
estimates.
Our target price is derived using a sum-of-theparts valuation wherein we value the real estate
business at a 40% discount to its NAV of INR62
(from 10% earlier), Unitech Wireless at INR8 and
INR5 as terminal value to its business. At a 40%
discount to NAV, Unitech is in line with other
large sector peers, though lower than sector leader
DLF (30% discount to NAV). We believe the
NAV discount is justified given the company’s
business positioning and execution track record.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential loss of 12.2% (including prospective
dividend yield), which is within the Neutral band.
Thus we downgrade our rating on Unitech to
Underweight (V) from Neutral (V) earlier.
Risks
While we like the company’s business
strategy and land bank quality, execution on
its fresh sales of 16.6m sq ft (FY10) and old
undelivered projects of 17m sq ft is a key risk
to our valuation.
Improvement in demand leading to better than
anticipated volumes in the event of a property
price correction and a reasonably favourable
interest rate scenario.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech (UT IN)
Margin fall and a high tax rate will keep Q3 FY11 earnings growth
muted. We expect new volume sales to disappoint during Q3
Cut earnings 6-15% during FY12-13 to factor in weak demand
environment. High property prices unlikely to offset lower volumes
Downgrade to Underweight (V) from Neutral (V) and lower TP to
INR50 from INR87, as we factor in downcycle valuation
3Q FY11 outlook:
We expect Unitech to report soft revenue growth
of 12% y-o-y but show a huge sequential jump of
35%, reflecting our expectation of a pick-up in
execution. In Q3 FY10, Unitech reported the
weakest EBITDA margin of 24% as the company
accounted for increased construction cost on old
undelivered projects. While the impact of the cost
escalation on those projects will be seen during
3Q FY11, the impact will be limited as their share
of total revenue comes down. Hence, while we
expect a 1,200bp y-o-y EBITDA margin
expansion, in sequential terms we expect it to
come down 320bp, to 36%.
We expect profit growth to remain muted, at 5%,
on account of a higher tax rate of 28% during 3Q
FY11 (21% in 3Q FY10). Unitech is expected to
release volumes and sales data a few days before
the 3Q FY11 earnings release and we expect new
sales volumes of 2.5m sq ft, at an average
realisation of INR4,600 psf.
Investment summary
Shift of focus towards high end product will
hurt business growth. Unitech’s strategy to
refocus on the luxury/ high income residential
segment in our view will hurt business volumes.
Additionally, the company has focused on
liquidating existing inventory at higher prices by
reducing new launches. Hence, while realizations
might move up, they are unlikely to compensate
for the fall in sales value (Product * Price). We
lowered our volume estimates after Q2 FY11 for
FY12 by 41% and for FY13 by 45%. We believe
there is an elevated risk to our current volume
estimates as well, though we would look at
reviewing them after Q4 FY11.
Despite comfortable leverage, tight liquidity and
rising interest rates pose a risk to execution and
earnings. Unitech’s debt-equity position at 0.6x
remains comfortable. While the company needs to
refinance only INR1.2-1.3bn of debt during FY12
(20% of the outstanding debt), tight liquidity in the
system and the Indian central bank’s cautious view
on the property sector suggest adverse policy
measures could affect the sector. This, in our view,
could impact Unitech’s earnings growth through
increased borrowing cost and also affect execution in
the near to medium term.
What could change our view? Refocus on midincome housing. Unitech has a land bank of
c10,000 acres. Hence, we think the company
should change its strategy to focus on a build and
churn model to sustain cash flows and earnings
growth. This could be done through more new
project launches in the mid-income category.
With a very low land cost, Unitech is in a good
position to launch projects using a competitive
pricing strategy.
Key earnings changes
We have made marginal changes to our top line
growth to adjust for revenue mix changes. Our
EBITDA margin estimate is lowered by 60-80bps
for FY11-12 and c420bps in FY13, primarily due
to the increased construction cost factors for
project launches during FY12 and some revenue
mix changes. In line with this we cut our earnings
forecasts by c3-15% over FY11-13e (figure C.2).
Valuation
We calculate Unitech’s Net Asset Value (NAV)
using a discounted cash flow method based on its
real estate project realizations. We value Unitech on
a net asset value approach using discounted cash
flows of its real estate projects (WACC of 15%,
which includes COE of 15.7%, risk free rate of
8.0%, market risk premium of 5.5% and cost of debt
12%). We have lowered our target price to INR50
(INR87 earlier) to reflect our weak volume
estimates.
Our target price is derived using a sum-of-theparts valuation wherein we value the real estate
business at a 40% discount to its NAV of INR62
(from 10% earlier), Unitech Wireless at INR8 and
INR5 as terminal value to its business. At a 40%
discount to NAV, Unitech is in line with other
large sector peers, though lower than sector leader
DLF (30% discount to NAV). We believe the
NAV discount is justified given the company’s
business positioning and execution track record.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential loss of 12.2% (including prospective
dividend yield), which is within the Neutral band.
Thus we downgrade our rating on Unitech to
Underweight (V) from Neutral (V) earlier.
Risks
While we like the company’s business
strategy and land bank quality, execution on
its fresh sales of 16.6m sq ft (FY10) and old
undelivered projects of 17m sq ft is a key risk
to our valuation.
Improvement in demand leading to better than
anticipated volumes in the event of a property
price correction and a reasonably favourable
interest rate scenario.
No comments:
Post a Comment