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Unitech (UNTE.BO)
Reasonable on Valuations after the Fall but Overhang Remains
New Base NAV of Rs 85 vs Rs 113— Our new NAV adjusts for the
following: a) roll forward to Dec-11; b) built-in 50% discount to the telecom
business (vs earlier valuation) on the back of concerns; c) further delays to a
few projects; d) updated current prices and cost of construction; e) increased
cost of capital to 17.3% versus 13% earlier - this assumes debt costs at 12%,
long-term DE of 0.5, risk-free rate of ~8%, a market premium of 8% and tax
rate of 30%.
Reduce Target Price to Rs 51 — Based on the geographic mix of its
landbank and leverage requirements, we have assumed a 50% probability of
a 15% price cut - weighted average blended NAV/share comes to Rs 63. We
have increased the discount to 20% (vs 15% earlier) keeping in mind the
overhang of telecom and promoter share pledge news issues. Based on the
new methodology, we arrive at a target price of Rs 51. While this indicates an
upside of ~18%, we believe risks are high, given various issues surrounding
the company. We maintain our Hold recommendation for now.
Why we like DLF over Unitech — In our view, DLF scores over Unitech on
the following counts: a) a more city-centric land bank – recent plot sales
support our thesis on the same; b) good lease portfolio and strong track
record on leasing; c) annuity rental income of ~Rs. 16-17bn in DLF is a big
relative positive as well.
P/B analysis — Unitech currently trades at ~0.9x consensus 1-year forward
P/B as against a band of 0.6x – 10x 1-year forward P/B. The stock does look
attractive on valuations but multiple issues remain, which may limit upside in
the stock price in the near term.
Key drivers — a) better-than-expected execution; b) pick-up in presales and
leasing in UCP portfolio; c) Unitech Infra being valued up closer to demerger;
d) any positive newsflow on the telecom issue or the promoter share
pledging news.
Challenges/Risks — Unitech’s stock price has declined very sharply, partly
factoring in the negative newsflow around on the stock (telecom/promoter
share pledge issues/execution/other sectoral issues). Any further negative
news flow on the same counts could result in further downside for the stock.
Quants View − Unattractive
Unitech currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores, having been a resident there for
the past 12 months. Compared to its peers in the Real Estate sector, Unitech
fares worse on the valuation metric and on the momentum metric. Similarly,
compared to its peers in its home market of India, Unitech fares worse on the
valuation metric and on the momentum metric.
From a macro perspective, Unitech has a high Beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from small-cap
outperformance, tightening US credit spreads, falling commodity (ex-oil) prices,
falling EM yields, a weaker US dollar, and a weaker yen.
Unitech
Valuation
Our target price of Rs51 is based on a 20% discount to our Dec 11 blended
NAV of Rs63. Unitech has significant exposure to the NCR region. We believe
chances of price cuts are quite probable, given the price hikes the region has
seen since the last downturn. Hence, we have assigned 50% probability of
potential 15% price cuts to arrive at our TP. This is in line with our valuation
methodology for the sector. Our Dec-11E base NAV (ex-price cut) of Rs 85
assumes: a) development volume of ~440msf; b) increased cost of capital of
17.3%; c) cap-rates of 10-11%; d) a value of ~Rs6 per share for Unitech's
32.75% stake in the telecom venture; and e) a tax rate of 27%
Risks
We rate Unitech Medium Risk, in line with the risk rating flagged by our
quantitative risk rating system, which tracks 260-day historical share price
volatility. Upside risks to our target price include: 1) better-than-anticipated
response to the company's new project launches in the mid-income segment;
2) hotel, office and school/hospital plots are sold at substantially higher-thanexpected
prices; 3) potential corporate actions (UCP acquisition & Infra listing)
leading to value accretion and 4) release of pledged shares. Downside risks
would include: 1) delays in execution and 2) poor response to project launches;
and 3) telecom overhang.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech (UNTE.BO)
Reasonable on Valuations after the Fall but Overhang Remains
New Base NAV of Rs 85 vs Rs 113— Our new NAV adjusts for the
following: a) roll forward to Dec-11; b) built-in 50% discount to the telecom
business (vs earlier valuation) on the back of concerns; c) further delays to a
few projects; d) updated current prices and cost of construction; e) increased
cost of capital to 17.3% versus 13% earlier - this assumes debt costs at 12%,
long-term DE of 0.5, risk-free rate of ~8%, a market premium of 8% and tax
rate of 30%.
Reduce Target Price to Rs 51 — Based on the geographic mix of its
landbank and leverage requirements, we have assumed a 50% probability of
a 15% price cut - weighted average blended NAV/share comes to Rs 63. We
have increased the discount to 20% (vs 15% earlier) keeping in mind the
overhang of telecom and promoter share pledge news issues. Based on the
new methodology, we arrive at a target price of Rs 51. While this indicates an
upside of ~18%, we believe risks are high, given various issues surrounding
the company. We maintain our Hold recommendation for now.
Why we like DLF over Unitech — In our view, DLF scores over Unitech on
the following counts: a) a more city-centric land bank – recent plot sales
support our thesis on the same; b) good lease portfolio and strong track
record on leasing; c) annuity rental income of ~Rs. 16-17bn in DLF is a big
relative positive as well.
P/B analysis — Unitech currently trades at ~0.9x consensus 1-year forward
P/B as against a band of 0.6x – 10x 1-year forward P/B. The stock does look
attractive on valuations but multiple issues remain, which may limit upside in
the stock price in the near term.
Key drivers — a) better-than-expected execution; b) pick-up in presales and
leasing in UCP portfolio; c) Unitech Infra being valued up closer to demerger;
d) any positive newsflow on the telecom issue or the promoter share
pledging news.
Challenges/Risks — Unitech’s stock price has declined very sharply, partly
factoring in the negative newsflow around on the stock (telecom/promoter
share pledge issues/execution/other sectoral issues). Any further negative
news flow on the same counts could result in further downside for the stock.
Quants View − Unattractive
Unitech currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores, having been a resident there for
the past 12 months. Compared to its peers in the Real Estate sector, Unitech
fares worse on the valuation metric and on the momentum metric. Similarly,
compared to its peers in its home market of India, Unitech fares worse on the
valuation metric and on the momentum metric.
From a macro perspective, Unitech has a high Beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from small-cap
outperformance, tightening US credit spreads, falling commodity (ex-oil) prices,
falling EM yields, a weaker US dollar, and a weaker yen.
Unitech
Valuation
Our target price of Rs51 is based on a 20% discount to our Dec 11 blended
NAV of Rs63. Unitech has significant exposure to the NCR region. We believe
chances of price cuts are quite probable, given the price hikes the region has
seen since the last downturn. Hence, we have assigned 50% probability of
potential 15% price cuts to arrive at our TP. This is in line with our valuation
methodology for the sector. Our Dec-11E base NAV (ex-price cut) of Rs 85
assumes: a) development volume of ~440msf; b) increased cost of capital of
17.3%; c) cap-rates of 10-11%; d) a value of ~Rs6 per share for Unitech's
32.75% stake in the telecom venture; and e) a tax rate of 27%
Risks
We rate Unitech Medium Risk, in line with the risk rating flagged by our
quantitative risk rating system, which tracks 260-day historical share price
volatility. Upside risks to our target price include: 1) better-than-anticipated
response to the company's new project launches in the mid-income segment;
2) hotel, office and school/hospital plots are sold at substantially higher-thanexpected
prices; 3) potential corporate actions (UCP acquisition & Infra listing)
leading to value accretion and 4) release of pledged shares. Downside risks
would include: 1) delays in execution and 2) poor response to project launches;
and 3) telecom overhang.
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