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Unitech Ltd (UT IN)
Upgrade to OW(V): Risk-reward ratio now favourable
Q3 was a mixed bag: While earnings were c40% below HSBC
and street est., debt reduced reflecting improved cash flows
Stock has corrected c37% over the past month and is now
trading at 0.7x FY12e PB, close to past cycle bottom
Valuation now offers comfort. Upgrade to OW(V) with target
price of INR50 (unchanged)
Q3 FY11 was a mixed bag. Unitech’s reported earnings of INR1.1bn (-37% y-o-y) were
41% below HSBC est. and 44% below consensus. EBITDA margins at 31.6% expanded
770bps y-o-y, though were lower than our estimate of c36% as old projects with lower
margin contributed significantly during Q3. However, improved cash flows was a positive
surprise as net debt fell by cINR5.6bn and net debt to equity ratio fell to 0.45x from 0.53x in
Q2 FY11. The company also booked fresh volumes of c2.2m sq ft (HSBC est. 2.5m sq ft) at
INR4709psf (HSBC est. INR4650).
Stock price correction overdone. Unitech’s share price has fallen by c37% over the past
month and c56% over the past 3 months; it underperformed the Sensex by c49% over the past
3 months. The stock is now trading at 0.7x FY12e PB, which is a mere 20% above the last
downcycle. With net debt-equity of 0.45x, Unitech is not faced with balance sheet liquidity
issues as it was during FY09 (net debt-equity rose to 1.7x), and hence the steep price correction
seems unwarranted.
New launch volume data should act as price catalysts in the near-medium term. Unitech
has launched 7 new projects over the past 45 days and plans to accelerate the launch schedule
(10m sq ft) over the next 4 months. Improved business volumes from such new launches will
in our view act as share price catalysts in the near to medium term.
Upgrade to OW(V) with TP of INR50 (unchanged). We continue to value Unitech at a 50%
discount to our FY12e net asset value (NAV) along with INR8 for its telecom investments and
INR6 for terminal value. The stock in the past 12 months has traded in a P/NAV range of
+1%/-55%. Despite our negative sector outlook, we believe the risk-reward ratio post the steep
price correction is now favourable. We upgrade Unitech to OW(V) from UW(V) on valuation.
Stock price correction has been overdone
Unitech’s share price has fallen by c37% over the past month and c55% over the past 3 months; it has
underperformed the Sensex by c49% over the past 3 months. The stock is now trading at 0.7x FY12e PB,
which is a mere 20% above the last downcycle. A key reason for Unitech’s below-par share price
performance in the last business downcycle was its high balance sheet leverage, which exposed it to risk
of bankruptcy. However, with net debt-equity of 0.45x, Unitech is not faced with liquidity issues similar
to those in FY09 when net debt-equity rose to 1.7x. With very limited leverage and improving cash flows,
along with management’s prudent decision to avoid large land investments, a situation similar to 2009
seems unlikely. Hence, we believe the recent steep share price correction is unwarranted.
Upgrade to OW(V) with TP of INR50 (unchanged)
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 retain our target price at INR50. Our target price is derived using a sum-of-the
parts valuation wherein we value the real estate business at a 40% discount to NAV of INR62, Unitech
Wireless at INR8 and INR5 as terminal value for 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). Our
target price implies the stock will trade close to 1 standard deviation below its mean. (Mean at 16x
discount to NAV and -1std deviation at 41% discount to NAV.)
Ratings rationale
For Indian stocks, HSBC considers the average cost of equity to be 10.5%. A volatile Indian stock with a
potential return 10 percentage points either side of 10.5%, i.e., 0.5-20.5%, merits a Neutral rating. Since
the current potential return on the stock is greater than 20.5%, we upgrade to Overweight (V) from
Underweight (V).
Risks to our investment view
Weaker-than-expected project execution on fresh sales of 16.6m sq ft and old undelivered projects of
17 m sq ft is a key downside risk.
Lower than estimated volumes over FY11-13 and at a lower pricing is a risk to our valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech Ltd (UT IN)
Upgrade to OW(V): Risk-reward ratio now favourable
Q3 was a mixed bag: While earnings were c40% below HSBC
and street est., debt reduced reflecting improved cash flows
Stock has corrected c37% over the past month and is now
trading at 0.7x FY12e PB, close to past cycle bottom
Valuation now offers comfort. Upgrade to OW(V) with target
price of INR50 (unchanged)
Q3 FY11 was a mixed bag. Unitech’s reported earnings of INR1.1bn (-37% y-o-y) were
41% below HSBC est. and 44% below consensus. EBITDA margins at 31.6% expanded
770bps y-o-y, though were lower than our estimate of c36% as old projects with lower
margin contributed significantly during Q3. However, improved cash flows was a positive
surprise as net debt fell by cINR5.6bn and net debt to equity ratio fell to 0.45x from 0.53x in
Q2 FY11. The company also booked fresh volumes of c2.2m sq ft (HSBC est. 2.5m sq ft) at
INR4709psf (HSBC est. INR4650).
Stock price correction overdone. Unitech’s share price has fallen by c37% over the past
month and c56% over the past 3 months; it underperformed the Sensex by c49% over the past
3 months. The stock is now trading at 0.7x FY12e PB, which is a mere 20% above the last
downcycle. With net debt-equity of 0.45x, Unitech is not faced with balance sheet liquidity
issues as it was during FY09 (net debt-equity rose to 1.7x), and hence the steep price correction
seems unwarranted.
New launch volume data should act as price catalysts in the near-medium term. Unitech
has launched 7 new projects over the past 45 days and plans to accelerate the launch schedule
(10m sq ft) over the next 4 months. Improved business volumes from such new launches will
in our view act as share price catalysts in the near to medium term.
Upgrade to OW(V) with TP of INR50 (unchanged). We continue to value Unitech at a 50%
discount to our FY12e net asset value (NAV) along with INR8 for its telecom investments and
INR6 for terminal value. The stock in the past 12 months has traded in a P/NAV range of
+1%/-55%. Despite our negative sector outlook, we believe the risk-reward ratio post the steep
price correction is now favourable. We upgrade Unitech to OW(V) from UW(V) on valuation.
Stock price correction has been overdone
Unitech’s share price has fallen by c37% over the past month and c55% over the past 3 months; it has
underperformed the Sensex by c49% over the past 3 months. The stock is now trading at 0.7x FY12e PB,
which is a mere 20% above the last downcycle. A key reason for Unitech’s below-par share price
performance in the last business downcycle was its high balance sheet leverage, which exposed it to risk
of bankruptcy. However, with net debt-equity of 0.45x, Unitech is not faced with liquidity issues similar
to those in FY09 when net debt-equity rose to 1.7x. With very limited leverage and improving cash flows,
along with management’s prudent decision to avoid large land investments, a situation similar to 2009
seems unlikely. Hence, we believe the recent steep share price correction is unwarranted.
Upgrade to OW(V) with TP of INR50 (unchanged)
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 retain our target price at INR50. Our target price is derived using a sum-of-the
parts valuation wherein we value the real estate business at a 40% discount to NAV of INR62, Unitech
Wireless at INR8 and INR5 as terminal value for 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). Our
target price implies the stock will trade close to 1 standard deviation below its mean. (Mean at 16x
discount to NAV and -1std deviation at 41% discount to NAV.)
Ratings rationale
For Indian stocks, HSBC considers the average cost of equity to be 10.5%. A volatile Indian stock with a
potential return 10 percentage points either side of 10.5%, i.e., 0.5-20.5%, merits a Neutral rating. Since
the current potential return on the stock is greater than 20.5%, we upgrade to Overweight (V) from
Underweight (V).
Risks to our investment view
Weaker-than-expected project execution on fresh sales of 16.6m sq ft and old undelivered projects of
17 m sq ft is a key downside risk.
Lower than estimated volumes over FY11-13 and at a lower pricing is a risk to our valuations.
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