JPMorgan: Unitech - Earnings miss, but net debt reduction is positive

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Unitech Ltd
Neutral
UNTE.BO, UT IN
Earnings miss, but net debt reduction is positive ....But does it really matter?


Unitech’s 3Q11 headline PAT had one negative – Adj. PAT of Rs1.5B, 31%
below estimates (revenue loss due to Commonwealth Games) – and one
positive – Net debt reduction of Rs5.5B Q/Q. Pre-sales and execution trends
were largely stable Q/Q. Adjusting for the QIPs/ warrant issues done in 2009,
UT is trading at ~Rs25, or below its distressed levels during the Lehman
crisis, with significantly better operating cash flows. However, the headline
financial/operational numbers would probably matter more if the stock were
trading on business fundamentals rather than telecom news flow. On the latter
we have no visibility, and this clearly reflects a major area of market concern.
We stay Neutral, and cut our Mar-12 PT to Rs45 (from Rs85), which
represents a 25% discount to our fair value estimate of Rs60/share.    
• PAT below estimates but net debt down sharply: Unitech’s 3Q FY11
adjusted PAT of Rs1.5B (-14% Q/Q/-15% Y/Y) was below estimates.
Revenues of Rs 6.6B (2% Q/Q, -15% Y/Y) were low, as the company lost
~1 month in October due to labor shortages during Commonwealth Games.
Margins on the core RE business remained largely stable at 46%. Tax rate
during the Q jumped to 40%, normalizing  the 9M run rate to 31%. During
the Q, the company delivered 1.1 msf, and ~90% of old projects (24 msf)
are in the final stages of construction/delivery. Net debt during the Q came
down by Rs5.5B given warrant conversions (Rs3.7B) and operating cash
flows. On-site work force is now back to peak levels of 22.5K.
• Pre-sales Rs50B (10msf) target, 67% achieved: Unitech is now working
on a 10msf (Rs50B) pre-sales target for the full year, Rs 33.5B (7.2 msf) of
which it achieved over 9M FY11. Average realizations now at Rs4650 psf
were largely stable Q/Q and are up 10% Y/Y. Despite modeling a rise in
input costs (and lower presales), we expect margins on the core RE business
to rise from hereon given 1) better pricing achieved over FY10/11, and 2)
the gradual removal of pre-2009 (low-margin) projects from the P&L.
• Estimate changes: We cut our earnings estimates for FY11 and FY12 by
30% and 18% respectively. An expected pick-up in revenue recognition
doesn’t seem to be flowing through. Against Rs50B of presales over
FY10/11 (ex Mumbai), the current annualized revenue run-rate is just Rs24B
(less than half), implying that if execution picks up, the revenue growth rate
can be very high, but this has proven to be elusive for the last three quarters.


3Q FY11 results – PAT below estimates but significant
reduction in net debt
Unitech’s 3Q FY11 adjusted PAT was Rs1.5B (-14% Q/Q/ -15% Y/Y), below our
estimate of Rs2.2B. Revenues at Rs6.6B (2% Q/Q, -15% Y/Y) were low as the
company lost ~1 month in Oct due to labor shortages during the  Commonwealth
Games. Margins on the core RE business remained largely stable at 46%. Tax rate
during the Q jumped to 40%, taking the 9M run rate to 31%. Net debt (at Rs46B)
came down meaningfully by Rs5.5B during the Q aided by warrant conversions
(Rs3.8B) and operational cash flows.


Sales update
Overall sales for Dec-Q stood at 2.2msf/Rs10.4B against Rs2msf/Rs10.1B of sales
achieved in Sep-Q. This takes the 9M FY11 bookings to 7.2msf/Rs33.5B (-40%
Y/Y) with NCR accounting for 70% of the overall sales. Average realization were
largely stable Q/Q but were up 10% Y/Y. Company is now guiding to 10msf/Rs50B
of pre sales for the full year of which it has achieved close to 67% over 9M FY11.