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UBS Investment Research
Unitech
Weak Qtr; but valuations at trough levels
„ Q3 below expectations
Revenues and earnings down 15% YoY and 37% YoY respectively. Key reasons –
1) one-time loss of Rs375mn on asset sale, and 2) lower sales, slower execution led
to lower revenue recognition. While we were 12-15% below consensus; we have
lowered FY11/12E/13E by 13%/16%/15% respectively factoring slower execution.
„ Operationally a lacklustre qtr, but Q4 plans and lower debt a silver lining
With pre-sales of 2.2msf (YTD 7.2msf), muted launches of 1.6msf and incremental
execution on new projects up only 1.2msf in Q3; mgmt lowered its FY11E sales
target to 10msf and Rs50bn (vs. 13msf with Rs60bn earlier). However, its plans to
launch 10msf in next 4-mths (though seems aggressive); and reduction in net-debt
by Rs5.5bn to Rs46.2bn (Net D/E 0.4x) was a silver lining.
„ News flow may remain an overhang
With stock having corrected 27% over last 15-days, concerns of 2G controversy on
new licensees and likely risk of margin call being triggered on pledged shares seem
largely priced in. However, we see news flow from 2G investigations on the
company gathering momentum amidst weak sentiments as a near-term overhang.
„ Valuation: Stock at deep disc to NAV & <1x P/BV; lower our PT to 58
The stock trades at 64% disc to reduced NAV of Rs96 factoring slower execution,
risk of delays in Mumbai and higher WACC. We see attractive risk reward, even as
we lower PT to Rs58 on 40% disc (vs. 30% earlier) to NAV to factor in risk of 2G
penalty. Valuations seem to be at trough levels with stock at 0.9x P/BV and at 40%
disc to bear-case NAV of Rs58 with no value ascribed for telecom investment.
Valuations at trough levels
While extreme negative sentiments and negative news flow on back on ongoing
2G investigations may remain a overhang on near-term stock performance; with
stock having corrected sharply by 27% over last 10-15 days and 60% in the last
3 months, most concerns are priced in at current levels, in our view. Further,
with stock valuations at trough levels (similar to credit crisis period) at 1) 64%
disc to our reduced base NAV of Rs96, 40% disc to our bear-case NAV of Rs58;
and 2) at 0.9x P/BV; we see attractive risk-reward and believe the stock can
offer good return potential over a 12-mth period to investors with a relatively
higher risk appetite.
2G license controversy seems largely priced in;
but news flow to remain a dampener
With stock already having corrected 60% from Oct’10, when controversy
arising from the 2G license allotments to new licensees like Unitech began, we
think large part of these concerns are priced in. Further with 1) Unitech
management continuing to reiterate to have abided by all policy guidelines, 2)
Unitech having brought in foreign direct investment (FDI) following its tie-up
with Telenor rather than selling their stake; 3) rolled out commercial services in
13 of the 22 circles – we believe the probability of large penalties is low.
However, if investigations result in believing Unitech misrepresented facts to
qualify for being allocated 2G spectrum, stock sentiment could worsen and
result in large negative financial implications - leading to further downside. That
said, with investigations on the company gathering momentum we see adverse
news flow amidst weak sentiments weigh on near-term stock performance.
We lower our NAV to Rs96 and PT to Rs58
We are lowering our NAV/share estimate to Rs96 and our price target to Rs58
based on a higher 40% discount to NAV. Our lower NAV estimate factors in
slower execution, risk of delay on its Mumbai ‘Golibar’ project, and likely
higher cost of capital (from 13% to 15%) in a tightening funding environment
with 2G investigations underway and high pledged equity. Our NAV does not
value Unitech’s telecom business (Rs 12/share). This apart, we have increased
our discount to NAV to 40% (vs. 30% earlier) largely to incorporate risks from
2G investigations and weak sentiments in current environment. Other NAV
assumption ascribe 78% value to company’s residential portfolio, while
commercial assets (including UCP investments) contribute 22%; other
assumptions being as under.
Table 2: NAV assumptions
Price escalation nil
Cost of capital 15%
Tax rate 25%
Devt volume (msf) 395
Execution delay 1-2 years
Source: UBS estimates
Stock at 40% disc to bear-case NAV
With the stock trading at a 40% discount to our bear case NAV of Rs58 that
factors 1) five-year development visibility (80msf, 38% of NAV), 2) no value
for telecom exposure, and 3) undeveloped land reserves (62% of NAV); we
foresee stock valuations at trough levels. Our bull case builds in 10% higher
prices, Rs12/share for telecom investment, faster execution cycle, lower debt
levels, and higher value for its telecom investments. We believe this provides a
good perspective on downside risks and upside potential to NAVs.
Lacklustre Q3
Revenues declined 15% YoY to Rs 6,598 mn (+2% QoQ) lower than UBSe &
Street expectations. EBITDA margins were below our expectations at 32%. Net
Profit was impacted by a one-time capital asset disposal loss of Rs 357 mn
partially driving 37% YoY lower to Rs 1,114 mn. EBITDA grew 12% YoY to
Rs 2,088 million. We believe the key reasons for the variance to our estimates
were – 1) one-time loss of Rs375mn on asset sale, and 2) lower sales, slower
execution led to lower revenue recognition.
Change in Estimates
We lower our FY11E\12E\13E estimates by 13%/16%/15% respectively to
factor relatively weak quarter and slower execution on post Mar’09 launches.
Operational Analysis
With pre-sales of 2.2msf generating Rs 10.36bn (YTD 7.2msf) generating Rs
33bn, muted launches of 1.6msf and incremental execution on new projects up
only 1.2msf in Q3; mgmt lowered its FY11E sales target to 10msf and Rs50bn
(vs. 13msf with Rs60bn earlier)
Key Risks
We believe the key risks to Unitech are: 1) Severer than expected penalty on
Unitech for misrepresentation of facts to obtain license in 2008. 2) Slowing
fundamentals – muted pre-sales and slower than expected ramp-up in
construction in 2H would reduce cashflows and stress Unitech’s liquidity, all
being sentiment dampeners for the stock.
Q Unitech
Unitech, 74%-owned by the Chandra family, is one of India's largest and most
diversified real estate companies. It is a leading developer of residential
apartments, commercial/IT parks, and retail malls. Unitech holds a pan-India
telecom licence; it has sold a 60% stake in this venture to Telenor, which is
based in Norway.
Q Statement of Risk
Key risks to Unitech include exposure to telecom business and rising interest
rates and legal/regulatory risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Unitech
Weak Qtr; but valuations at trough levels
„ Q3 below expectations
Revenues and earnings down 15% YoY and 37% YoY respectively. Key reasons –
1) one-time loss of Rs375mn on asset sale, and 2) lower sales, slower execution led
to lower revenue recognition. While we were 12-15% below consensus; we have
lowered FY11/12E/13E by 13%/16%/15% respectively factoring slower execution.
„ Operationally a lacklustre qtr, but Q4 plans and lower debt a silver lining
With pre-sales of 2.2msf (YTD 7.2msf), muted launches of 1.6msf and incremental
execution on new projects up only 1.2msf in Q3; mgmt lowered its FY11E sales
target to 10msf and Rs50bn (vs. 13msf with Rs60bn earlier). However, its plans to
launch 10msf in next 4-mths (though seems aggressive); and reduction in net-debt
by Rs5.5bn to Rs46.2bn (Net D/E 0.4x) was a silver lining.
„ News flow may remain an overhang
With stock having corrected 27% over last 15-days, concerns of 2G controversy on
new licensees and likely risk of margin call being triggered on pledged shares seem
largely priced in. However, we see news flow from 2G investigations on the
company gathering momentum amidst weak sentiments as a near-term overhang.
„ Valuation: Stock at deep disc to NAV & <1x P/BV; lower our PT to 58
The stock trades at 64% disc to reduced NAV of Rs96 factoring slower execution,
risk of delays in Mumbai and higher WACC. We see attractive risk reward, even as
we lower PT to Rs58 on 40% disc (vs. 30% earlier) to NAV to factor in risk of 2G
penalty. Valuations seem to be at trough levels with stock at 0.9x P/BV and at 40%
disc to bear-case NAV of Rs58 with no value ascribed for telecom investment.
Valuations at trough levels
While extreme negative sentiments and negative news flow on back on ongoing
2G investigations may remain a overhang on near-term stock performance; with
stock having corrected sharply by 27% over last 10-15 days and 60% in the last
3 months, most concerns are priced in at current levels, in our view. Further,
with stock valuations at trough levels (similar to credit crisis period) at 1) 64%
disc to our reduced base NAV of Rs96, 40% disc to our bear-case NAV of Rs58;
and 2) at 0.9x P/BV; we see attractive risk-reward and believe the stock can
offer good return potential over a 12-mth period to investors with a relatively
higher risk appetite.
2G license controversy seems largely priced in;
but news flow to remain a dampener
With stock already having corrected 60% from Oct’10, when controversy
arising from the 2G license allotments to new licensees like Unitech began, we
think large part of these concerns are priced in. Further with 1) Unitech
management continuing to reiterate to have abided by all policy guidelines, 2)
Unitech having brought in foreign direct investment (FDI) following its tie-up
with Telenor rather than selling their stake; 3) rolled out commercial services in
13 of the 22 circles – we believe the probability of large penalties is low.
However, if investigations result in believing Unitech misrepresented facts to
qualify for being allocated 2G spectrum, stock sentiment could worsen and
result in large negative financial implications - leading to further downside. That
said, with investigations on the company gathering momentum we see adverse
news flow amidst weak sentiments weigh on near-term stock performance.
We lower our NAV to Rs96 and PT to Rs58
We are lowering our NAV/share estimate to Rs96 and our price target to Rs58
based on a higher 40% discount to NAV. Our lower NAV estimate factors in
slower execution, risk of delay on its Mumbai ‘Golibar’ project, and likely
higher cost of capital (from 13% to 15%) in a tightening funding environment
with 2G investigations underway and high pledged equity. Our NAV does not
value Unitech’s telecom business (Rs 12/share). This apart, we have increased
our discount to NAV to 40% (vs. 30% earlier) largely to incorporate risks from
2G investigations and weak sentiments in current environment. Other NAV
assumption ascribe 78% value to company’s residential portfolio, while
commercial assets (including UCP investments) contribute 22%; other
assumptions being as under.
Table 2: NAV assumptions
Price escalation nil
Cost of capital 15%
Tax rate 25%
Devt volume (msf) 395
Execution delay 1-2 years
Source: UBS estimates
Stock at 40% disc to bear-case NAV
With the stock trading at a 40% discount to our bear case NAV of Rs58 that
factors 1) five-year development visibility (80msf, 38% of NAV), 2) no value
for telecom exposure, and 3) undeveloped land reserves (62% of NAV); we
foresee stock valuations at trough levels. Our bull case builds in 10% higher
prices, Rs12/share for telecom investment, faster execution cycle, lower debt
levels, and higher value for its telecom investments. We believe this provides a
good perspective on downside risks and upside potential to NAVs.
Lacklustre Q3
Revenues declined 15% YoY to Rs 6,598 mn (+2% QoQ) lower than UBSe &
Street expectations. EBITDA margins were below our expectations at 32%. Net
Profit was impacted by a one-time capital asset disposal loss of Rs 357 mn
partially driving 37% YoY lower to Rs 1,114 mn. EBITDA grew 12% YoY to
Rs 2,088 million. We believe the key reasons for the variance to our estimates
were – 1) one-time loss of Rs375mn on asset sale, and 2) lower sales, slower
execution led to lower revenue recognition.
Change in Estimates
We lower our FY11E\12E\13E estimates by 13%/16%/15% respectively to
factor relatively weak quarter and slower execution on post Mar’09 launches.
Operational Analysis
With pre-sales of 2.2msf generating Rs 10.36bn (YTD 7.2msf) generating Rs
33bn, muted launches of 1.6msf and incremental execution on new projects up
only 1.2msf in Q3; mgmt lowered its FY11E sales target to 10msf and Rs50bn
(vs. 13msf with Rs60bn earlier)
Key Risks
We believe the key risks to Unitech are: 1) Severer than expected penalty on
Unitech for misrepresentation of facts to obtain license in 2008. 2) Slowing
fundamentals – muted pre-sales and slower than expected ramp-up in
construction in 2H would reduce cashflows and stress Unitech’s liquidity, all
being sentiment dampeners for the stock.
Q Unitech
Unitech, 74%-owned by the Chandra family, is one of India's largest and most
diversified real estate companies. It is a leading developer of residential
apartments, commercial/IT parks, and retail malls. Unitech holds a pan-India
telecom licence; it has sold a 60% stake in this venture to Telenor, which is
based in Norway.
Q Statement of Risk
Key risks to Unitech include exposure to telecom business and rising interest
rates and legal/regulatory risks.
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