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Unitech (UT)
Property
3QFY11 disappoints, but other issues at play. 3QFY11 revenue and PAT were 18%
and 29% below our estimate though debt decline qoq is positive. We suspend our
long-standing SELL rating and target price as the stock price is likely trading based on
news-flow beyond fundamentals until issues related to the telecom business and share
pledges are resolved. We highlight that UT trades at its previous cycle low adjusted for
equity issuances and our stress-case valuation is Rs49/share.
Second straight quarter of disappointing results
Unitech reported 3QFY11 EBITDA of Rs2.1 bn (-17% qoq, +15% yoy and 32% below estimate),
3QFY11 revenues at Rs6.6 bn (+2% qoq, -15% yoy and 18% below estimates) and adjusted PAT
of Rs1.5 bn (-14% qoq, +7% yoy and 29% below estimates). The tax rate increased to 40% in
3QFY11 versus 24.5% in 2QFY11 and 21.1% in 3QFY10. We believe this is due to a delay in
ramp-up in construction activity and also raw material cost escalations. 3QFY11 EBITDA margin
again highlighted the volatility in UT’s margins which declined 760 bps qoq to 31.6% versus
39.2% in 2QFY11 and our estimate of 38%. Unitech’s result press release mentions an
extraordinary non-operating loss of Rs376 mn due to disposal of a capital asset which we have
adjusted as an extraordinary expense. We are cutting our FY2012E/13E revenue and earnings
estimate by 20/18% and 23/18%, respectively.
Seven new projects launched; ambitious plan to launch 10 mn sq. ft in next three months
Unitech has launched seven new projects in YTD-CY2011 and intends to launch 10 mn sq. ft in
4QFY11. However, launches in 3QFY11 were subdued at 1.6 mn sq. ft and sales had a marginal
qoq uptick to 2.2 mn sq. ft. Unitech mentioned that leasing activity is picking up (similar stance as
peers) and that pricing is up 10% over 1HFY11.
Stock impacted by non-fundamentals; we suspend our SELL rating
We suspend our SELL rating and target price after a 37% stock price correction over the past
month. We highlight that our stress case NAV is Rs49/share assuming (1) zero value of the telecom
business, (2) increasing WACC to 18% and (3) increasing interest cost by 200 bps. We see two
factors which could over-ride fundamentals – (1) the ongoing Central Bureau of Investigation (CBI)
inquiry into 2G spectrum allocations (2) news-flow related to share pledges by UT promoters to
the extent of around 62-65% of their shareholding.
Debt decrease qoq is the biggest positive in 3QFY11 results
UT’s gross debt (excluding telecom debt of Rs5.2 bn) decreased to Rs58.5 bn versus Rs61.8
bn as of end-2QFY11. Net debt stands at 0.45X on a consolidated basis and 0.4X excluding
telecom debt.
Loans and advances are up by Rs1.1 bn qoq, indicating possible advances for land
acquisition. Sundry creditors remained steady at Rs10.4 bn while customer advances
increased to Rs 102 bn (Rs 95 bn in 1QFY11).
Price range of Rs36-49/share based on three different approaches
#1 Stress case NAV at Rs49/share
Our stressed case NAV is Rs49/share assuming (1) zero valuation for the telecom business
versus Rs30 bn which was valued at par with the valuation at which Uninor had invested in
the company, (2) increase WACC to 18% and interest cost by 200 bps and (3) factoring in
weak launches in 3QFY11 and the consequent delay in cash inflow.
#2 – Current book value is Rs44/share
Current book value is Rs44/share including telecom investments. Excluding the initial
investment made by Unitech to purchase telecom licenses, this would come down to
Rs36/share.
UT is trading at a P/B of 0.8X
Stress case vs. earlier estimates, Unitech, March fiscal year-ends
As on 31 Dec 2010
Shareholders equity (Rs mn) 115,190
No. of shares (mn) 2,616
Book value / share (Rs) 44
Price (Rs) 36
P/B (X) 0.8
Source: Company, Bloomberg, NSE, Kotak Institutional Equities
#3 – Adjusted low of the previous down-cycle (Rs36-42/share)
Unitech’s stock hit a low at Rs23/share in November 2008 and we adjust for (1) two QIPs in
FY2010 and (2) increase in promoter stake through warrants. Adjusting for this, the effective
low valuation comes to Rs36/share. This assumes that incremental cash raised has not been
deployed in value destructive projects. This also excludes retained earnings since 3QFY09 to
date. Accounting for these, value would increase to Rs42/share.
We suspend our SELL rating, stock trading on issues beyond fundamentals
The stock is down 37% over the past month and we are suspending our SELL rating as we
believe non-fundamental issues could be the primary determinant unless these are settled.
(1) Outcome of the 2G spectrum allocation investigation in which the CBI has mentioned
Unitech as one of the beneficiaries as per media reports
(2) Promoter pledges of 62-65% of their shareholding, which could trigger covenants in
the event of a further share price decline. We do not know at what stock prices these
could be triggered, however, given the 52% decline over the past 12M, we would
consider this to be an important concern. However, a recent issue where Unitech
promoters had outstanding NCD worth Rs18.9 bn with Unitech stock as the collateral
was resolved with Unitech promoters repaying the entire amount much before the
Delhi High Court mandated timelines.
Key events in 2G scam
Date
Jan-08 Pan India licences issued at 2001 fee of Rs16.6 bn
Oct-08 Unitech (Uninor) closes deal with Telenor
Nov-08 Swan, Unitech informs DoT os stake sale 6-7 times licence fee
Oct-09 CBI registers FIR citing criminal conspiracy and loss to exchequer in spectrum scam
Nov-10 CAG report finalised, says exchequer lost Rs1.76 trillion
Nov-10 A Raja (then Telecom minister) resigns
Feb-11 CBI names Uninor as one of the beneficiaries
Source: News sources, Kotak Institutional Equities
Lower actual launches but plans 10 mn sq. ft over next three months
Unitech launched 1.6 mn sq. ft in 3QFY11 (versus 1.8 mn sq. ft in 2QFY11 and 2.8 mn sq ft
in 1QFY11) and sold 2.2 mn sq ft in 3QFY11 ( versus 2 mn sq. ft in 2QFY11 and 3 mn sq ft
in 1QFY11). This takes the total area launched since March 2009 to 30.2 mn sq. ft
(excluding Mumbai).
Unitech mentioned that average realization in the residential segment has increased by 10%
in 3QFY11 over 1HFY11.
Out of the total area launched of 30.2 mn sq. ft, it has managed to sell 21.9 mn sq. ft upto
end-3QFY11. In 3QFY11, Unitech has sold 2.2 mn sq. ft (versus 2 mn sq. ft in 2QFY11 and 3
mn sq. ft in 1QFY11). Total sales value in 3QFY11 was Rs1 bn with Gurgaon and NOIDA
accounting for 66% of area sold. Residential area sold was 1.8 mn sq. ft while 0.4 mn sq. ft
was commercial and retail.
In 3QFY11, Unitech has delivered 1.1 mn sq. ft (versus 1 mn sq. ft in 2QFY11 and 0.9 in
1QFY11) across Gurgaon, Noida, Kolkata and Lucknow.
Unitech has close to 22,500 workers deployed across various construction sites which is an
all-time high.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech (UT)
Property
3QFY11 disappoints, but other issues at play. 3QFY11 revenue and PAT were 18%
and 29% below our estimate though debt decline qoq is positive. We suspend our
long-standing SELL rating and target price as the stock price is likely trading based on
news-flow beyond fundamentals until issues related to the telecom business and share
pledges are resolved. We highlight that UT trades at its previous cycle low adjusted for
equity issuances and our stress-case valuation is Rs49/share.
Second straight quarter of disappointing results
Unitech reported 3QFY11 EBITDA of Rs2.1 bn (-17% qoq, +15% yoy and 32% below estimate),
3QFY11 revenues at Rs6.6 bn (+2% qoq, -15% yoy and 18% below estimates) and adjusted PAT
of Rs1.5 bn (-14% qoq, +7% yoy and 29% below estimates). The tax rate increased to 40% in
3QFY11 versus 24.5% in 2QFY11 and 21.1% in 3QFY10. We believe this is due to a delay in
ramp-up in construction activity and also raw material cost escalations. 3QFY11 EBITDA margin
again highlighted the volatility in UT’s margins which declined 760 bps qoq to 31.6% versus
39.2% in 2QFY11 and our estimate of 38%. Unitech’s result press release mentions an
extraordinary non-operating loss of Rs376 mn due to disposal of a capital asset which we have
adjusted as an extraordinary expense. We are cutting our FY2012E/13E revenue and earnings
estimate by 20/18% and 23/18%, respectively.
Seven new projects launched; ambitious plan to launch 10 mn sq. ft in next three months
Unitech has launched seven new projects in YTD-CY2011 and intends to launch 10 mn sq. ft in
4QFY11. However, launches in 3QFY11 were subdued at 1.6 mn sq. ft and sales had a marginal
qoq uptick to 2.2 mn sq. ft. Unitech mentioned that leasing activity is picking up (similar stance as
peers) and that pricing is up 10% over 1HFY11.
Stock impacted by non-fundamentals; we suspend our SELL rating
We suspend our SELL rating and target price after a 37% stock price correction over the past
month. We highlight that our stress case NAV is Rs49/share assuming (1) zero value of the telecom
business, (2) increasing WACC to 18% and (3) increasing interest cost by 200 bps. We see two
factors which could over-ride fundamentals – (1) the ongoing Central Bureau of Investigation (CBI)
inquiry into 2G spectrum allocations (2) news-flow related to share pledges by UT promoters to
the extent of around 62-65% of their shareholding.
Debt decrease qoq is the biggest positive in 3QFY11 results
UT’s gross debt (excluding telecom debt of Rs5.2 bn) decreased to Rs58.5 bn versus Rs61.8
bn as of end-2QFY11. Net debt stands at 0.45X on a consolidated basis and 0.4X excluding
telecom debt.
Loans and advances are up by Rs1.1 bn qoq, indicating possible advances for land
acquisition. Sundry creditors remained steady at Rs10.4 bn while customer advances
increased to Rs 102 bn (Rs 95 bn in 1QFY11).
Price range of Rs36-49/share based on three different approaches
#1 Stress case NAV at Rs49/share
Our stressed case NAV is Rs49/share assuming (1) zero valuation for the telecom business
versus Rs30 bn which was valued at par with the valuation at which Uninor had invested in
the company, (2) increase WACC to 18% and interest cost by 200 bps and (3) factoring in
weak launches in 3QFY11 and the consequent delay in cash inflow.
#2 – Current book value is Rs44/share
Current book value is Rs44/share including telecom investments. Excluding the initial
investment made by Unitech to purchase telecom licenses, this would come down to
Rs36/share.
UT is trading at a P/B of 0.8X
Stress case vs. earlier estimates, Unitech, March fiscal year-ends
As on 31 Dec 2010
Shareholders equity (Rs mn) 115,190
No. of shares (mn) 2,616
Book value / share (Rs) 44
Price (Rs) 36
P/B (X) 0.8
Source: Company, Bloomberg, NSE, Kotak Institutional Equities
#3 – Adjusted low of the previous down-cycle (Rs36-42/share)
Unitech’s stock hit a low at Rs23/share in November 2008 and we adjust for (1) two QIPs in
FY2010 and (2) increase in promoter stake through warrants. Adjusting for this, the effective
low valuation comes to Rs36/share. This assumes that incremental cash raised has not been
deployed in value destructive projects. This also excludes retained earnings since 3QFY09 to
date. Accounting for these, value would increase to Rs42/share.
We suspend our SELL rating, stock trading on issues beyond fundamentals
The stock is down 37% over the past month and we are suspending our SELL rating as we
believe non-fundamental issues could be the primary determinant unless these are settled.
(1) Outcome of the 2G spectrum allocation investigation in which the CBI has mentioned
Unitech as one of the beneficiaries as per media reports
(2) Promoter pledges of 62-65% of their shareholding, which could trigger covenants in
the event of a further share price decline. We do not know at what stock prices these
could be triggered, however, given the 52% decline over the past 12M, we would
consider this to be an important concern. However, a recent issue where Unitech
promoters had outstanding NCD worth Rs18.9 bn with Unitech stock as the collateral
was resolved with Unitech promoters repaying the entire amount much before the
Delhi High Court mandated timelines.
Key events in 2G scam
Date
Jan-08 Pan India licences issued at 2001 fee of Rs16.6 bn
Oct-08 Unitech (Uninor) closes deal with Telenor
Nov-08 Swan, Unitech informs DoT os stake sale 6-7 times licence fee
Oct-09 CBI registers FIR citing criminal conspiracy and loss to exchequer in spectrum scam
Nov-10 CAG report finalised, says exchequer lost Rs1.76 trillion
Nov-10 A Raja (then Telecom minister) resigns
Feb-11 CBI names Uninor as one of the beneficiaries
Source: News sources, Kotak Institutional Equities
Lower actual launches but plans 10 mn sq. ft over next three months
Unitech launched 1.6 mn sq. ft in 3QFY11 (versus 1.8 mn sq. ft in 2QFY11 and 2.8 mn sq ft
in 1QFY11) and sold 2.2 mn sq ft in 3QFY11 ( versus 2 mn sq. ft in 2QFY11 and 3 mn sq ft
in 1QFY11). This takes the total area launched since March 2009 to 30.2 mn sq. ft
(excluding Mumbai).
Unitech mentioned that average realization in the residential segment has increased by 10%
in 3QFY11 over 1HFY11.
Out of the total area launched of 30.2 mn sq. ft, it has managed to sell 21.9 mn sq. ft upto
end-3QFY11. In 3QFY11, Unitech has sold 2.2 mn sq. ft (versus 2 mn sq. ft in 2QFY11 and 3
mn sq. ft in 1QFY11). Total sales value in 3QFY11 was Rs1 bn with Gurgaon and NOIDA
accounting for 66% of area sold. Residential area sold was 1.8 mn sq. ft while 0.4 mn sq. ft
was commercial and retail.
In 3QFY11, Unitech has delivered 1.1 mn sq. ft (versus 1 mn sq. ft in 2QFY11 and 0.9 in
1QFY11) across Gurgaon, Noida, Kolkata and Lucknow.
Unitech has close to 22,500 workers deployed across various construction sites which is an
all-time high.
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