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Unitech :At book value: A worthy risk
Telecom risk minimal, assuming no impact on UT's balance sheet
Key man risk reduced as UT is a family-run business
Cash flow risk appears low; core business at discount to BV
Upgrade to BUY: TP of INR57 based on 1.25x FY12E P/BV
High risk, fairly priced
Unitech (UT) has been hurt by news
reports regarding its involvement in the
India telecom 2G scam. Investor’s key
concerns include: 1) impact of liabilities
(fines, levies or spectrum cancellation) on
UT’s telecom business, 2) potential
prosecution of the promoter of UT
Wireless (not listed) if found guilty, and 3)
cash flow risk from real-estate project
cancellations.
Telecom write-off impact small
UT’s equity investment in its telecom
venture is some INR6.5b (INR2/share). A
key assumption here is that there will be
no recourse to UT’s balance sheet as a result of loans taken by the
telecom venture. We believe the balance sheet will be unaffected, as it is
common practice to provide loans on spectrum because telecom is a
recognised sector. Even if we subtract the entire debt on UT Wireless
balance sheet, we estimate the value erosion for UT would still be only
INR10/share (INR8 for debt and INR2 for investment).
Key man risk reduced as UT is a family-run business
Unitech is a family-owned and operated business that was created by
Ramesh Chandra, and currently is run by his sons, Sanjay Chandra (MD)
and Ajay Chandra (Joint MD). Although applying a harsh sentence to
Unitech Wireless’s promoters for their involvement in the 2G scandal may
hurt UT’s stock performance, we believe the situation would not be grave
unless there are some huge liabilities, which may impact UT’s balance
sheet. In such a dire situation, the property business will likely rely on
joint developments.
Cash flows and project execution in fair condition
Our channel checks with brokers in the National Capital Region (NCR)
and south India suggest that UT’s cash flow is still liquid. Project
execution has not suffered any significant lag and that operational cash
flow for the past nine months has been positive.
Core business at discount to book; Upgrade to BUY
Unitech’s core business is available at a discount to book value (even
after the telecom business write-off), which suggests that most of the
negatives are priced in. Thus, we upgrade the stock to BUY (from Hold),
but lower our TP to INR57 (from INR79) based on a target FY12E P/BV
(ex-telecom) of 1.25x (1.5x previously), in line with the historical throughcycle
average of global listed developers. Our estimates have been
changed to consider lower sales volume in FY12E. Key risks are
liabilities arising from the 2G scam, prosecution of 2G promoter, and UT’s
dependence on the investor-driven NCR market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech :At book value: A worthy risk
Telecom risk minimal, assuming no impact on UT's balance sheet
Key man risk reduced as UT is a family-run business
Cash flow risk appears low; core business at discount to BV
Upgrade to BUY: TP of INR57 based on 1.25x FY12E P/BV
High risk, fairly priced
Unitech (UT) has been hurt by news
reports regarding its involvement in the
India telecom 2G scam. Investor’s key
concerns include: 1) impact of liabilities
(fines, levies or spectrum cancellation) on
UT’s telecom business, 2) potential
prosecution of the promoter of UT
Wireless (not listed) if found guilty, and 3)
cash flow risk from real-estate project
cancellations.
Telecom write-off impact small
UT’s equity investment in its telecom
venture is some INR6.5b (INR2/share). A
key assumption here is that there will be
no recourse to UT’s balance sheet as a result of loans taken by the
telecom venture. We believe the balance sheet will be unaffected, as it is
common practice to provide loans on spectrum because telecom is a
recognised sector. Even if we subtract the entire debt on UT Wireless
balance sheet, we estimate the value erosion for UT would still be only
INR10/share (INR8 for debt and INR2 for investment).
Key man risk reduced as UT is a family-run business
Unitech is a family-owned and operated business that was created by
Ramesh Chandra, and currently is run by his sons, Sanjay Chandra (MD)
and Ajay Chandra (Joint MD). Although applying a harsh sentence to
Unitech Wireless’s promoters for their involvement in the 2G scandal may
hurt UT’s stock performance, we believe the situation would not be grave
unless there are some huge liabilities, which may impact UT’s balance
sheet. In such a dire situation, the property business will likely rely on
joint developments.
Cash flows and project execution in fair condition
Our channel checks with brokers in the National Capital Region (NCR)
and south India suggest that UT’s cash flow is still liquid. Project
execution has not suffered any significant lag and that operational cash
flow for the past nine months has been positive.
Core business at discount to book; Upgrade to BUY
Unitech’s core business is available at a discount to book value (even
after the telecom business write-off), which suggests that most of the
negatives are priced in. Thus, we upgrade the stock to BUY (from Hold),
but lower our TP to INR57 (from INR79) based on a target FY12E P/BV
(ex-telecom) of 1.25x (1.5x previously), in line with the historical throughcycle
average of global listed developers. Our estimates have been
changed to consider lower sales volume in FY12E. Key risks are
liabilities arising from the 2G scam, prosecution of 2G promoter, and UT’s
dependence on the investor-driven NCR market.
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