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UBS Investment Research
Unitech
News flow a dampener; but attractive
News flow to dampen share price sentiment
We believe the arrest of Unitech’s MD in connection with the 2G investigation has raised
the risk of: 1) more controversy/penalties from 2G fallout; 2) increased differences with
Telenor on the telecom venture; and 3) margin calls on 68% of the pledged co-founder’s
holding. Although we think the 60% correction over the past month prices this in, we
believe weak sentiment will weigh on near-term share performance.
Prolonged overhang raises risk; we cut EPS estimates
With members of the co-founder family actively managing the real estate business, we
are not concerned from a management perspective. However, a prolonged negative
overhang on the co-founders could affect sentiment and slow pre-sales in H1 FY12.
Factoring this and a likely increase in funding costs in, we lower FY11E/12E/13E EPS
12%/28%/28%, respectively, to factor in slower execution.
Steps underway to boost the core real estate business
Unitech targets launching 10msf in H1 FY11, primarily affordable housing; it launched
14 projects in January-April 2011 with a number recording good pre-sales response.
Leasing momentum for its NCR projects has also improved. However, the pace of
construction and sustained pre-sales will be critical for cash flows and the negative
sentiment.
Valuation: lower price target from Rs58.00 to Rs52.00
With Unitech trading at a 58% discount to our base NAV of Rs86, a 38% discount to
our bear-case NAV of Rs52 and 0.9x P/BV in FY11E, we believe valuations are at
trough levels and offer a high risk-reward opportunity. We lower our price target to
Rs52.00, which is based on a 40% discount to our lower NAV estimate of Rs86.00,
factoring in a higher WACC of 17% (15% previously).
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.
Statement of Risk
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Unitech
News flow a dampener; but attractive
News flow to dampen share price sentiment
We believe the arrest of Unitech’s MD in connection with the 2G investigation has raised
the risk of: 1) more controversy/penalties from 2G fallout; 2) increased differences with
Telenor on the telecom venture; and 3) margin calls on 68% of the pledged co-founder’s
holding. Although we think the 60% correction over the past month prices this in, we
believe weak sentiment will weigh on near-term share performance.
Prolonged overhang raises risk; we cut EPS estimates
With members of the co-founder family actively managing the real estate business, we
are not concerned from a management perspective. However, a prolonged negative
overhang on the co-founders could affect sentiment and slow pre-sales in H1 FY12.
Factoring this and a likely increase in funding costs in, we lower FY11E/12E/13E EPS
12%/28%/28%, respectively, to factor in slower execution.
Steps underway to boost the core real estate business
Unitech targets launching 10msf in H1 FY11, primarily affordable housing; it launched
14 projects in January-April 2011 with a number recording good pre-sales response.
Leasing momentum for its NCR projects has also improved. However, the pace of
construction and sustained pre-sales will be critical for cash flows and the negative
sentiment.
Valuation: lower price target from Rs58.00 to Rs52.00
With Unitech trading at a 58% discount to our base NAV of Rs86, a 38% discount to
our bear-case NAV of Rs52 and 0.9x P/BV in FY11E, we believe valuations are at
trough levels and offer a high risk-reward opportunity. We lower our price target to
Rs52.00, which is based on a 40% discount to our lower NAV estimate of Rs86.00,
factoring in a higher WACC of 17% (15% previously).
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.
Statement of Risk
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
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