Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech
Reuters: UNTE.BO Bloomberg: UT IN
Execution risks, but in the
price; upgrading to Hold
While underperformance captures risks, the stock lacks near-term triggers
This sector trend-setter faces big challenges – execution risks on aggressive
launches and pre-sales since March 2009, and margin pressures on high inflation
and a higher proportion of low-margin pre-sales. These risks are aggravated in
non-Gurgaon locations, where more inventory is unsold. A poor FY11 (more so in
4Q margins) forces us to cut estimates and the target price. However, these risks
have largely been factored into the 10% underperformance since January 2009
and 17% underperformance in the past six months to sector; we upgrade to Hold.
Always a trend-setter in the sector
Unitech has long been a sector trend-setter– it is the oldest listed stock, the first
to chase land-banking, the only non-Mumbai player to foray into the Mumbai
redevelopment market, the first developer to foray into telecom, first large
developer to be significantly affected by liquidity woes in late 2008, and first to
raise significant equity from early CY09, aggressively launch projects (especially
mid-end residential) and propose a demerger of its non-residential verticals.
Execution is a key risk…
A huge number of pre-launches and pre-sales from early CY09 raise significant
execution concerns – in terms of getting approvals, construction and sales as per
promised quality standards – in the current era of high inflation and shortage of
materials (sand) and manpower. Rising unsold inventory in non-Gurgaon locations
should be a challenge amid sluggish demand. Despite significant delays, there is
a mismatch in office supply – what is constructed is not fully pre-leased and preleased
assets are still under construction.
…but in the price; cutting estimates but upgrading to Hold; risks
Given weak financials in FY11 (especially low 4Q margins), we cut estimates by
up to 50% and the target price by c.39% to INR 40. Unitech is among the worst
performing property stocks – underperforming BSEREAL by c.10% since January
2009 (~17% in the past six months). With c.15% upside potential, we upgrade to
Hold. Risks include execution, margins and macro environment vs. expectations
Investment thesis
Outlook
Amassing considerable land bank during FY06-09 without raising much equity, coupled with
the current tight financial markets, created bankruptcy woes for Unitech during the liquidity
crisis of late 2008. However, it was also the first developer to capitalise on the improving
liquidity scenario by rescheduling debt, raising USD900m QIP (in two tranches) through 47%
equity dilution and the conclusion of the sale of a few non-core assets. Thus, net gearing had
dropped from 197% to c.46% by March 2011. However, while demand seems to picking up,
we are concerned about execution given its (a) continual aggressive guidance, (b) substantial
ramp-up in pre-sales without a commensurate ramp-up in deliveries, (c) focus on affordable
housing in the current era of high inflation, (d) foray into infrastructure development (through
the proposed demerger of a division) and (e) telecom woes. However, with substantial share
price underperformance, we upgrade our rating on Unitech to Hold.
Valuation
While DCF-based gross asset value (GAV) is most appropriate, in our view, it still understates
the stock value of the developer as it excludes the terminal value.
Considering the tightening liquidity and high interest rates, we increase our WACC to 17.5%
(from 16% earlier), and with huge execution risks, increase the discount to DCF-based GAV
to 35% (10% earlier). We calculate Unitech's DCF-based GAV on flat prices and costs, land
bank developed in c.15 years, cap rate of c.10% and effective tax rate of c.25%. Thus, we
derive a GAV per share of INR 105 and adjusted GAV of INR 69 for the company’s real estate
division after the 35% discount. Excluding liabilities, the DCF for its real estate division is INR
40. With continued uncertainty, we value its telecom venture at NIL from INR 5 earlier. Thus,
our target price for Unitech is INR 40.
Risks
Risks include a stronger/weaker-than-expected performance on: (a) execution given its
aggressive pre-launches in the past two years, (b) margins (given its focus on mid-market
prices amid very high inflation), (c) macro environment (customer demand, interest rates,
liquidity in financial markets) and (d) refinancing debt.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech
Reuters: UNTE.BO Bloomberg: UT IN
Execution risks, but in the
price; upgrading to Hold
While underperformance captures risks, the stock lacks near-term triggers
This sector trend-setter faces big challenges – execution risks on aggressive
launches and pre-sales since March 2009, and margin pressures on high inflation
and a higher proportion of low-margin pre-sales. These risks are aggravated in
non-Gurgaon locations, where more inventory is unsold. A poor FY11 (more so in
4Q margins) forces us to cut estimates and the target price. However, these risks
have largely been factored into the 10% underperformance since January 2009
and 17% underperformance in the past six months to sector; we upgrade to Hold.
Always a trend-setter in the sector
Unitech has long been a sector trend-setter– it is the oldest listed stock, the first
to chase land-banking, the only non-Mumbai player to foray into the Mumbai
redevelopment market, the first developer to foray into telecom, first large
developer to be significantly affected by liquidity woes in late 2008, and first to
raise significant equity from early CY09, aggressively launch projects (especially
mid-end residential) and propose a demerger of its non-residential verticals.
Execution is a key risk…
A huge number of pre-launches and pre-sales from early CY09 raise significant
execution concerns – in terms of getting approvals, construction and sales as per
promised quality standards – in the current era of high inflation and shortage of
materials (sand) and manpower. Rising unsold inventory in non-Gurgaon locations
should be a challenge amid sluggish demand. Despite significant delays, there is
a mismatch in office supply – what is constructed is not fully pre-leased and preleased
assets are still under construction.
…but in the price; cutting estimates but upgrading to Hold; risks
Given weak financials in FY11 (especially low 4Q margins), we cut estimates by
up to 50% and the target price by c.39% to INR 40. Unitech is among the worst
performing property stocks – underperforming BSEREAL by c.10% since January
2009 (~17% in the past six months). With c.15% upside potential, we upgrade to
Hold. Risks include execution, margins and macro environment vs. expectations
Investment thesis
Outlook
Amassing considerable land bank during FY06-09 without raising much equity, coupled with
the current tight financial markets, created bankruptcy woes for Unitech during the liquidity
crisis of late 2008. However, it was also the first developer to capitalise on the improving
liquidity scenario by rescheduling debt, raising USD900m QIP (in two tranches) through 47%
equity dilution and the conclusion of the sale of a few non-core assets. Thus, net gearing had
dropped from 197% to c.46% by March 2011. However, while demand seems to picking up,
we are concerned about execution given its (a) continual aggressive guidance, (b) substantial
ramp-up in pre-sales without a commensurate ramp-up in deliveries, (c) focus on affordable
housing in the current era of high inflation, (d) foray into infrastructure development (through
the proposed demerger of a division) and (e) telecom woes. However, with substantial share
price underperformance, we upgrade our rating on Unitech to Hold.
Valuation
While DCF-based gross asset value (GAV) is most appropriate, in our view, it still understates
the stock value of the developer as it excludes the terminal value.
Considering the tightening liquidity and high interest rates, we increase our WACC to 17.5%
(from 16% earlier), and with huge execution risks, increase the discount to DCF-based GAV
to 35% (10% earlier). We calculate Unitech's DCF-based GAV on flat prices and costs, land
bank developed in c.15 years, cap rate of c.10% and effective tax rate of c.25%. Thus, we
derive a GAV per share of INR 105 and adjusted GAV of INR 69 for the company’s real estate
division after the 35% discount. Excluding liabilities, the DCF for its real estate division is INR
40. With continued uncertainty, we value its telecom venture at NIL from INR 5 earlier. Thus,
our target price for Unitech is INR 40.
Risks
Risks include a stronger/weaker-than-expected performance on: (a) execution given its
aggressive pre-launches in the past two years, (b) margins (given its focus on mid-market
prices amid very high inflation), (c) macro environment (customer demand, interest rates,
liquidity in financial markets) and (d) refinancing debt.
No comments:
Post a Comment