Unitech Ltd (UT IN) UW (V): From bad to worse  HSBC Research

Unitech Ltd (UT IN)
UW (V): From bad to worse
 4Q earnings were c97-98% below HSBCe and consensus as
execution and EBITDA margin disappoint once again
 A lack of new launches hurt contracted sales (-17% q-o-q);
we cut our earnings forecasts by 12-15% in FY13-14
 We retain our UW(V) with a revised TP of INR20 (from
INR25); we think any re-rating would need more visibility on
execution and new launches

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4Q earnings surprise. Unitech’s reported earnings of INR23m (-98% y-o-y) were 98%
below HSBCe and 97% below consensus. The weak performance was driven by: 1) slower
execution as sales of INR7.16bn (-32% y-o-y) were 23% below HSBCe; 2) an extraordinarily
low EBITDA margin of c5% (HSBCe of 28%) primarily as all its fringe businesses (25% of
sales) reported either a loss or sub-10% margins, while the real estate business reported a
low 17% margin owing to cost escalations; and 3) a higher tax rate (c94%).
Contracted sales were let down by the limited new project launches. Q4 contracted
sales at INR7.8bn (1.8m sq ft @ INR4,352psf) were 34% below HSBCe. Average realisation
on contracted sales was down by 22%. A key reason for lower-than-expected contracted
sales was the limited new launches of 0.6mn sq ft (-85% y-o-y and -47% q-o-q) during Q4.
We cut FY13-14e earnings by 18-20%. We expect Unitech’s execution to remain under
pressure as the backlog of slow execution and new launches during FY12 will exert
pressure on further execution scale-up during FY13-14. Consequently, we lower our sales
volumes expectation by 10-15% and earnings by 18-20% over FY13-14e.
Retain UW (V) with a revised TP of INR20 (INR25 earlier). Our revised target price
reflects lower visibility on Unitech’s execution scale-up and recent earnings cut. This
leads us to increase our target NAV discount from 53% (1 std deviation below mean)
earlier to 60% (12% below 1std deviation). At a 60% NAV discount, we value Unitech at
the bottom end of the peer trading range (25-60%). A combination of weak earnings, a
deteriorating business environment and lack of share price catalysts suggests to us that
Unitech may continue to trade at a lower valuation multiple.


Valuation and risks
Investment summary
A spate of weak quarterly results (five quarters in a row) has lowered visibility on core operating
performance. We believe the operating margin structure on Unitech’s development projects is far lower
than warranted, despite consistent selling price inflation in the market. This, coupled with potential
pressure on new sales volumes in a weak operating environment and a delayed execution cycle (12-18
months across project categories), exerts pressure on earnings and valuation. We expect Unitech to report
a modest c3% earnings CAGR over FY11-14. We look forward to seeing management’s focus on the
core real estate business improving after the 2G spectrum issue court trials are over. This, in our view,
could act as a share price catalyst over the next 12-18 months.
Retain UW (V) with a revised target price of INR20 (INR25 earlier)
We lower our target price to INR20 (INR25 earlier), which is primarily driven our revised lower earnings
forecasts and our increased NAV discount. We now value Unitech at a 60% discount (53% discount
before) to its FY13e net asset value (NAV) of INR51. At a 60% NAV discount, Unitech is valued at the
high end of the NAV discount range of 20-60% for its peer group. We do not include the value of its
telecom business in our target valuation, as we foresee limited visibility on the monetisation of Unitech’s
stake in the business. A combination of weak earnings, a deteriorating business environment and the lack
of share price catalysts suggests that Unitech may continue to trade at a lower valuation multiple.


Ratings rationale
Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and below
the hurdle rate for India stocks of 11%. Our new INR20 target price for Unitech (previously INR25) implies
a potential return of -6.6% (including a forecast dividend yield of 0.6%), below the Neutral band; therefore,
we retain our Underweight(V) rating. Potential return equals the percentage difference between the current
share price and the target price, including the forecast dividend yield when indicated.
Risks to our investment view
 The key upside risk is better-than-estimated execution improving its cash flow cycle.
 The key downside risk is the 2G spectrum allocation issue becoming protracted, which will likely
distract management’s focus.