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Unitech Ltd (UT IN)
UW(V): Meeting update - FY13 focus on execution
Unitech expects to scale up execution by +30% during FY13,
while maintaining new projects momentum steady
Management guiding for EBITDA rebounding to 35% and
FCF generation of INR13bn in FY13
We maintain our conservative forecasts and await more
visibility; retain UW(V) with TP of INR20
Following are the key takeaways from our recent conversation with management.
Please find details inside the note:
1) We sense management is keen to focus on execution to complete 12m sq ft of undelivered
projects sold prior to FY09. Hence, in FY13, new launches will be flat at 8m sq ft
2) Unitech expects to make INR12-14bn of FCF during FY13 by spending INR12-13bn
on construction. (HSBCe of INR11bn of FCF, unchanged. Refer to page 3)
3) Management expects EBITDA margins in FY13 to rebound sharply to 32-35% against
a mere 16% in FY12. We remain less optimistic on low visibility and stay constant at 25%
4) Management expects improved funding environment to help it refinance its INR12bn
repayment liability during FY13. This will allow it to plough back FCF into scaling up
execution, although keeping absolute debt constant cINR50bn.
Overall, although management sounded upbeat on improving market demand and its
ability to scale up execution, we remain sceptical of Unitech’s ability to improve its
EBITDA margins due to its limited control on cost inflation.
Retain UW(V) with a TP of INR20. Our target price of INR20 values Unitech at a 60%
discount to its FY13e net asset value (NAV) of INR51. Our target price reflects our lower
visibility on Unitech’s execution scale up and our recent earnings estimate cut. At a 60%
NAV discount, we value Unitech at bottom end of the peer trading range (25-60%). 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.
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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech Ltd (UT IN)
UW(V): Meeting update - FY13 focus on execution
Unitech expects to scale up execution by +30% during FY13,
while maintaining new projects momentum steady
Management guiding for EBITDA rebounding to 35% and
FCF generation of INR13bn in FY13
We maintain our conservative forecasts and await more
visibility; retain UW(V) with TP of INR20
Following are the key takeaways from our recent conversation with management.
Please find details inside the note:
1) We sense management is keen to focus on execution to complete 12m sq ft of undelivered
projects sold prior to FY09. Hence, in FY13, new launches will be flat at 8m sq ft
2) Unitech expects to make INR12-14bn of FCF during FY13 by spending INR12-13bn
on construction. (HSBCe of INR11bn of FCF, unchanged. Refer to page 3)
3) Management expects EBITDA margins in FY13 to rebound sharply to 32-35% against
a mere 16% in FY12. We remain less optimistic on low visibility and stay constant at 25%
4) Management expects improved funding environment to help it refinance its INR12bn
repayment liability during FY13. This will allow it to plough back FCF into scaling up
execution, although keeping absolute debt constant cINR50bn.
Overall, although management sounded upbeat on improving market demand and its
ability to scale up execution, we remain sceptical of Unitech’s ability to improve its
EBITDA margins due to its limited control on cost inflation.
Retain UW(V) with a TP of INR20. Our target price of INR20 values Unitech at a 60%
discount to its FY13e net asset value (NAV) of INR51. Our target price reflects our lower
visibility on Unitech’s execution scale up and our recent earnings estimate cut. At a 60%
NAV discount, we value Unitech at bottom end of the peer trading range (25-60%). 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.
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.
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