| Unitech Ltd (UT IN) Earnings remain depressed given legacy backlog. Pre-sales start to improve. Needs asset sales to improve cash position | Neutral Price Target: Rs14.00 PT End Date: 31 Mar 2015 | |
UT’s 4Q14 Adj. EPS Rs 0.2/Share (adj. for telco write down) was better than expected, driven by lower tax rate. Core RE EBITDA% at 4% remains under pressure as cost increases in legacy projects continue to pressure margins. Key positives were in terms of operations with pre-sales picking up for the second straight quarter (though FY14 total is a 5-year low) and almost 50% of total under construction area now moving to a near finishing state. Whilst we think there is substantial land value in the company (conservatively estimated at Rs100/share or 2.3x PB) vs. stock at 0.6x PB, it partly reflects cash pressures in the company given pressures from legacy projects and low level of overall launches. We estimate UT will need Rs30B of asset sales to improve its free cash position substantially. Any news-flow on this account, in our view, will be taken positively by the market.
· Low margin legacy gradually moving out of the book…but will still take 18 months to resolve fully: Unitech’s backlog of legacy projects has been reducing but not at a pace we will like. Of the total ~55msf of projects under construction, close to 47% is now near finishing stage. Focus remains on reducing under construction area by ramping up deliveries of near completion projects (additional 9msf). We believe once these projects move out of the order book, margins on core RE will materially inflate from current low levels of 4%. However, the current situation is likely to persist for at-least next 18 months.
· Pre-sales improve sequentially for second quarter but still far below desired levels: Of a weak base established in 2/3Q, pre-sales have improved Q/Q. However, FY14 total aggregate at Rs15B is still 4x below Rs 60B levels seen in 2009. UT’s core Gurgaon and Noida markets have been weak for a while and the company itself has not done any big new launches given its focus on reducing current backlog.
· Cash flows remain tight … Asset sales required to improve current situation: Our analysis of UT’s FY14 cash flows suggests that operating cash flow to interest cover remains extremely tight at the company. We think that the company will need to under take Rs20-30B of asset sales to improve its cash position substantially. The process could potentially get a boost if UT decides to participate in the UCP sale (offer made to buy out 100% of portfolio but not decided by UT/UCP yet) and is successful in monetizing some of its hotels / land holdings. Any such news, in our view, will be taken positively by the market.
· Net debt increase on lower inflows: UT’s net debt position has increased by Rs3B through FY14 likely on account of higher construction in lower inflows from legacy projects. Of the total debt of Rs63B core RE debt is at Rs 42B and remaining is secured against its commercial assets (UCP / Amusement Parks/ Hotels etc). Whilst Net D/E at 0.5x is not very high, cash cover is low and hence the requirement for asset sales.
Table 1: Q4 results summary
1QFY14
|
2QFY14
|
3QFY14
|
4QFY14
|
Q/Q (%)
|
Y/Y (%)
| |
Net Sales
|
5,726
|
5,958
|
7,317
|
10,333
|
41%
|
22%
|
Stock in trade
|
74
|
121
|
(87)
|
(88)
| ||
Real estate cost
|
(4,519)
|
(5,437)
|
(6,436)
|
(9,168)
|
42%
|
31%
|
Total RM Cost
|
(4,445)
|
(5,316)
|
(6,524)
|
(9,255)
|
42%
|
31%
|
Staff cost
|
(529)
|
(547)
|
(514)
|
(541)
|
5%
|
-12%
|
Total expenditure
|
(4,974)
|
(5,862)
|
(7,038)
|
(9,797)
|
39%
|
27%
|
EBITDA
|
752
|
95
|
279
|
536
|
92%
|
-33%
|
EBITDA %
|
13.1%
|
1.6%
|
3.8%
|
5.2%
|
1.4%
|
-4.2%
|
Other income
|
251
|
376
|
619
|
419
|
-32%
|
-51%
|
Interest
|
(57)
|
(50)
|
(281)
|
(377)
|
34%
|
2094%
|
Depreciation
|
(112)
|
(118)
|
(120)
|
(155)
|
30%
|
49%
|
PBT
|
834
|
303
|
498
|
423
|
-15%
|
-72%
|
Tax
|
(264)
|
(101)
|
(209)
|
4
|
NM
|
NM
|
Tax Rate
|
32%
|
33%
|
42%
|
-1%
| ||
Minority
|
1
|
1
|
1
|
88
| ||
Associates
|
55
|
54
|
38
|
0
| ||
PAT pre exceptional
|
626
|
257
|
329
|
515
|
57%
|
-52%
|
Reported PAT
|
626
|
257
|
329
|
(1,030)
|
NM
|
NM
|
Source: Company Reports
Investment Thesis
We think UT’s land parcel embed a lot of value (conservative value of Rs 70/share). However, cash flow mismatch in the business cannot be ignored. Pre-sales trends continue to remain weak; while legacy project portfolio has been a drag on the cash flows and financials. Given cash flow mismatch in the business, we think the company will need to shed approx Rs30B of assets to get to a comfortable level.
Valuation
Our Mar-15 PT of Rs14/share is based on 7x EV/cash EBITDA, in line with the sector average.
Risks to Rating and Price Target
Key upside risks include – a) Resolution of execution issues and better than expected pick up in execution/deliveries; b) Higher than expected contract bookings and launches; c) Large ticket asset sales.
Key downside risks include – a) Slow execution and delay in handing over old projects; b) Delay in new launches and weak pre sale trends and consequently continued cash flows mismatch.
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