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Unitech (UNTE.BO)
Launches on Track; Execution a Little Slow
We spoke to Unitech management to take stock of key updates so far in Q2-FY12. It is
encouraging to see company’s operational performance is largely on track, despite a
challenging macro environment and promoter-related issues. Having said that, we think
financially FY12 will be a year largely similar to FY11- execution is slow and margins
are strained, given inflationary and funding pressures.
Launch target of ~10msf by Sept-11 will be achieved — Management seemed
confident of making it to the ~10msf launch guidance by Sept-11. Further to the ~7msf
launched up to Jun-11, new projects have been launched in Gurgaon and Chennai. A
planned pipeline is in place for the upcoming festive season.
Resi pricing growth has moderated — Company mentioned that prices are rising
across most locations, though at a slower rate (~10-12% annualized) in their key
operating segment (mid-income). Chennai prices could see more upsides.
Management feels that there is no scope for price cuts in the Gurgaon market now.
Leasing biz yet to feel the heat of global macro woes — Leasing has been quite
strong the last 1-1.5 years (leased ~3.0msf) and global macro worries have not yet
affected business. The company looks to maintain the leasing runrate of 0.5-0.75msf
/quarter. Rentals have gone up 15-20% in Gurgaon; Noida and Kolkata remain steady.
Deleveraging on the cards — Debt to the tune of ~Rs 10bn is due in FY12. So far in
1HFY12, repayments have been funded through internal cash flows, as banks have
been wary of refinancing. Overall Unitech is looking to reduce debt by ~10-15% in
FY12. Average cost of debt has gone up to ~13.8-14% (up 175-200bps since last year).
Cut Estimates; Maintain Hold — We build in higher construction spends, further
moderation in execution schedule, higher cost of debt and incorporate the FY11 annual
report. This results in reduced TP of Rs 32 and ~18-23% cut in profit estimates. We
believe debt refinancing is critical as it will free up internal cash flows to fast track
execution. Key risks: Execution pace, pricing and changes in macro environment
Key Takeaways from our Conversation with
Management
Update on Launches: Management affirmed that it will achieve the ~10.0msf
launch target by Sept-11. Between Jan-June-11, the company had launched
7.5msf and so far in Q2 it has launched projects in Chennai and Gurgaon.
– Anthea (Wild Flower Country), was launched in Sector 70 Gurgaon. Phase-1
of 300-350 units has been sold out and Phase-II of another 300 units is getting
sold- so far 100-150 has been absorbed. Average pricing is ~Rs 5500/sf.
– Crest View (Wild Flower Country), was launched in Sector 70 Gurgaon. It is a
relatively new launch. Prop Equity data suggests that of the 450 units up for
sale, ~40% has been sold. Average pricing is ~Rs 5000/sf.
– With the auspicious season coming up, company has a planned launch
pipeline in place. One of those projects is in Gurgaon and its approvals have
come in.
Update on pricing: The company highlighted that in its mainstay operating
segment (i.e. mid-income housing), prices have been rising across most
locations though at a moderated pace now (~10-12% annualized). While NCR
and Kolkata should see steady performance, Chennai prices could see more
upside. Also, there is no scope currently for any price cuts in the Gurgaon
market.
Update on leasing business: The company mentioned that leasing has been
quite strong over the past 1-1.5 years for them (leased ~3.0msf). So far global
macro worries have not yet affected business. It is looking to maintain the leasing
runrate of 0.5-0.75msf /quarter. Rentals have gone up 15-20% in Gurgaon (from
Rs 50-55.sf to Rs 60-65/sf) whereas Noida and Kolkata remain steady (in mid
30s). Unitech is expected to garner ~Rs 1.5bn rental income in FY12.
Deleveraging Update: Of the total ~Rs 59bn debt, ~Rs 10bn is due for
repayment in FY12; company had repaid ~Rs 2.0bn in Q1.
– Management mentioned that, so far in 1HFY12, repayments have been
funded through internal cash flows, as banks have been wary of refinancing.
– There is no specific asset sale plan in place for debt repayment, which will
largely be funded by internal cash accruals.
– Overall Unitech is looking to reduce debt by ~10-15% in FY12 and some
negotiations are on for refinancing part of the debt due this year.
– Average cost of debt has gone up to ~13.8-14%, up 175-200bps since last
year.
Operational challenges: Inflationary pressures are high and as a result
construction costs have gone by 10-20% since 2009. This uptrend continues
whereas pricing appreciation is yet to flow through P/L. Labour availability is a
challenge, given policies like NREGA have reduced supply of immigrant labour.
Hence, wages have also gone up.
Reduce Avg NAV/TP to Rs 39/32; Maintain Hold
We have revisited our assumptions/estimates based on FY11 annual report, Q1
performance and updates received from company management. While we roll
forward to Sept-12, we conservatively build in (1) higher construction spends (2)
further moderation in execution schedule (3) increase in cap rates (4) higher cost of
debt and (5) higher effective tax.
We maintain our valuation methodology of assuming 50% probability of 15% price
cut scenario to arrive at our Average Blended NAV of Rs 39. Our target price of Rs
32 (vs Rs 40 earlier) is based on 20% discount to Avg NAV.
While operational performance (in terms of launches/sales/leasing), we believe the
stock will remain sensitive to news flow (particularly around the telecom issues).
Maintain Hold.
Figure 2. Unitech Base NAV Summary (in Rs Millions)
Gross NAV Residential 336,788
Gross NAV Non-Residential 94,136
Total Gross NAV 430,924
Less: Amt outstanding for land 23,430
Less: Tax @ 28% 114,098
Less: Debt outstanding 56,470
Less: Customer Advances 106,860
Add: Stake in Telecom
Business
14,878
Add: UCP Leased Assets Value 5,250
Add: Cash 3,170
Net NAV 153,363
No. of Shares O/S 2,616
NAV / share (Rs) 59
Source: Citi Investment Research and Analysis
Changes to estimates
We have moderated our assumptions on operating margins and the execution
schedule based on the current environment, Q1 performance and updates received
from company management. This has resulted in changes in the top line (-12%/-
13% for FY12/13E) but a more significant change at EBITDA level (-18/-23% for
FY12/13E). We have also increased other income assumptions. Overall, PAT
estimates have been cut by 18%/23% for FY12/13.
Unitech
Company description
Unitech is one of India's largest, most diversified real estate developers with an
emerging pan-India presence. It enjoys leadership in the markets of NCR and
Kolkata. Its core strengths of land acquisition, reputation in building townships and
relationships with governments and customers have enabled it to build a diversified
portfolio. Unitech has a landbank of ~8,000 acres with total saleable area of ~440m
sq ft spread over Chennai, NCR, Kolkata. Residential projects account for ~80% of
the landbank and balance in commercial (including IT Parks), retail and hotels.
Unitech Group has diversified into telecoms through a 33% stake in Uninor and also
has a small presence in power transmission, prefabricated construction, paving
blocks and ready mix concrete. The promoter family holds a ~48% stake in the
company.
Investment strategy
We rate Unitech Hold/Medium Risk (2M) with a target price of Rs32. The equity
raisings (incl. warrants) and non-core asset sales post downturn have eased a nearterm
liquidity crunch and leverage concerns. Net D/E is now comfortable at 0.46x.
Further, an encouraging response to the company's new launches, relative pick-up
in construction of its projects (both past and new) and leasing momentum in UCP
assets make us believe that business is looking up. Going forward, a further pick-up
in leasing and execution, and likely corporate actions in the form of UCP acquisition
and the listing of its de-merged Infra entity, could act as potential catalysts.
Valuation
Our target price of Rs 32 is based on a 20% discount to our Sept 12 blended NAV
of Rs 39. Unitech has significant exposure to the NCR region. We believe chances
of price cuts are quite probable, given the price hikes the region has seen since the
last downturn. Hence, we have assigned 50% probability of potential 15% price cuts
to arrive at our TP. This is in line with our valuation methodology for the sector. Our
Sept-12E base NAV (ex-price cut) of Rs 59 assumes: a) development volume of
~440-450msf; b) cost of capital of 17.1%; c) cap-rates of 11-12%; d) value of
~Rs6/share for 32.75% stake in the telecom venture; and e) a tax rate of 28%.
Risks
We rate Unitech Medium Risk. Our quantitative risk-rating system assigns Unitech a
High Risk rating, but we believe a Medium Risk rating is justified given its relative
pick-up in launches/leasing momentum, launches/sales track record seen in last few
quarters and relatively comfortable Net D/E. Upside risks to our target price include:
1) better-than-anticipated response to the company's new project launches in the
mid-income segment; 2) hotel, office and school/hospital plots are sold at
substantially higher-than-expected prices; 3) potential corporate actions (UCP
acquisition & Infra listing) leading to value accretion and 4) release of pledged
shares. Downside risks would include: 1) delays in execution 2) poor response to
project launches; and 3) telecom overhang.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unitech (UNTE.BO)
Launches on Track; Execution a Little Slow
We spoke to Unitech management to take stock of key updates so far in Q2-FY12. It is
encouraging to see company’s operational performance is largely on track, despite a
challenging macro environment and promoter-related issues. Having said that, we think
financially FY12 will be a year largely similar to FY11- execution is slow and margins
are strained, given inflationary and funding pressures.
Launch target of ~10msf by Sept-11 will be achieved — Management seemed
confident of making it to the ~10msf launch guidance by Sept-11. Further to the ~7msf
launched up to Jun-11, new projects have been launched in Gurgaon and Chennai. A
planned pipeline is in place for the upcoming festive season.
Resi pricing growth has moderated — Company mentioned that prices are rising
across most locations, though at a slower rate (~10-12% annualized) in their key
operating segment (mid-income). Chennai prices could see more upsides.
Management feels that there is no scope for price cuts in the Gurgaon market now.
Leasing biz yet to feel the heat of global macro woes — Leasing has been quite
strong the last 1-1.5 years (leased ~3.0msf) and global macro worries have not yet
affected business. The company looks to maintain the leasing runrate of 0.5-0.75msf
/quarter. Rentals have gone up 15-20% in Gurgaon; Noida and Kolkata remain steady.
Deleveraging on the cards — Debt to the tune of ~Rs 10bn is due in FY12. So far in
1HFY12, repayments have been funded through internal cash flows, as banks have
been wary of refinancing. Overall Unitech is looking to reduce debt by ~10-15% in
FY12. Average cost of debt has gone up to ~13.8-14% (up 175-200bps since last year).
Cut Estimates; Maintain Hold — We build in higher construction spends, further
moderation in execution schedule, higher cost of debt and incorporate the FY11 annual
report. This results in reduced TP of Rs 32 and ~18-23% cut in profit estimates. We
believe debt refinancing is critical as it will free up internal cash flows to fast track
execution. Key risks: Execution pace, pricing and changes in macro environment
Key Takeaways from our Conversation with
Management
Update on Launches: Management affirmed that it will achieve the ~10.0msf
launch target by Sept-11. Between Jan-June-11, the company had launched
7.5msf and so far in Q2 it has launched projects in Chennai and Gurgaon.
– Anthea (Wild Flower Country), was launched in Sector 70 Gurgaon. Phase-1
of 300-350 units has been sold out and Phase-II of another 300 units is getting
sold- so far 100-150 has been absorbed. Average pricing is ~Rs 5500/sf.
– Crest View (Wild Flower Country), was launched in Sector 70 Gurgaon. It is a
relatively new launch. Prop Equity data suggests that of the 450 units up for
sale, ~40% has been sold. Average pricing is ~Rs 5000/sf.
– With the auspicious season coming up, company has a planned launch
pipeline in place. One of those projects is in Gurgaon and its approvals have
come in.
Update on pricing: The company highlighted that in its mainstay operating
segment (i.e. mid-income housing), prices have been rising across most
locations though at a moderated pace now (~10-12% annualized). While NCR
and Kolkata should see steady performance, Chennai prices could see more
upside. Also, there is no scope currently for any price cuts in the Gurgaon
market.
Update on leasing business: The company mentioned that leasing has been
quite strong over the past 1-1.5 years for them (leased ~3.0msf). So far global
macro worries have not yet affected business. It is looking to maintain the leasing
runrate of 0.5-0.75msf /quarter. Rentals have gone up 15-20% in Gurgaon (from
Rs 50-55.sf to Rs 60-65/sf) whereas Noida and Kolkata remain steady (in mid
30s). Unitech is expected to garner ~Rs 1.5bn rental income in FY12.
Deleveraging Update: Of the total ~Rs 59bn debt, ~Rs 10bn is due for
repayment in FY12; company had repaid ~Rs 2.0bn in Q1.
– Management mentioned that, so far in 1HFY12, repayments have been
funded through internal cash flows, as banks have been wary of refinancing.
– There is no specific asset sale plan in place for debt repayment, which will
largely be funded by internal cash accruals.
– Overall Unitech is looking to reduce debt by ~10-15% in FY12 and some
negotiations are on for refinancing part of the debt due this year.
– Average cost of debt has gone up to ~13.8-14%, up 175-200bps since last
year.
Operational challenges: Inflationary pressures are high and as a result
construction costs have gone by 10-20% since 2009. This uptrend continues
whereas pricing appreciation is yet to flow through P/L. Labour availability is a
challenge, given policies like NREGA have reduced supply of immigrant labour.
Hence, wages have also gone up.
Reduce Avg NAV/TP to Rs 39/32; Maintain Hold
We have revisited our assumptions/estimates based on FY11 annual report, Q1
performance and updates received from company management. While we roll
forward to Sept-12, we conservatively build in (1) higher construction spends (2)
further moderation in execution schedule (3) increase in cap rates (4) higher cost of
debt and (5) higher effective tax.
We maintain our valuation methodology of assuming 50% probability of 15% price
cut scenario to arrive at our Average Blended NAV of Rs 39. Our target price of Rs
32 (vs Rs 40 earlier) is based on 20% discount to Avg NAV.
While operational performance (in terms of launches/sales/leasing), we believe the
stock will remain sensitive to news flow (particularly around the telecom issues).
Maintain Hold.
Figure 2. Unitech Base NAV Summary (in Rs Millions)
Gross NAV Residential 336,788
Gross NAV Non-Residential 94,136
Total Gross NAV 430,924
Less: Amt outstanding for land 23,430
Less: Tax @ 28% 114,098
Less: Debt outstanding 56,470
Less: Customer Advances 106,860
Add: Stake in Telecom
Business
14,878
Add: UCP Leased Assets Value 5,250
Add: Cash 3,170
Net NAV 153,363
No. of Shares O/S 2,616
NAV / share (Rs) 59
Source: Citi Investment Research and Analysis
Changes to estimates
We have moderated our assumptions on operating margins and the execution
schedule based on the current environment, Q1 performance and updates received
from company management. This has resulted in changes in the top line (-12%/-
13% for FY12/13E) but a more significant change at EBITDA level (-18/-23% for
FY12/13E). We have also increased other income assumptions. Overall, PAT
estimates have been cut by 18%/23% for FY12/13.
Unitech
Company description
Unitech is one of India's largest, most diversified real estate developers with an
emerging pan-India presence. It enjoys leadership in the markets of NCR and
Kolkata. Its core strengths of land acquisition, reputation in building townships and
relationships with governments and customers have enabled it to build a diversified
portfolio. Unitech has a landbank of ~8,000 acres with total saleable area of ~440m
sq ft spread over Chennai, NCR, Kolkata. Residential projects account for ~80% of
the landbank and balance in commercial (including IT Parks), retail and hotels.
Unitech Group has diversified into telecoms through a 33% stake in Uninor and also
has a small presence in power transmission, prefabricated construction, paving
blocks and ready mix concrete. The promoter family holds a ~48% stake in the
company.
Investment strategy
We rate Unitech Hold/Medium Risk (2M) with a target price of Rs32. The equity
raisings (incl. warrants) and non-core asset sales post downturn have eased a nearterm
liquidity crunch and leverage concerns. Net D/E is now comfortable at 0.46x.
Further, an encouraging response to the company's new launches, relative pick-up
in construction of its projects (both past and new) and leasing momentum in UCP
assets make us believe that business is looking up. Going forward, a further pick-up
in leasing and execution, and likely corporate actions in the form of UCP acquisition
and the listing of its de-merged Infra entity, could act as potential catalysts.
Valuation
Our target price of Rs 32 is based on a 20% discount to our Sept 12 blended NAV
of Rs 39. Unitech has significant exposure to the NCR region. We believe chances
of price cuts are quite probable, given the price hikes the region has seen since the
last downturn. Hence, we have assigned 50% probability of potential 15% price cuts
to arrive at our TP. This is in line with our valuation methodology for the sector. Our
Sept-12E base NAV (ex-price cut) of Rs 59 assumes: a) development volume of
~440-450msf; b) cost of capital of 17.1%; c) cap-rates of 11-12%; d) value of
~Rs6/share for 32.75% stake in the telecom venture; and e) a tax rate of 28%.
Risks
We rate Unitech Medium Risk. Our quantitative risk-rating system assigns Unitech a
High Risk rating, but we believe a Medium Risk rating is justified given its relative
pick-up in launches/leasing momentum, launches/sales track record seen in last few
quarters and relatively comfortable Net D/E. Upside risks to our target price include:
1) better-than-anticipated response to the company's new project launches in the
mid-income segment; 2) hotel, office and school/hospital plots are sold at
substantially higher-than-expected prices; 3) potential corporate actions (UCP
acquisition & Infra listing) leading to value accretion and 4) release of pledged
shares. Downside risks would include: 1) delays in execution 2) poor response to
project launches; and 3) telecom overhang.
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