[T.S.R:16460] Unitech-Sell (First Global)

Unitech Limited-Stuck In A Semi-Urban Slum

The irregularities unearthed in relation to the 2G spectrum allotment process in the telecom sector and housing loans in the real estate industry could act as a potential overhang for the stock in the near term. Moreover, if the government decides to nullify the overall gains to the company arising from the sale of stake in the telecom arm and cost of spectrum, or cancel the licence itself, then the stock's valuation could be significantly impacted. In view of the slowdown in the company's new sales bookings, uncertainty over the outcome of 2G spectrum allotment and increasingly cautious approach likely to be adopted by banks towards real estate lending, we, reiterate our rating of Underperform on Unitech.

 

Unitech Ltd. (UNTE.BO/UT.IN) reported significantly lower than expected revenue in Q2 FY11, though the net profit for the quarter came in slightly below our estimate, on account of a higher than expected EBIDTA margin. In Q2 FY11, the company reported total revenue of Rs.6.44 bn, up 26.5% Y-o-Y, but down 22.2% sequentially, as against our estimate of Rs.8.84 bn.

 

Heavy monsoon and shortage of labour in the NCR due to the Commonwealth Games led to slower execution of projects and consequently, lower recognition of revenue on percentage of completion method. The EBIDTA margin for the quarter came in at 39.2%, down 1920 bps Y-o-Y, due to cost escalation on earlier projects, but up 380 bps sequentially, on account of the contribution by new projects to the total revenue, as well as some contribution by the high margin non-residential component.

 

The net profit for the quarter fell 2.4% Y-o-Y and 5.8% sequentially to Rs.1.73 bn, due to a higher Other income and a lower effective tax rate, partly offset by higher interest expenses. Unitech reported an EPS of Rs.0.69 for Q2 FY11, as against our estimate of Rs.0. 73. In Q2 FY11, the company sold around 1.44 mn sq. ft. of residential projects and 0.54 mn sq. ft. of non-residential projects, valued at Rs.10.92 bn.

 

The NCR continued to dominate new sales booked by the company in the quarter, contributing over 76% of sales volume and 86% of sales value.

 

The board of Unitech Corporate Parks Plc (UCP) has rejected Unitech's offer to acquire its 60% stake in six commercial assets being developed by the company. We believed that the offer could have added value to Unitech's shareholders in the long term if it had been accepted. There was a

decline in new sales booked by the company, with the run rate down from 3.0 mn sq. ft. over the last three quarters to 2.0 mn sq. ft. in Q2 FY11.

 

Apart from the fall in sales volume, there has also been a consistent decline in the value of sales booked by Unitech over the last four quarters. In view of the lower revenue recorded by the company in Q2 FY11 and decline in sales of new bookings, we have lowered our revenue estimates for FY11 and FY12.

 

We now expect Unitech to post an EPS of Rs.3.6 on revenue of Rs.39.48 bn in FY11, as against our previously estimated EPS of Rs.3.9 on revenue of Rs.43.41 bn. The stock currently trades at a P/E of 18.2x FY11 (E) earnings and an EV/EBIDTA of 15.6x FY11 (E), which appear fairly priced.

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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