U nitech Ltd
Execution & telecom the key
overhangs; reinstate Neutral
Reinstate with Neutral rating; PO of Rs28
We reinstate coverage of Unitech with a Neutral rating and a PO of Rs28. Our PO
implies 11% upside from current levels, based on a 0.6x forward P/B multiple
(corresponds to one SD lower than the 3-year average P/B multiple ) due to the
overhang of telecom probe. At our PO, the stock would be trading at 58%
discount to our NAV. We believe Unitech is trading cheap, with a 15% discount to
its trough P/B multiple of 2008-09. Also our estimate of its undeveloped land bank
is around Rs43/sh. But we believe the alleged irregularities in getting a telecom
license and the slowing execution will put pressure on liquidity, limiting the upside.
Slackening execution a major concern
We believe Unitech should shift its focus to execution rather than launching new
projects. It is yet to commence construction on almost 8mn sq ft of pre-sold
projects. The current execution backlog has increased to 40mn sq ft and is piling
up against 24mn sq ft during 2008-09. We believe given the current tight liquidity
it would be difficult for Unitech to substantially improve execution, which in turn
will lead to delays and further cost overruns.
Cash flows likely to remain positive over next 6-12 months
We do expect cash flows to remain positive over the next 6-12 months even at the
current pace of execution, which should help it to reduce its debt by 5-7% in
FY12. But Unitech would still need to refinance another Rs5-7bn, which should
not be a major concern just yet, given banks are funding approved viable projects.
Positive outcome in telecom probe could lead to rerating
It is difficult to predict the outcome of the 2G license probe, but we believe if the
court rules in favour of Unitech, the stock could trade closer to its book value of
Rs46/share which corresponds to 30% discount to our NAV.
Risks –
Downside risks
Telecom – Unitech is being probed for its alleged involvement in the telecom
scam in 2008. We believe a negative outcome in the enquiry could seriously
impact the stock price.
Execution – It has a huge backlog of execution, and any further delay could
impact its cash flows and NAV
High debtors – It has also seen increase in debtors in FY11 especially in
completed projects. If these customers fail to pay up, it may have to take
writedowns.
Upside risks
Clean chit in telecom – If its gets a clean chit from the court in the telecom
probe, the stock could rerate.
Volume sustained at current levels- We expect the volume to correct for
Unitech, but if sustained at current level, it could drive stock higher
Execution & telecom the key
overhangs; reinstate Neutral
Reinstate with Neutral rating; PO of Rs28
We reinstate coverage of Unitech with a Neutral rating and a PO of Rs28. Our PO
implies 11% upside from current levels, based on a 0.6x forward P/B multiple
(corresponds to one SD lower than the 3-year average P/B multiple ) due to the
overhang of telecom probe. At our PO, the stock would be trading at 58%
discount to our NAV. We believe Unitech is trading cheap, with a 15% discount to
its trough P/B multiple of 2008-09. Also our estimate of its undeveloped land bank
is around Rs43/sh. But we believe the alleged irregularities in getting a telecom
license and the slowing execution will put pressure on liquidity, limiting the upside.
Slackening execution a major concern
We believe Unitech should shift its focus to execution rather than launching new
projects. It is yet to commence construction on almost 8mn sq ft of pre-sold
projects. The current execution backlog has increased to 40mn sq ft and is piling
up against 24mn sq ft during 2008-09. We believe given the current tight liquidity
it would be difficult for Unitech to substantially improve execution, which in turn
will lead to delays and further cost overruns.
Cash flows likely to remain positive over next 6-12 months
We do expect cash flows to remain positive over the next 6-12 months even at the
current pace of execution, which should help it to reduce its debt by 5-7% in
FY12. But Unitech would still need to refinance another Rs5-7bn, which should
not be a major concern just yet, given banks are funding approved viable projects.
Positive outcome in telecom probe could lead to rerating
It is difficult to predict the outcome of the 2G license probe, but we believe if the
court rules in favour of Unitech, the stock could trade closer to its book value of
Rs46/share which corresponds to 30% discount to our NAV.
Risks –
Downside risks
Telecom – Unitech is being probed for its alleged involvement in the telecom
scam in 2008. We believe a negative outcome in the enquiry could seriously
impact the stock price.
Execution – It has a huge backlog of execution, and any further delay could
impact its cash flows and NAV
High debtors – It has also seen increase in debtors in FY11 especially in
completed projects. If these customers fail to pay up, it may have to take
writedowns.
Upside risks
Clean chit in telecom – If its gets a clean chit from the court in the telecom
probe, the stock could rerate.
Volume sustained at current levels- We expect the volume to correct for
Unitech, but if sustained at current level, it could drive stock higher
No comments:
Post a Comment