The CBI's partial exoneration of Unitech Wireless in the 2G spectrum scam is positive, but
Unitech is still charged with being ineligible to receive a 2G licence. Unitech's debt reduction plan
through asset sales seems aggressive; execution and balance sheet remain concerns. We
upgrade to Hold after underperformance.
Some positive developments…
Unitech faces liquidity pressure due to ongoing sector headwinds as well as one of its promoters,
Sanjay Chandra, being in prison for more than five months as part of the 2G wireless spectrum
allocation probe. To overcome this, Unitech is launching new projects at attractive prices to
achieve faster monetisation (such as Anthea Floors in Gurgaon, which booked Rs3.5bn sales via
450 bookings, as per The Economic Times). Also, the company gained a reprieve in the 2G
investigation after the Central Bureau of Investigation’s (CBI) public prosecutor informed the
special court that there was no evidence of a ‘quid-pro-quo or a money trail’ between Unitech
Wireless (the telecoms arm of Unitech) and former telecom minister, A Raja (The Economic
Times, 30 Aug 2011).
…but share overhang persists
Wireless woes and the size of its debt burden have been key overhangs on Unitech shares.
Unitech is still charged with being ineligible to receive a mobile permit (issues surround stipulated
paid-up capital/net worth and inability to meet main object clause in Memorandum of
Association). To tackle its debt, Unitech has announced a target to reduce existing debt
(Rs56.5bn) by 10-15% every year via land sales and investments in IT SEZs and IT Parks (60%
owned by Unitech Corporate Park). We believe this remains a challenge. We highlight that
Unitech has been selling its assets (Saket office, hotels, retail mall and land) since 2009 as a part
of its de-leveraging strategy, which in our view leaves it with few monetisable assets other than
land. Unitech’s high level of debtors (up 70% in FY11 to Rs21.5bn), also highlighted by the
auditors, and the slow pace of ongoing project execution remain concerns. It has delivered only
11.7msf of projects launched before March 2009, and the remaining 12.2msf are still at various
stages of construction.
Upgrade to Hold after significant underperformance
We factor in sector headwinds and cut earnings estimates by 16%/8% for FY12F/13F, resulting in
a revised DCF-based TP of Rs28 (applying a 40% discount for execution risk) for its real estate
business, down from our earlier TP of Rs30. Unitech’s 38% underperformance ytd vs the Sensex
causes us to think further downside is limited. Thus, we upgrade to Hold.
Unitech is still charged with being ineligible to receive a 2G licence. Unitech's debt reduction plan
through asset sales seems aggressive; execution and balance sheet remain concerns. We
upgrade to Hold after underperformance.
Some positive developments…
Unitech faces liquidity pressure due to ongoing sector headwinds as well as one of its promoters,
Sanjay Chandra, being in prison for more than five months as part of the 2G wireless spectrum
allocation probe. To overcome this, Unitech is launching new projects at attractive prices to
achieve faster monetisation (such as Anthea Floors in Gurgaon, which booked Rs3.5bn sales via
450 bookings, as per The Economic Times). Also, the company gained a reprieve in the 2G
investigation after the Central Bureau of Investigation’s (CBI) public prosecutor informed the
special court that there was no evidence of a ‘quid-pro-quo or a money trail’ between Unitech
Wireless (the telecoms arm of Unitech) and former telecom minister, A Raja (The Economic
Times, 30 Aug 2011).
…but share overhang persists
Wireless woes and the size of its debt burden have been key overhangs on Unitech shares.
Unitech is still charged with being ineligible to receive a mobile permit (issues surround stipulated
paid-up capital/net worth and inability to meet main object clause in Memorandum of
Association). To tackle its debt, Unitech has announced a target to reduce existing debt
(Rs56.5bn) by 10-15% every year via land sales and investments in IT SEZs and IT Parks (60%
owned by Unitech Corporate Park). We believe this remains a challenge. We highlight that
Unitech has been selling its assets (Saket office, hotels, retail mall and land) since 2009 as a part
of its de-leveraging strategy, which in our view leaves it with few monetisable assets other than
land. Unitech’s high level of debtors (up 70% in FY11 to Rs21.5bn), also highlighted by the
auditors, and the slow pace of ongoing project execution remain concerns. It has delivered only
11.7msf of projects launched before March 2009, and the remaining 12.2msf are still at various
stages of construction.
Upgrade to Hold after significant underperformance
We factor in sector headwinds and cut earnings estimates by 16%/8% for FY12F/13F, resulting in
a revised DCF-based TP of Rs28 (applying a 40% discount for execution risk) for its real estate
business, down from our earlier TP of Rs30. Unitech’s 38% underperformance ytd vs the Sensex
causes us to think further downside is limited. Thus, we upgrade to Hold.
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