Unitech – Upgrade on underperformance::RBS

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.

Reader Query Answered:: Mutual Fund Talk:: Business Line,

I have started investing Rs 1000 per month in each of the three funds - HDFC Top 200, DSP BR Equity Fund and ICICI Pru Dynamic through SIP. I wish to have a corpus of Rs 25 lakh for my five-year old son, for his higher studies after 12 years. I want to have your advice on these SIPs, keeping my target in mind. I am ready to change funds or increase the amount, if required. I also want to start investing Rs 2000 per month through SIP for the next five years for purchasing a car worth Rs 5-6 lakh. Please suggest schemes for the same. I am 37 years old.

Vinod Sharma

It is good that you have set yourself goals and the time frame for achieving it. You have not stated when you started your SIPs. We therefore assume that you have just commenced them. The sum that you are currently allocating for your son's education and the amount you intend to invest to buy a car are both inadequate.

EDUCATION PORTFOLIO

Let us first look at the amount needed for education. You have 12 years to reach your target. However, as a matter of precaution we recommend investors to switch systematically to safer debt avenues a year or two before the target date, especially when you have a long-term goal of over 10 years. We shall consider the time available for investment as 11 years in your case. To reach Rs 25 lakh in 11 years you can consider investing Rs 5,000 per month in diversified equity funds that would earn a compounded annual return of 15 per cent and Rs 2,500 per month in a mid-cap fund that would deliver at least 18 per cent per annum. In all, you would need Rs 7,500 per month towards the education portfolio Rs 4,500 more than your current investment.

Do look at whether this is feasible as you would need 7,500 per month (delivering 15 per cent annually) for the next four and a half years to buy a car as well. If the education target appears too stiff, you have one more option. Consider investing Rs 5,000 per month (of which Rs 2,500 can be in a mid-cap fund) and think of upping investment by another Rs 5,500 per month five years from now. This second lot of investment, we assume, will yield 15 per cent per annum for the remaining six years.

This will mean setting aside Rs 5,000 towards your son's education to begin with and Rs 10,500 per month (Rs 5,000 plus Rs 5,500), from the sixth year (2016). Yes, the total outgo will be more if you increase your investment later; simply because early investments, by way of compounding over a longer period, deliver higher returns than investment made late. You need not necessarily increase this after five years; you may gradually step-up savings every year too.

You can hold HDFC Top 200 and ICIC Pru Dynamic. Please review performance of the latter every year and exit if the fund trails its benchmark — Nifty. You can shift from DSPBR Equity to DSPBR Small and Midcap for the mid-cap exposure (of Rs 2,500) that we have built in our return calculation. Please remember that mid-cap funds need to deliver 18-20 per cent annually to make up for the higher risks undertaken.

A year (or earlier if you have reached the target) before your goal, use a systematic withdrawal or transfer plan to shift the sums to short-term debt funds. If interest rates in one-year bank deposits are attractive at that time (say 11-12 per cent), you can also invest a part of this sum in few such deposits.

BUYING A CAR

Moving to your aspiration of buying a car in five years, as mentioned earlier, you will need Rs 7,500 per month to manage Rs 6 lakh, four and a half years from now (use the six months to shift to safe liquid funds or short-term bank deposits).

We are assuming a 15 per cent annual return in this portfolio and not more, given the relatively shorter period of this goal. It is noteworthy that some of the best funds have only managed 12-13 per cent returns in the last five years and the diversified equity category as an average delivered a measly 10 per cent per annum in the same period. We will add a mid-cap fund to your portfolio. Hopefully this will help achieve the 15 per cent annual return mark.

You can hold HDFC Equity, Fidelity Equity and IDFC Premier Equity in this portfolio. You do not have much leeway here to tinker with the quantum of savings needed for the goal, given the five-year time period. You may at best postpone your goal if you are unable to spare any surplus or go for a car loan for part of the car value, provided you can comfortably pay the EMI.