Sandipan Pal QFY13 Results Update Sector: Real Estate Unitech CMP: INR29 TP: INR44 Buy

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1 BSE Sensex S&P CNX 19,608 5,933 Bloomberg UT IN Equity Shares (m) 2,438.8 M.Cap. (INR b)/(usd b) 70/ Week Range (INR) 41/18 1,6,12 Rel. Perf. (%) -27/24/-13 Financials & Valuation (INR b) Y/E March 2013E 2014E 2015E Net Sales EBITDA Adj PAT Adj. EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuation P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield (%) February QFY13 Results Update Sector: Real Estate Unitech CMP: INR29 TP: INR44 Buy 3QFY13 revenues grew 27% YoY (19% QoQ) to INR6.4b (v/s est of INR6.1b). EBITDA grew 7.6% YoY (35% QoQ) to INR1.1b (v/s est of INR1b), translating into margin improvement of 2pp QoQ to 17.2% v/s est of 16%. PAT stood at INR842m (53% YoY, 92% QoQ) v/s est of INR707m. UT refinanced almost the entire INR12b (v/s INR7b till 1HFY13) of its loan scheduled for repayment in FY13 - thus freeing funds to boost execution. Management hinted that lenders are more comfortable in financing projects with substantial pre-sales. It targets to increase the current workforce from 21,000 to 25,000/30,000 by Mar-13/Dec-13. During 3QFY13, UT launched 0.5msf (v/s 1.6msf in 2QFY13), including new phases of existing projects at Gurgaon and Noida. Pre-sales stood at 1.4msf (INR6.8b) v/s 1.6msf (INR8.4b) in 2QFY13. 9MFY13 pre-sales stood at INR22b (v/s INR38b in FY12). We lower pre-sales estimate to INR30b/38b for FY13E/ 14E (v/s earlier est of INR36b/42b). Management guided for resuming launch activities in early FY14, largely focusing on Gurgaon market which saw a dearth of fresh launches over the past 4-5 quarters. Operating cash flow improved marginally QoQ despite an uptick in execution. We believe the improvement in construction ramp-up will have limited impact on collections initially, as its older projects with delayed execution offer lower cash inflow, against relatively higher construction spending left. In 3QFY13, UT's total collections stood ~INR7b, including rentals of INR0.45b (v/s ~INR6.5b in 2QFY13), against construction spending of INR3.2b (v/s INR2.9b in 2QFY13). This combined with an interest expense of INR1.3b, UCP construction of INR0.6b, overhead of INR1.2b led to ~INR0.7b QoQ decline in net debt to INR54.2b (0.43x), while gross debt is up at INR60.8b as in Dec-12 due to recent disbursements. The stock trades at 0.6x FY15E BV, 14.6x FY15E EPS and 40% discount to our NAV of INR49. Maintain Buy with a target price of INR44 (10% discount to NAV). Sandipan Pal (Sandipan.Pal@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 3QFY13 P&L beats estimates sign of execution uptick 3QFY13 revenues grew 27% YoY (19% QoQ) to INR6.4b (v/s est of INR6.1b). EBITDA grew 7.6% YoY (35% QoQ) to INR1.1b (v/s est of INR1b), translating into margin improvement of 2pp QoQ to 17.2% v/s est of 16%. PAT stood at INR842m (53% YoY, 92% QoQ) v/s est of INR707m. Sequential improvement in revenue booking is a clear indication of an uptick in construction progress, post the improvement in refinancing environment from 4QFY12. Core real estate EBIT margin improved QoQ by 2.6pp to 18.1% (much lower than 26% in FY12). Key reason behind the muted margin is moderate to negative margin contribution from older projects (pre 2009), which have seen significant cost escalations. Revenue contribution from these projects brings down EBITDA margin to mid-teen level, against 30-35% operating margin in new projects. UT is yet to make any provision for the telecom settlement as the business transfer process would take another 3-4 months to conclude and have the requisite approvals from BOT. It expects the accounting impact to be visible by FY14. Significant improvement in financing outlook refinanced almost entire repayment obligation of FY13; Harbinger for ramp-up in construction ahead While funding constraints in FY12 had been inhibiting UT s execution scale-up plan, we find encouraging improvement in the scenario from 2QFY13. Management hinted that lenders are more comfortable in financing projects with substantial pre-sales. UT refinanced almost INR12b (v/s INR7b till 1HFY13) of its loan scheduled for repayment in FY13, thus freeing funds for the much-awaited boost in execution. It targets to increase the workforce from 21,000 to 25,000/30,000 by Mar-13/Dec- 13, resulting in scale-up in construction spending from current sub-inr3b/quarter level. On a steady state scenario, management believes 30,000 workers can potentially deliver 9-10msf. We expect this to enhance the revenue booking and cash flow hereon. However, as on date, revenue booking run-rate (INR4-5b/q) remains much below its sales run-rate (INR8-10b/q), indicating a stark backlog in execution (especially in NCR projects) to be bridged. Revenues much below pre-sales run-rate due to execution delay Huge cost over-run in old projects impacts margin substantially Source: Company, MOSL 14 February

3 Operation updates: Pre-sales deteriorated on declining new launches; Launch activities at Gurgaon to revive in early FY14 UT adopted a strategy to lower new launches due to a) existing construction backlog in ongoing projects and b) presence of unsold inventory (10msf). During 3QFY13, it launched 0.5msf (v/s 1.6msf in 2QFY13), including new phases of existing projects at Gurgaon and Noida. 3QFY13 pre-sales stood at 1.4msf (INR6.8b) v/s 1.6msf (INR8.4b) in 2QFY13. 9MFY13 pre-sales stood at INR22b (v/s INR38b in FY12). We lower pre-sales estimate to INR30b/38b for FY13E/14E (v/s earlier est of INR36b/42b). Management guided for resuming launch activities in early FY14 largely focusing on Gurgaon market, which has seen a dearth of fresh launches over the past 4-5 quarters. It is also changing the strategy to do preliminary construction activities on sites before officially launching projects, which would be followed in upcoming Gurgaon launches. Management also guided for phased monetization of projects going ahead (unlike front heavy selling currently) to mitigate the possible cost escalation by achieving higher realizations at a later stage of the project. Cash flow improves slowly with execution; Net debt declines QoQ on positive FCFE Operating cash flow improved marginally QoQ despite an uptick in execution. We believe the improvement in construction ramp-up will have limited impact on collections initially, as its older projects with delayed execution offer lower cash inflow, against relatively higher construction spending left. In 3QFY13, UT s total collections stood ~INR7b, including rentals of INR0.45b (v/s ~INR6.5b in 2QFY13), against construction spending of INR3.2b (v/s INR2.9b in 2QFY13). This combined with an interest expense of INR1.3b, UCP construction of INR0.6b, overhead of INR1.2b led to ~INR0.7b QoQ decline in net debt to INR54.2b (0.43x), while gross debt is up at INR60.8b as in Dec-12 due to recent disbursements. Steady decline in recent launches led to decline in pre-sales (msf) Trend in quarterly sales and realizations (msf) Source: Company, MOSL 14 February

4 Construction workforce aimed at Noida key sales contributor - by value (%) 30k by Dec-13 ( 00) Progress status: Pre-09 projects Net debt down QoQ by INR1.5b Progress status: Post-09 projects 9MFY13 delivery stands at 2.3msf on positive FCFE Valuation and view Source: Company, MOSL Uptick in revenue booking in 3QFY13 highlights early sign of improvement in construction activities. A better liquidity outlook/easing of refinancing hurdles address major concerns over debt repayment and planned ramp-up in execution spending. This should lead to steady reduction in huge existing execution backlog, along with an improvement in UT s cash conversion cycle, on the back of robust pre-sales of ~INR150b (significant portion yet to be collected). ~25% uptick in construction spending (to ~INR16-17b v/s INR12-13b in FY12-1HFY13) should augment customer collections by INR9-10b. A steady fix-up in execution and subsequent uptick in business recovery would be a key to bring back business stabilizations. Our asset valuation exercise for UT signifies MTM land bank valuation of INR61+/ share (offers meaningful upside potential) and BV of land at INR36/share (limits downside risk in a favorable scenario). We await evidence of improvement in cash generation in core business in the upcoming quarters along with clarity on recent allegation related to the telecom issue. The stock trades at 0.6x FY15E BV, 14.6x FY15E EPS and 40% discount to our NAV of INR49. Maintain Buy with a target price of INR44 (10% discount to NAV). 14 February

5 Unitech: an investment profile Company description Unitech is the second largest listed real estate developer in India by market capitalization. It was incorporated in February 1971 and converted to a public limited company in October In 1986, it launched its real estate development business with its first project in Gurgaon. Unitech Group also has a construction business, which undertakes civil construction and infrastructure projects. Key investment arguments Improved revenue mix, accelerated execution and focus on affordable housing segment. Cash flow visibility from robust pre-sales. Cheap valuation, trading at lower end of mediumterm multiple band. Key investment risks Negative news flow on the telecom 2G issue. High debtors and execution backlog. Recent developments UT refinanced almost INR12b (v/s INR7b till 1HFY13) of its loan scheduled for repayment in FY13, thus freeing funds for the much-awaited boost in execution. 3QFY13 pre-sales stood at 1.4msf (INR6.8b) v/s 1.6msf (INR8.4b) in 2QFY13. 9MFY13 pre-sales stood at INR22b (v/s INR38b in FY12). Its amusement park business started making profit in 2QFY13. The current annualized rent run-rate is INR1.5b, which is likely to improve meaningfully over FY Valuation and view Our asset valuation exercise for UT signifies MTM land bank valuation of INR61+/share (offers meaningful upside potential) and BV of land at INR36/ share (limits downside risk in a favorable scenario). We await evidence of improvement in cash generation in core business in the upcoming quarters along with clarity on recent allegation related to the telecom issue. The stock trades at 0.6x FY15E BV, 14.6x FY15E EPS and 40% discount to our NAV of INR49. Maintain Buy with a target price of INR44 (10% discount to NAV). Sector view RE sector has been a major underperformer over the last 12 months with multiple operational and non operational headwinds such as volume slowdown (due to declining affordability), monetary tightening, pilling liquidity pressure etc. However, with imminent rate cut cycle and increasing instances of regulatory pressure subsiding, we believe the outlook will improve going forward. Comparative valuations Unitech DLF Anant Raj P/E (x) FY13E FY14E P/BV (x) FY13E FY14E EV/Sales (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E EPS: MOSL forecast v/s consensus (INR) Most Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Buy Stock performance (1 year) Shareholding pattern (%) Dec-12 Sep-12 Dec-11 Promoter Domestic Inst Foreign Others February

6 Financials and Valuation 14 February

7 N O T E S 14 February

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