Unitech. CMP: INR20 TP: INR30 Buy

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1 BSE SENSEX S&P CNX 16,328 4,943 Bloomberg UT IN Equity Shares (m) 2, Week Range (INR) 38/17 1,6,12 Rel. Perf. (%) -25/-14/-34 M.Cap. (INR b) 48.8 M.Cap. (USD b) May QFY12 Results Update Sector: Real Estate Unitech CMP: INR20 TP: INR30 Buy Cost overrun dents margin; liquidity challenges to persist in near-term; valuation attractive; maintain Buy with revised target price of INR30 Unitech (UT)'s 4QFY12 numbers has been impacted by severe cost overrun (prior period adjustment done in 4QFY12). Core real estate EBIT margin was 17% as against 27-30% in 9MFY12. MTM loss provisioning relating to dollar-linked investment further impacted profitability. Revenue for the quarter declined 32% YoY to IN R7.2b, which is higher than our estimate of INR6b. However, EBITDA declined by a steep 77% YoY to INR389m, much below our estimate of INR1.12b. EBITDA margin was 5.4%. PAT declined 97% YoY to INR33m, also due to higher effective tax rate. For the full year, Revenue, EBITDA and PAT declined 23%, 57% and 56%, respectively. New launches declined in line with the company's strategy guidance of focusing more on clearing execution backlog. Sales during the year were 7.2msf/INR38b (ahead of estimate of INR36b), led by Noida projects, v/s 9.2msf/INR43b in FY11. During 4QFY12, UT managed to re-finance the balance ~INR5b of repayment need of FY12. This has led to temporary respite and we see the impact in the form of a sequential improvement of ~33% in revenue booking from real estate projects. While the management has hinted at strong execution ramp-up in FY13, we believe the ability to manage liquidity would be the most crucial factor, especially given that the company has higher repayment (>INR10b) scheduled for FY13. We expect near-term outlook to remain challenging due to liquidity headwinds adversely impacting execution ramp-up and cash conversion cycle. We downgrade our NAV estimate by ~20% to INR40/share and cut our target price by ~30% to INR30 (~30% discount to NAV) to align valuations to earnings growth outlook (implying FY13 EBITDA multiple of 20.5x - the past one years' median multiple). Nonetheless, we maintain our Buy recommendation due to steep valuation discount. The stock trades at ~ 50% discounts to our revised NAV, 15.5x FY13E EBITDA (lower end of historical band) and 14x FY13E EPS. We believe its land bank (BV of ~INR110b) offers strong support at INR19-20, limiting downside. Sandipan Pal (Sandipan.Pal@MotilalOswal.com);

2 Severe margin contraction owing to cost overrun Unitech (UT) witnessed sharp EBITDA margin contraction to 5.4% in 4QFY12 v/s 20.2% in 3QFY12, led by severe cost overrun in ongoing projects, which was adjusted in 4QFY12 numbers. Core real estate EBIT margin dropped to 17% from 27% in 3QFY12. The margin is expected to hover around lower twenties, going forward. In 4QFY12, UT has provided ~INR300m MTM loss pertaining to dollar-linked foreign investment. It had invested ~INR2.3b in a derivative product called Yield Enhancement Certificate in FY10, and has been provisioning losses on a quarterly basis. Adjusted for MTM loss, EBITDA margin was 10%. Severe cost overrun impacted EBIT margin Understanding the actual impact on operating margin Revenue (INR b) 7.2 EBITDA (INR b) 0.4 Margin (%) 5.4 Loss provision in Foreign investment (INR b) 0.3 EBITDA ex. loss provision (INR b) 0.7 Adjusted margin (%) 10.0 Source: Company/MOSL Margins continue to disappoint a structural reduction for near-to-medium term UT has consistently disappointed on the margin front since FY10. EBITDA margin has declined from 36.5% in FY10 to 29% in FY11 and further to 16.4% in FY12. Cost escalation in delayed projects and higher contribution from low margin projects have led to lower profitability and these would remain major overhangs, going forward. While the removal of MTM loss impact from 1QFY13 could improve margins sequentially, we expect EBITDA margin to settle at lower twenties (20-25%) over FY Operational updates: New launches muted as indicated; Noida sales encouraging UT has adopted a strategy to lower new launches due to (a) existing construction backlog in ongoing projects, and (b) presence of unsold inventory (11-12msf). During 4QFY12, it launched only 0.6msf (1.8msf in 2HFY12 v/s 6msf in 1HFY12). The company sold 1.8msf (INR7.8b) in 4QFY12 v/s 1.7msf (INR9.4b) in 3QFY12. Sales have been largely led by mid-income housing projects at Noida, which accounted for ~56% of sales volume. Sales for FY12 were marginally ahead of our estimate at ~INR38b, due to encouraging sales momentum in Noida projects. While lower focus on new launches would help the management to devote more bandwidth towards execution, higher dependence on unsold inventory could dent sales run-rate. We expect sales of INR38b/43b in FY13/14 (v/s INR43b in FY11). 16 May

3 New launches decline sharply in 2HFY12 Sales volume steady (msf); ahead of FY12 sales value at INR38b (v/s our (msf) expectations estimate of INR36b) Noida market led sales in 4QFY12 Proportion of residential sales (%) Core real estate EBIT margin (%) Structural declining trend Source: Company/MOSL Re-financed loans in 4QFY12; temporary respite led to sequential uptick in revenue booking Severe liquidity pressure impacted UT s execution, cash flow and revenue booking adversely in FY12. Delay in re-financing of ~INR10b repayable debt (~INR5b repaid in 1HFY12, while remaining was scheduled for re-financing) has been the key factor behind execution slowdown. Key impact of this has been: Real estate revenue booking run-rate (INR4b-5b/quarter) in FY12 has been significantly lower than the sales run-rate of INR9b-10b/quarter over the last 8 quarters. Average cash flows from sales declined to INR6b-7b/quarter in FY12 against a normal run-rate of ~INR9b/quarter in FY Average construction expense run-rate declined to INR2.5b-3b/quarter in FY12 from INR3.5b in FY11 and target of INR4b-4.5b at the beginning of FY12. The management mentioned that it has succeeded in re-financing the INR5b debt in 4QFY12, which has led to sequential uptick in execution, customer collections and revenue booking. While the company is yet to disclose the magnitude of improvement in cash flows (balance sheet not yet published), revenue growth (core real estate) of ~33% QoQ is an early sign of revival. 16 May

4 Strong delivery guidance, but higher repayment need in FY13 concerning UT delivered 3.4msf of projects in FY12 as against a target of ~10msf at the beginning of the year. However, the management is optimistic about execution ramp-up and expects to make-up the slippage partially in FY13, with targeted delivery of ~9msf. While a significant number of UT s projects are at an advanced stage of construction, we believe that in the backdrop of an even higher repayment need (INR10b+) in FY13, the ability to manage liquidity would be the most crucial factor to boost operating cash flow. Additionally, labor issues and constrained availability of sand could also emerge as headwinds to execution ramp-up. Revenue much below sales run-rate Delivery muted, though guidance due to execution slowdown strong (msf) Debt levels largely steady Source: Company/MOSL Valuation and view Near-term outlook remains challenging: We expect headwinds to persist in the near term, holding back the company s ability to post strong numbers at least over 1HFY13 on account of: Backlog too high to bridge in short period: Sustained liquidity pressure has impacted UT s execution and operating cash flows, severely. While the management expects a revival in the pace of execution over 1HFY13, we remain skeptical on the probability of reaching the desired level of execution (quarterly construction run-rate of INR4b-4.5b v/s INR2.5b) in a short period. Higher repayment need in FY13 than in FY12: UT needs to repay INR10b+ in FY13 (more than FY12). In the backdrop of uncertain liquidity scenario and funding constraints, we expect a subdued 1HFY13 - especially as UT is yet to show any meaningful sign of recovery. Lower launches could dilute sales momentum: While we agree with the management s strategy of controlling new launches until it clears up backlogs, higher dependence on unsold inventory could dent sales momentum. Almost 45% of its existing inventory (11-12msf) is located in Noida market. Delayed cash conversion cycle: Despite the company having robust pre-sales of ~INR140b (a significant portion yet to be collected), we believe the cash conversion cycle could be stretched over next 6-9months due to execution hurdles. 16 May

5 Cutting target price: We cut our NAV estimate by ~20% to INR40/share, to model (a) delays in execution, (b) cost escalations, and (c) slower collection. We cut our target price by ~30% to INR30 (~30% discount to NAV) to align valuations to earnings growth outlook (implying FY13 EBITDA multiple of 20.5x - the past one years' median multiple). Maintain Buy on steep valuation discount We maintain our Buy recommendation due to steep valuation discount. The stock trades at ~50% discount to our revised NAV, 15.5x FY13E EBITDA and 14x FY13E EPS (lower end of historical band). We believe its land bank (BV of ~INR110b) offers strong support at INR19-20, limiting further downside. UT's ability to improve operating leverage in FY13 would largely depend on (1) support from easing of liquidity, (2) execution ramp-up, and (3) ability to address FY13 loan repayments. Unitech: EV/EBITDA trend (x) 16 May

6 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 ongoing telecom 2G spectrum issue is a key overhang for the stock. Headwind in re-financing, impacting construction. Continuation of increasing debtors. Recent developments The management mentioned that it has succeeded in re-financing the INR5b debt in 4QFY12, which has led to sequential uptick in execution, customer collections and revenue booking Comparative valuations Unitech DLF HDIL P/E (x) FY13E FY14E P/BV (x) FY13E FY14E EV/Sales (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E The company sold 1.8msf (INR7.8b) in 4QFY12 v/s 1.7msf (INR9.4b) in 3QFY12. The management is optimistic about execution ramp-up and expects to make-up the slippage partially in FY13, with targeted delivery of ~9msf. Valuation and view We cut our target price by ~30% to INR30 (~30% discount to NAV) to align valuations to earnings growth outlook (implying FY13 EBITDA multiple of 20.5x - the past one years' median multiple). Nonetheless, we maintain our Buy recommendation due to steep valuation discount. The stock trades at ~ 50% discounts to our revised NAV, 15.5x FY13E EBITDA ((lower end of medium term band) and 14x FY13E EPS. We believe its land bank (BV of ~INR110b) offers strong support at INR19-20, limiting further downside. 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. 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 (%) Mar-12 Dec-11 Mar-11 Promoter Domestic Inst Foreign Others May

7 Financials and Valuation 16 May

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