October 24, 2009 Unitech Ltd. Analyst: Preeti Gupta preetig@bajajcapital.com Reviewed By: Alok Agarwala aloka@bajajcapital.com Industry Chairman Construction Ramesh Chandra Inc.Year 1971 Net Reserves (Rs.cr) INVEST Unitech Limited operates as a real estate development company in India and internationally. Its real estate projects include residential complexes, golf course communities, integrated townships, amusement parks, commercial offices, IT parks, and retail malls. The company also engages in various construction activities, including construction contracts of highways & roads. Its latest residential projects include the launch of Iconic Towers (Aqua & Tera part of the Unitech Grande) in NCR, Uniworld City in Mohali near Chandigarh and the launch of Harmony in Uniworld City in Kolkota. 1830.6 3275.3 4844.8 TRACK RECORD As per the earliest records available with us company has been raising fixed deposits since 2003. There is no news or information pertaining to any default or delay in servicing or repayment of any term loans raised by it. 244.8 2005-06 2006-07 2007-08 2008-09 Debt Equity Ratio 4.5 2.8 2.9 2.1 2005-06 2006-07 2007-08 2008-09 CREDIT RATING Most of the company s debt programs in FY09 and in FY10 (till June 02, 2009) are rated Speculative or highly speculative which reflect the minimal capacity for timely payment of financial commitments and vulnerability to near-term adverse changes in financial and economic conditions. Company s Pass through Certificates (PTC) are rated highly speculative which indicates a significantly higher credit risk and payment of financial commitments may not be made when due. The rating of the debt programs in FY08 was strong with most of the debt program rated superior/fair/good/adequate quality. Tight liquidity position and weak global scenario has led to the poor rating of various debt programs in FY09. However, with improving market conditions and high level of liquidity available in the market, the scenario is likely to improve in future.
UNITECH V/S NSE 6000 140 5000 120 4000 100 3000 80 60 2000 40 1000 20 0 Nifty (L.H.S) Unitech (R.H.S) 0 UNITECH FUND RAISING THROUGH QIP S KEY INVESTMENT ARGUMENTS Revitalizing growth through affordable housing: Unitech posted a poor financial performance in Q4 09 due to a sharp deterioration in demand, a decline in real estate prices, and high finance costs. However, the easing liquidity situation along with lower interest rates and the continuation of the current policy measures introduced by the Central Government is expected to revive the demand in the coming quarters. The shift in developers focus towards affordable housing represents the transformation of residential real estate segment into a largely volume-led led play. While such strategy augurs well for near-term cash flow generationn & enlargement of addressable market, land-bank valuation is typically more sensitive to pricing than to volume.
Residential Segment Previous Strategy Primarily target luxury/upper middle income housing segment New Strategy More focus on mid and affordable housing segment Commercial Segment Create capacity in anticipation of demand. Build and hold to lease Cater to primarily pre-sold/pre-lease Projects. Build and sell Assets and land bank Buy predominantly agricultural land and build land bank for projects across all segments Sell assets selectively and acquire Land only for mid/low income housing projects. Monetize existing land bank. Cash Flows Maximize realizations Maximize volumes while sustaining margins Debt Short-term maturities Higher proportion of expensive unsecured loans Increasing debt with more projects Restructured to longer maturities Cheaper collateralized loans Reduced leverage New Project Launches receiving good response: The Company s new launches have received good responses already. Unitech has launched 24 projects across seven cities totaling over more then 9 million sq.ft. (Figures till June 2009). Projects Recently Launched Project Segment Location Status of sales Launch date Uniworld Gardens II Residential - Apartments Gurgaon Fully Sold Mar-09 The Villas Individual Bungalows Gurgaon N.A. Aug - Sep 09 The Residences Residential - Apartments Gurgaon Fully Sold May-09 Sunbreeze Residential - Apartments Gurgaon Fully Sold Aug - sep 09 Unitech Vistas Residential - Apartments Kolkata 20-25% sold Jul-09 Gateway Phase 2 Residential - Apartments Kolkata 5-10% sold Aug-09 Unihomes Residential - Apartments Kolkata 0-5% sold Aug-09 Unihomes Residential - Apartments Noida 80% sold Jul-09 Uniworld Gardens Residential - Apartments Noida more than 70% sold Jul-09 Willows @ Grande Residential plots Noida 40% sold Jul-09 Unihomes Plots Residential plots Greater Noida Fully Sold Jul - Aug 09 Unihomes Residential - Apartments Greater Noida ~ 5% sold Sep-09 Unihomes Residential - Apartments Chennai 300 units sold Aug-09 Ananda Residential - Apartments Chennai Fully Sold May-09 Brahma Residential - Apartments Chennai Fully Sold May-09 *BNP Paribas estimates Increasing residential sales volume: Unitech has sold more than 4,000 residential apartments totaling nearly 4.5 mn sq.ft. in three months (April June 2009). Moreover, a drop in interest rates and tax incentives offered to the housing sector are expected to propel the demand, primarily in the mid-income and affordable housing segments. Easing liquidity Unitech has stunned the market by raising Rs. 4,380 crore through its two Qualified Institutional Placements (QIPs). The market has given tremendous response to Unitech s QIPs, thus reinstating their confidence in the company s business. Unitech plans to use a significant portion of these funds to repay a portion of debt and for expansion in the affordable housing segment under its brand name of Unihomes. Unitech has also raised Rs. 1,600cr by selling its non-core assets Bajaj Capital Centre for Investment Research 3/8
i.e. hotels and office space. Going forward the promoters are also planning to invest Rs. 1,100 crore over the next 15 months by way of preferential convertible warrants at Rs.50 on which they are expected to initially pay Rs. 271cr. i.e 25% in a couple of weeks. Thus, the company has taken significant steps to address its liquidity issues. Source Amount in cr. (Rs) Cash raised from sale of assets 1,600 First tranche of Telenor Payment received 386 Funds from QIP I 1,620 Funds from QIP II 2,760 Issue of warrants to promoters (Proposed) 1,100 Total Fund Raised (incl. Proposed) 7,466 This will result in a significant moderation in its leverage in terms of the Debt Equity Ratio as shown below: Scenario 1 Scenario 2 Scenario 3 Scenario 4 % of Debt repayment 25 30 35 40 Funds Raised (Rs. cr) 7,466 7,466 7,466 7,466 Current Debt (Rs. cr) (Standalone as at FY09 end) 7,800 7,800 7,800 7,800 Debt Repayment (Rs. cr) 1,950 2,340 2,730 3,120 Remaining Debt (Rs. cr) 5,850 5,460 5,070 4,680 Debt / Equity Ratio (projected for FY10) 0.62 0.57 0.53 0.49 Project Funding Required (company estimates) (Rs. cr) 6,000 6,000 6,000 6,000 Funds available after debt repayment (Rs. cr) 5,516 5,126 4,736 4,346 Cash Flow from operations (Rs. cr) (FY10E) 1,100 1,100 1,100 1,100 Surplus / (Deficit) of funds (Rs. cr) 616 226-164 -554 Revenues expected to increase going forward Revenues are expected to increase going forward due to an expected increase in residential sales volume for the mid-income/affordable housing segment coupled with slum redevelopment projects with its joint venture partners. The company s guidance states that the company to sell 30 mn sq ft of space and 20,000 homes in FY10 alone. Debt reduced by the company Unitech has been raising funds from the beginning of this year to improve its cash flow and to reduce its massive debt. As a result, the Company s long term debt decreased to approx. Rs. 5200 cr. at the end of March 31, 2009 leading to a net long term debt-equity ratio of 1.60x. The Company has raised nearly Rs. 4320 cr. through two rounds of qualified institutional placement (QIP) in H1FY10. Debt-Equity Ratio to improve in the future It is expected that Unitech would reduce its debt by ~35% to Rs. 5,070 cr. by the end of FY10 from the existing debt of Rs. 7,800 cr. (June 30, 2009) which should bring down its Debt/Equity from 3.2X to 0.55x. The funds have been or are likely to be raised from QIPs and other initiatives Bajaj Capital Centre for Investment Research 4/8
(sale of non-core assets, Telenor deal, warrants to be issued to promoters, etc) and should be sufficient to fund its planned projects. In light of the above, it seems the funding woes for the company are more or less over in the short to mid-term. Revenues and Net Profit decline but the future looks good (consolidated) Unitech s consolidated revenue declined 50.1% yoy, from Rs.1031.7 cr. in Q1 FY09 to Rs. 514.9 crores in Q1FY10, due to a significant decline in Construction and Real estate revenues. Unitech s Q1FY10 net profit decreased 54.1% yoy from Rs 423.9 cr. in Q1 FY09 to Rs. 194.7 cr. in Q1FY10. However, revenues are expected to increase between FY09 and FY11 because of increasing residential sales volume. Payment received from Telenor Unitech received Rs. 360 cr. from Telenor as the first tranche of payment for the Telecom deal. Increasing FIIs holding due to QIP placements Improved Cash flow position 30 th September 2008 : 5.3% 30 th June 2009 : 22.8% 30 th September 2009 : 36.4% Overall Cash flows are likely to improve going forward aided by (i) QIP proceeds, (2) internal generation, (3) asset sale, and (4) PE funding. Unitech has already sold assets worth Rs. 1000cr and expects to sell stake in several projects to PE investors in FY10. In the current fiscal, Unitech has already launched 17mn sq ft of space & sold 7mn out of the same. It has created a new brand Uni Homes to target the affordable housing segment (price range of Rs. 10-30 lacs per unit) with 10mn sq ft of launch across 8 cities planned in the first phase. DETERMINANT MATRIX (2008-2009, CONSOLIDATED) NCA/TD* Ratio View Remarks Favorable Company is generating sufficient cash to service its debt obligations. RoCE** Debt Equity Ratio Interest Coverage Ratio Favorable Unfavorable Favorable Company s RoCE stood at 10.4% in FY09; it has earned more on the capital employed than its cost of Debt. Debt equity ratio for the FY09 stood at 2.1, it has not seen favorable debt equity ratio in past 5 years. However they are likely to improve going ahead as enumerated in the report above. Company has seen favorable interest coverage ratio since 2004. * Net Cash Accrual/Total Debt ** Return on Capital Employed Bajaj Capital Centre for Investment Research 5/8
DEBT ANALYSIS Company raised additional debt of Rs. 382cr, thereby total debt in FY09 came at Rs. 10848cr. Out of total debt, Rs. 3783cr is taken for working capital advances. Debt equity ratio for the FY09 stood at 2.1. Its interest cost at Rs. 592cr went up by 87% in FY09 against Rs. 317cr in FY08. Due to high interest burden and low operating profit its interest coverage ratio deteriorated and came at 2.6 in FY09 against 7.0 in FY08. RECENT DEVELOPMENT Telenor gets approval to increase its stake to 74% in Unitech Wireless Unitech Wireless Tamil Nadu has got approval from the government for enhancing foreign shareholding by Telenor Asia (Singapore) up to 74%. Telenor would for now pump in an FDI of Rs. 3,740 cr. for raising the stake to 67.25% from the present 49%. The company plans to start services in December 2009 under Uninor brand in eight circles four in south and one each in UP (East-West), Orissa & Bihar. Unitech sells 10.11 million square feet between March and September with a value of Rs. 4,000 crore This sale is against 21.30 (msf) that has been launched. The sales include 8.16 msf in residential and 1.95 msf in non-residential spaces. Bajaj Capital Centre for Investment Research 6/8
FINANCIALS (CONSOLIDATED) Profit & Loss A/C (Rs. Cr) Particulars 200903 200803 200703 200603 200503 Net Sales 2849.6 4114.5 3289.5 926.3 644.4 Other Income 465.4 164.9 98.3 27.8 20.2 Expenditure 1257.6 1860.8 1410.5 1042.9 803.6 EBITDA 1586.6 2240.4 1866.0 174.7 77.3 Depreciation 20.9 20.5 7.3 11.2 11.3 EBIT 1565.7 2219.9 1858.7 163.5 66.0 Interest 591.9 317.0 165.1 52.2 29.8 PBT 1439.2 2067.8 1791.9 139.1 56.4 Tax 243.7 399.1 486.0 51.8 22.8 PAT 1195.5 1668.7 1305.9 87.3 33.7 APAT 1191.8 1624.6 1283.5 87.8 34.2 Dividend % 5.0 12.5 25.0 10.0 40.0 EBITDA (%) 55.8 54.6 57.0 14.3 8.8 APATM (%) 41.9 39.6 39.2 7.2 3.9 Balance Sheet (Rs. Cr) Particulars 200903 200803 200703 200603 200503 Equity Share Capital 324.7 324.7 162.3 12.5 12.5 Reserves 4844.8 3275.8 1832.0 247.2 183.2 Net Worth 5169.5 3600.5 1994.3 259.7 195.7 Minority Interest 61.5 115.9 1.3 23.7 21.0 Total Debt 10848.0 10466.0 5618.5 1150.5 581.2 Total liability 16079 14182 7614 1434 798 Gross Block 3417.5 1224.6 759.6 535.4 302.5 Less :Acc depreciation 100.3 66.1 47.6 91.1 83.2 Net Block 3317.2 1158.5 712.1 444.3 219.3 CWIP 1175.8 2098.2 215.3 126.8 13.3 Investment 1580.8 1416.5 454.8 14.5 50.2 Inventories 15775.6 13479.4 8699.5 3087.0 1656.2 Debtors 931.0 746.0 145.8 103.3 85.3 Cash 644.8 1408.3 1022.7 389.9 271.8 Loan and advance 2867.4 2190.6 1839.7 286.0 140.4 Total Current Assets 20218.9 17824.3 11707.7 3866.1 2153.7 CL(including.provisions) 10212.4 8309.3 5475.9 3003.2 1626.8 Net Current Assets 10006.5 9515.0 6231.8 862.9 526.9 Misc. Exp not written off 0.0 0.1 0.1 0.6 0.2 Net Deferred Tax -1.4-6.0 0.0-15.1-12.1 Total Assets 16079 14182 7614 1434 798 Cash Flow Summary (Rs. Cr.) 200903 200803 200703 200603 200503 Cash & Equivalents in Beginning 1408.3 1022.7 389.9 271.8 107.9 Net Cash from OA -143.6-975.0-2074.5-224.7 96.9 Net Cash Used in IA -1035.0-3187.4-725.5-308.3-96.3 Net Cash Used in FA 415.1 4548.0 3432.7 651.1 163.3 Cash & Equival at End of the year 644.8 1408.3 1022.7 389.9 271.8 * Free cash Flow -3060.0-4381.0-2792.0-638.0 12.5 Key Ratios 200903 200803 200703 200603 200503 Debt/ Equity Ratio 2.1 2.9 2.8 4.5 3.0 Interest Coverage Ratio 2.6 7.0 11.3 3.1 2.2 RoNW (%) 27.2 58.1 114.1 39.2 0.0 RoCE (%) 10.4 20.5 41.2 15.0 0.0 NCA/TD 11.0 15.8 22.6 7.2 6.0 Current Ratio 2.0 2.1 2.1 1.3 1.3 Total Debt/EBIT 6.9 4.7 3.0 7.0 Net Debt/EBITDA 6.0 4.0 2.0 4.0 4.0 RoTA 9.7 15.7 24.4 11.4 8.3 WC/TD 0.9 0.9 1.1 0.8 0.9 * Revaluation Reserve is excluded in calculation of RoNW and RoCE Bajaj Capital Centre for Investment Research 7/8
CONCLUSION Based on the above, any investment by way of an Inter Corporate Deposit in Unitech Ltd will carry an ABOVE AVERAGE RISK. The outlook is expected to improve in the near future contingent to a revival in general economic conditions, real estate markets and business outlook for the company. Disclaimer: This document has been prepared by Bajaj Capital Centre for Investment Research (BCCIR), a unit of Bajaj Capital Limited (BCL). This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). The investment discussed or views expressed may not be suitable for all investors. Affiliates of BCL may have issued other reports that are inconsistent with and reach to a different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject BCL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. In no event shall BCL, any of its affiliates or any third party involved in, or related to, computing or compiling the information herein have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of BCL and affiliates. This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. BCL will not treat recipients as customers by virtue of their receiving this report. BCL, its directors, employees and/or its associates/affiliates or their employees may have interest and/or hold position(s), financial or otherwise in the securities mentioned in this service. Bajaj Capital Centre for Investment Research Bajaj Capital Ltd 97, Bajaj House, Nehru Place New Delhi 110019 Bajaj Capital Centre for Investment Research 8/8