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UNITECH - Investment Thesis

Mr. Rahul Singh | Posted On Monday, October 13,2008, 02:52 AM

UNITECH - Investment Thesis

 

 

Company description
UNITECH is a leading real estate developer and the biggest urban landowner in India. Apart from the flagship business of real estate development, the group has interests in varied businesses such as Fund management, Infrastructure development and Transmission tower manufacturing. The Group has recently ventured into mobile telecom business.

Key investment highlights
• There would be a lower demand for commercial properties in Metros and Tier-1 cities due to slow down in IT/ITES industry
• Higher interest rates on home loan has forced customers to postpone their decision to purchase properties
• Unitech has maintained its aggressive growth strategy with a ramp-up in its land bank and projects under construction. However, it did not directly raise equity in the recent bull market, resulting in high net gearing of 194% and a significant dependence on customer advances

Key drivers
• Inability to raise large capital from the market to fund its aggressive growth strategy would force it to depend heavily on private equity firms
• Delay in finding a JV for its telecom business is affecting it to raise cash
• New launches and presence in more cities have increased its overhead; This combined with higher construction costs have put pressure on the margin
 
Sector views
Real estate sector has been worst hit with the rising interest rates, inflation and global credit crunch. Developers have seen significant drop in demand from customers due to rising rates which has driven away speculators from the market. Thus, we see price correction in the range of 10-15% in most regions. However, long term view of the industry is still strong due to intact growth story of India

Key risks
• Acute credit crunch in global capital markets may derail its expansion plan
• Prolonged inflationary environment in the country may force buyers to postpone or even cancel their purchase plans

Valuation

 

 

 

DLF

UNITECH

PURVANKARA

P/E (x)

FY08A

FY09E

7.5

8.1

31.1

12.8

34.4

17.5

P/B (x)

FY08A

FY09E

2.6

2.5

12.5

4.7

4.24

2.92

ROE (%)

FY08A

FY09E

71.1

31.8

59.4

44.2

33.5

18.4

I believe UNITECH is quite aggressive but do not have sufficient resources to sustain its growth plan and recommend a SELL on this stock because:
1) It has huge land bank primarily in urban areas which were purchased at exorbitant price
2) Lack of cheap capital to support the growth

I also recommend a SELL on the stock because the macro-economic situation is quite bad and that is affecting almost every real estate companies. The global credit crunch may or may not improve till sometime next year while we expect inflation figures would come down to single-digit only by June-09.

Stock View
Maintain underweight (SELL)

 

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