Unitech: better days ahead

Demand for Unitech’s shares have picked up considerably in recent months owing to the pickup in demand for housing and, more importantly, a big improvement in the company’s balance sheet.

Shares of Unitech Ltd rose 5% to Rs82 in a weak market, giving the impression that its results for the quarter ended March were better than expected. But according to an analyst, the results are a non-event.This is simply because much has changed since the March quarter for the company. In any case, Unitech’s consolidated operating profit fell by 74% in the March quarter, which isn’t much better than the rest of the industry. In other words, there’s nothing in the March quarter results to warrant fresh buying. Still, demand for Unitech’s shares have picked up considerably in recent months owing to the pickup in demand for housing and, more importantly, a big improvement in the company’s balance sheet.

Unitech’s consolidated operating profit fell by 74% in the March quarter, which isn’t much better than the rest of the industry. Ahmed Raza Khan / Mint

About a month after market sentiment improved (mid-March), Unitech moved quickly and made a placement of shares worth Rs1,620 crore with institutional investors.

In the past few months, it has also sold some assets including a hotel and raised about Rs1,000 crore. Prior to that, it restructured short-term debt in order to reduce near-term cash outflows.

The company has also approved a plan to issue warrants worth Rs1,150 crore to the promoter group, which will pay 25% of the amount as advance to subscribe to these warrants. While the share issuances are diluting equity substantially, hardly anyone’s complaining since the high debt on the company’s books was a cause of big concern. In fact, Unitech shares had fallen to as low as Rs25 on the National Stock Exchange earlier this year, which according to some analysts reflected the markets’ concern that the company ran the risk of defaulting on debt and eventually running into bankruptcy. Some of the proceeds from the equity issuances have been used to retire debt, which will reduce the debt-equity ratio substantially.

Motilal Oswal Securities Ltd estimates that the company would be able to reduce its debt-equity ratio from 1.9 times to 1.1 times. With the simultaneous improvement in home sales, the company’s results should look much better from the June quarter onwards, on a sequential basis. A number of brokerages are positive on the stock at current levels, with some of them estimating that demand for housing will continue to improve and prices will rise from the next fiscal year. Considering that much of the froth has been taken off Unitech’s valuations and that the company’s balance sheet is in much better shape, the risk of a sharp downside, at least, certainly seems limited.