Unitech: High-risk, high-return deposit

Vidya Bala

The fixed deposit scheme of Unitech is suitable for investors who can stomach some risk. The sharp downturn witnessed in the real estate sector, fund crisis faced by many players in the sector and the slow pick-up in demand for real estate place the business of Unitech in the high-risk category. Unitech's large size, established brand name and improved financials have, however, been steadily aiding recovery.

The attractive interest rates of as much as 12 per cent per annum for a three-year period can be construed as a premium payout for the risk involved.

Investment strategies

Investors can adopt a two-pronged strategy to reduce their risk term/exposure.

Short tenure: One, investors can restrict the term of their fixed deposit to six months to one year, locking their money for a short period and yet enjoying an interest rate of 11 per cent – a return not presently available in bank fixed deposits and most credit worthy financial institutions.

A six-month deposit is, however, available only under the cumulative option (where interest is paid on maturity) and would entail a minimum investment of Rs 25,000.

Interest payout: Investors can consider the two-year interest payout option (called Scheme A), available on a quarterly basis, at 11.5 per cent per annum. This would allow cash out on the interest, even as the principal continues to earn returns.

Net of tax, assuming a 10 per cent tax slab, you would earn an interest of 10.3 per cent if you opt for a two-year term under Scheme A.

A payout option, would however, require you to invest a minimum sum of Rs 25,000. Banks currently offer a maximum of 7.5 per cent for up to 2 years.

Cumulative option

While the above two investment strategies would be our preferred mode of investments, individuals who can assume higher risk can consider taking the two-year cumulative option where interest would be compounded and paid out only on maturity. Without doubt, the cumulative option is certain to offer superior yields as you earn “interest on interest”. Besides, the company has made the cumulative scheme attractive by compounding interest on a monthly basis.

For instance, if you consider the two-year cumulative scheme, Rs 10,000 would grow to Rs 12,572 at the end of two years, at an interest rate of 11.5 per cent. This would work to a yield of 12 per cent over the term. However, net of tax (assumed at 10 per cent), the yield would be about 11 per cent.

Investors can refrain from the three-year term as bank interest rates may themselves see a revival. The latter would then provide a safer and attractive option.

The company

Unitech is among the few real estate developers with a pan-India presence. The company's present projects measure to 21.5 million sq.ft. across nine cities, that include large projects in Gurgaon, Noida, Mumbai, Chennai and Kolkata. After being hit by the 2008 real estate crash, Unitech was also faced with a situation of mounting debt by late 2008. While it took resorted to a debt restructuring programme initially, the company thereafter offered residential projects at discounts to market prices and launched a number of affordable homes in order to revive working capital flows. Simultaneously in 2009, it successfully raised about Rs 4500 crore of equity in two tranches through qualified institutional placements.

These measures have enabled the company to bring back its net debt to equity ratio to a healthy 0.6 times in September, from a worrying 1.8 times in March. A good portion of the QIP funds have been used to repay debt, with the rest being ploughed for construction work.

The company has sold 50 per cent of the total area launched, a good part being residential projects. It has raised about Rs 550 crore through these sales so far; the rest of the payments, being mostly linked to construction, would only flow in a staggered manner. The company's interest obligations appear adequately covered by profits, despite decline in earnings over the past year and a half.

Additional interest: The fixed deposit scheme offers an additional 0.5 per cent per annum for its employees, shareholders (minimum holding of 100 shares), property owners as well as senior citizens above 60 years.

Unitech promoter plans to raise stake by 10%

In a notification to BSE, Unitech said that it plans to take shareholders’ approval for issuing warrants to the promoters, also indicated its plans to issue securities to raise long-term funds.

A little over a month after diluting stake, the promoter Chandra family at Unitech Ltd, India’s second largest real estate firm by market value, is considering raising its stake by 10% through an issue of convertible warrants.

The promoters currently hold a 51% stake in the company. The Chandra family will invest Rs1,000 crore in the next 18 months by subscribing to the warrants, a person familiar with the development said on condition of anonymity. In June, Unitech will invest Rs275 crore to subscribe to the warrants, this person said. A warrant is a security that gives the holder the right to either buy or sell securities, usually equity, from the issuer at a specific price within a certain time frame.

The promoters will raise funds for buying the warrants by exiting from certain non-core businesses, the person said. This will be similar to their decision in February to sell their stake in Orissa Sponge Iron and Steel Ltd for around Rs40 crore. “Post capital infusion, (the) debt-equity ratio of the company will reduce a lot... This also shows the confidence and commitment of the promoters in the company,” the person said. In a notification to the Bombay Stock Exchange (BSE) on Tuesday, Unitech said it plans to take shareholders’ approval for issuing warrants to the promoters. It also indicated that it would issue securities to raise long-term funds but did not indicate the sum.

The board on Tuesday approved both the proposals. The company has called for an extraordinary general meeting on 16 June to take the shareholders’ approval for the proposals. “Clearly, fund-raising in this environment will be considered favourably by the markets,” an analyst with an international brokerage firm said, who declined to be named. “But it is not clear from where the promoters will get the money to increase their stake.” Last month, Unitech raised $325 million (Rs1,543.7 crore) through a qualified institutional placement (QIP), in an attempt to part-retire its short-term debt. A QIP is a private placement of equity shares or securities convertible to equity by a listed company with qualified institutional buyers approved by market regulator Securities and Exchange Board of India. The QIP was done at Rs38.50 a share and resulted in a 13 percentage point-dilution of stake of the promoter family to 51% from 64%.

In recent weeks, real estate developers have been trying to raise funds through the equity route either to reduce debt or fund projects. Last week, DLF Ltd, India’s largest developer by market value, said its promoters had sold a 9.9% stake in the company for Rs3,860 crore to raise money to buy out hedge fund DE Shaw and Co. Lp.’s investment in DLF Assets Ltd, also promoted by them, and to infuse fresh capital into the latter. Indiabulls Real Estate Ltd is also raising around $600 million through the QIP route. Unitech has a debt of Rs8,500 crore and plans to reduce debt through the sale of assets such as hotels, office complexes and ready properties. Shares of Unitech were up 10.61% to close at Rs70.90 on BSE, while the benchmark Sensex index was up by 0.12% and BSE’s realty index, an index of 14 real estate companies, jumped 12.80%.

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.

Morgan Stanley ups stake in Unitech

The stake of Morgan Stanley entities in Unitech has increased to 5.53 per cent, after it acquired 4.11 per cent additional stake. Unitech had concluded a Qualified Institutional Placement (QIP) on June 26 to raise nearly $575 million by selling fresh shares to a clutch of institutional investors. Unitech also informed the Bombay Stock Exchange that HSBC Global Investment Fund has acquired 4.07 crore shares in the company (two per cent stake). It now holds 12.36 crore share s in the company, after the transaction. Unitech QIP proceeds are expected to be utilised for servicing the realtor’s debts and for funding new projects. The shares were placed at about Rs 81 a share.

Unitech: Strong Foundation, Strong Future

Stock data (21 May 2009)	BSE
Share Price (Rs.)	71.9
No. Of Shares (Mn Nos.)	1623.4
Market Cap (Rs.Mn)	116,639.5
52 week high/low (Rs.)	279.9/21.8
Average Volume (6 month) (Mn Nos.)	396.5
Source: BSE

Unitech Ltd was incorporated in 1972 as United Technical Consultants Ltd. The company started as a soil and foundation engineering consultancy firm, promoted by a group of engineers led by Ramesh Chandra. It diversified into construction in 1975 and got its first international project in Iraq and Libya in 1978. In order to tap the opportunity in the Indian real estate market the company launched its first residential project, South City-I in 1986, which was completed in 1992. Since then there has been no looking back and the company is now into construction of industrial plants, infrastructure projects, development of residential and commercial projects, leisure and entertainment projects, hospitality projects, shopping malls and various other types of construction. The company has also ventured into mobile telecom business recently.

So far, Unitech has built more than 100 residential projects, 50 commercial properties, hotels, highways, flyovers, schools, airports, amusement parks, transmission lines and other heavy constructions. The company today has pan India presence and is the second largest listed real estate company in India with a market capitalization of Rs.116.6bn

Shareholding Pattern

The promoter group holds 50% in the company. The single largest share holder is Prakausali Investment with a holding of 26.71%. The Managing Director, Sanjay Chandra holds 4.08%. Prakausali Investment is a Non-Banking Finance Company promoted by the family members of Sanjay Chandra. The rest 19.2% is held by other financial institutions and companies (belonging to the promoter group).

Key Milestones

The key milestones achieved by the company since incorporation are given in the table below:

Timeline	Milestone / Event
2008	- Forays into Telecom - Expanded into the Mumbai market
2007	- Commenced operations in UAE (Dubai) - Awarded title of Superbrand by Superbrand India
2006	- Won biggest land deal in India, 343 acres of prime land in Noida - Awarded Chandigarh Amusement Park project
2005	- Entered Kolkata - Awarded the title of Business Superbrand
2004	- Expanded into Greater Noida, U.P
2003	- Launched the first mega residential project, Uniworld City in Gurgaon - Entered Noida, U.P
1998	- Awarded the ISO 9002 certification
1996	- Constructed the Radisson Hotel, Delhi
1992	- Consolidated in Gurgaon with South City-I
1988	- Entered Bangalore
1987	- Entered Lucknow and Mumbai
1986	- Ventured into real estate and started shaping Gurgaon, Haryana
1978	- First international project in Iraq and Libya
1975	- Diversified into construction
1972	- Started out as a company dealing in soil mechanics
Source: Company

Financial performance

The company has a track record of healthy operating performance in its 22 years history as a listed company. The consolidated revenue and EBITDA of the Company have grown at a CAGR of 86.02% and 212.12% over the last three years. This significant increase in the revenue and earnings has been mainly due to the large scale of operations and efficient and timely execution of projects. The value of work done has grown at a CAGR of 78.89% over the last three years. Thus, the highlights of the profit and loss account are primarily a reflection of the company’s performance in executing projects.

Particulars	2005	2006	2007	2008
Revenues (Rs. Mn)	6,649.0	9,545.0	33,881.0	42,801.1
EBITDA (Rs. Mn)	779.0	1,966.7	19,278.7	23,687.2
PAT (Rs. Mn)	348.0	876.5	13,055.0	16,691.9
EBITDA (%)	11.7	20.6	56.9	55.3
PAT (%)	5.2	9.2	38.5	39.0
ROCE (%)	11.2	33.7	65.5	46.4
ROE (%)	17.8	10.3	23.8	16.0
Debt-Equity (x)	1.92	4.02	2.00	2.38
Shares in Issue (Mn)	1,623.4	1,623.4	1,623.4	1,623.4
EPS (Basic) Rs.	0.2	0.5	8.0	10.3
Source: Company

The consolidated revenue of the company rose by 26% to Rs.42,801.1m during FY08 as against Rs.33,881.0m during the previous year. The consolidated profit after tax (PAT) jumped by 28% to Rs.16,691.9m, as compared to Rs.13,055.0m in the previous year ended March 31, 2007. The PBDIT growth is slightly lower than the growth in revenues because of change in the product and the project mix. Real estate remains Unitech’s primary business segment accounting for over 87% of the company’s income from operations. Revenues from the real estate business increased by 24.77% to Rs.36.02bn in 2007-08 from Rs.28.77bn in 2006-07 while PBIT (without un-allocable overheads) increased by 22.27% to Rs.23.48bn in 2007-08.

The company enjoys high ROCE as the share of residential business is high (70% of area being developed in real estate business) where there is faster churning of capital due to substantial cash upfront payment from customers in the form of advances. ROCE declined during FY08 as compared to FY07 because during 2006-07, sale of 60% stake in six office projects to Unitech Corporate Parks PLC contributed significantly to the revenue and profit. The company’s net debt increased from Rs.29.5bn in FY07 to Rs.71bn in FY08 due to land bank payments, higher construction cost and payment of telecom licensee fees resulting in a higher debt:equity ratio.

Significant land reserves acquired at competitive prices: The Company has a large, low cost and well diversified land bank which is sufficient to meet its development plans for the next seven to eight years. As of 31 March 2009, the Company had 11,178.52 acres of land reserves. These land reserves are spread across the country in key Tier I and Tier II cities such as the NCR, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Kochi, Mohali, Chandigarh, Goa and Vishakhapatnam. The company intends to focus on exploiting its existing land bank to develop its future projects in order to improve the cash realisation from its projects. In addition, the Company plans to acquire new land very selectively and only when it considers that the acquisition affords an exceptional value proposition for it. I think Unitech is well positioned to grab a significant portion of the 5%+ CAGR growth of the Indian real estate market in the next four years.

Improving cash flow to reduce debt: The company completed the sale of one of its hotel properties, “Courtyard by Marriott”, situated in Gurgaon, Haryana for Rs.2.3bn in January, 2009. In addition, the company has sold off its commercial office block in Saket, Delhi (which was originally built as the company’s corporate office) for Rs.5bn and plans to sell certain projects in Kochi and Gurgaon. The Company is also planning to raise Rs.16bn during FY10 from selling four of its hotels which are currently under construction in Noida, Gurgaon and Kolkata. Further, the company is planning to induct private equity into some of its projects. The Company intends to use its improved cash flows to reduce its debt and thereby improve its debt to equity ratio. It plans to cut down its debt by at least Rs.10bn by the end of FY10 which will improve its debt:equity ratio from 2.38 to 2.00.

New Business Initiatives: The company has entered the telecom sector through its subsidiary Unitech Wireless. Unitech Wireless received pan-Indian telecommunication licenses in all 22 telecom circles in February 2008 and has, as of 13 February 2009, received initial spectrum (4.4 Mhz) in 21 telecom circles. Unitech Wireless expects to commence providing telecom services by the end of the third quarter of 2009. Telenor, the world’s seventh largest telecom operator has agreed to acquire 67.25% stake in Unitech Wireless in four phases. Two phases are already complete in which Telenor has acquired 49% stake for a total of Rs.23.8bn. These funds will help the company in clearing off part of its debt. Also, the entry of Unitech into the telecom sector will help the company to reduce its excessive dependence on the real estate sector. However, the downside is the intense competition from established players that have a pan India footprint.

Particulars	Q2FY09	Q3FY09	Q3FY08
Net Sales (Rs.Mn)	9,831	4,893.9	11,421.0
EBITDA (Rs.Mn)	6,092.0	2,443.0	7,573.80
PAT (Rs.Mn)	3589	1,360.5	5,257.8
EBITDA Margin (%)	62.0	49.9	64.3
PAT Margin (%)	36.5	27.8	46.0
EPS (Rs. )	2.6	0.8	3.2
Source: Company

Results Update - Q3FY09

The company’s revenue plunged by 57.1% YoY from Rs.11,421m to Rs.4,893.9m in Q3FY09. This was due to fall in revenues across the business segments including real estate, construction and consultancy but more so in the real estate market. The company derives 60-70% of the revenue from residential real estate which showed a downward trend since the beginning of the fourth quarter of FY08. The revenue from real estate business fell by 63.2% YoY, construction by 62.2% YoY and consulting by 19.8% YoY. The quarter witnessed a considerable fall in real estate demand leading to a huge decline in property prices. EBITDA Margin declined from 64.3% to 49.9% YoY due to lower realization rate and 10.1% increase in staff cost.

Future plans

Key Strategies

Strategy	Expected Result
Developing high quality projects at competitive prices	Consolidate its position as a leading real estate developer in India
Increased focus on the affordable housing segment	Competitive advantage in this segment of the housing market
Implementation of value engineering	To reduce costs and enhance customer value
Reducing capital-intensive projects	Strengthening its financial position
Source: Company

Capex: Unitech Wireless has plans to spend approximately Rs.75bn during the first three years of its operations and estimates that the total funding requirement for the telecom project including network rollout based on 2G technology will be Rs.150bn. Unitech Wireless expects to fund its capital expenditure through its internal cash resources, external funding through debt and shareholder contributions.

SWOT analysis

trengths	Weaknesses
· Strong brand and customer experience. · Large scale of operations. · Diversified portfolio, both in terms of product and geographies. · Large land reserve that can be developed in the future. · Track record of profitability	· Business heavily dependent on the performance of the real estate market in India. · High debt to equity ratio. · Negative net cash flows from operating and investing activities for the past three years.
Opportunities	Threats
· Focus on affordable housing, a segment where a demand-supply mismatch exists. · The housing investments are expected to grow to Rs.17,338bn between 2006-07 to 2010-11 as compared with Rs.9,810bn invested in the previous five years. (CRISIL) · Entry into the growing Indian telecom market.	· Intense competition among the peer group to grab maximum market share. · Global economic slowdown may continue to affect the business of the company.

Valuation and recommendation

Unitech’s revenue is estimated to grow at a CAGR of 8.8% over FY08-11, EBITDA by 8.0% and PAT by 7.9%. I expect growth to be led by higher scale of operations and new business initiatives. The EBITDA margin is expected to be 54%+ due to low cost of land and efficient and timely execution of projects.

Particulars	FY08	FY09	FY10E	FY11E
Revenues (Rs. Mn)	42,801	35,359	44,199	55,248
EBITDA (Rs.Mn)	23,687	20,703	24,844	29,812
EBITDA (%)	55	59	56	54
PAT (Rs.Mn)	16,692	13,416	16,769	20,962
EPS (Rs)	10.3	8.3	10.3	12.9
Shares in Issue (Mn)	1623.4	1623.4	1623.4	1623.4
P/E* (x)	7.0	8.7	7.0	5.6
*Price@71.85 as on 21 May 2009 Source: Company/Analyst Estimate

Company	EPS TTM	P/E	Price
Unitech	4.46	16.1	71.85
DLF	9.09	37.6	341.95
HDIL	53.6	5.6	300.3
Akruti City	72.09	6.2	448.25
India Bulls Real Estate	1.87	109.8	205.3
Source: Company/BSE

At a CMP of Rs.71.85, the company is trading at 7.0 times its FY08 earnings. It is trading at a discount to selected peer group companies. I believe current valuations are attractive and recommend a ‘BUY’ on the stock.