Is Unitech Ltd, a BUY?

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After announcing the Q4FY16, result an upbeat MD of Unitech Ltd (Rs.5.43), Sanjay Chandra, said: “Balance expected receipts from (these) ongoing projects combined are sufficient not only to meet the remaining construction expense but to also to service the debt, if any, against these projects. Apart from improving collections, company is also mobilizing funds from banks and financial institutions".

From a peak valuation of $11 billion in 2007 (Rs.74,756 Cr), life has come a full circle for Ramesh Chandra, the Unitech founder, with his company reporting losses till Q4FY16 and the market cap plummeting to around Rs 1,420.65. 

So, will it be good to buy the shares of Real Estate behemoth Unitech Ltd at Rs.5.43, which is available at the price of penny? 

In one word, it would be YES, it is because like most of the major builders in India, Unitech Ltd plans to raise funds and at the same time it is selling off its non-core assets to cut its burgeoning debt. Not only that the company is looking to raise funds, through private placement to ward-off its tight cash flow conditions. 

Look at the case of Lodha Developers Pvt. Ltd, India’s largest unlisted developer which has the highest cash flow among all real estate companies in India with collection of over Rs.6,200 crore in 2015-16. Its land bank was valued at over $11 billion by Knight Frank in 2014. However, after  Moody’s Investors Service downgraded the corporate family rating due to high debt, the company has started evaluating a couple of significant private equity transactions and have already raised Rs.425 crore in May, to fund its ongoing projects. 

In the same way, HDIL (which I recommended at Rs.67 and which rose to Rs.100 plus), plans to further reduce its debt through a couple of transactions by selling additional floor space index (FSI) in its projects to other developers. 

Similarly, Bengaluru based developer, Prestige Estates Projects Ltd (Rs.178.45) which has Rs.5,500 crore in debt, aims to repay debt from the cash flows, generated from its yielding assets. 

Moreover, some of the fund management companies are offering preferred equity transactions, where they don’t charge interest or principal repayment for the first few years, giving developers some breathing time. Some of the real estate companies are even issuing warrants to promoters to reduce debt. Therefore, the sector as a whole is looking good after a long time. 

Unitech Ltd at present has a debt of around Rs.7,165.70 crore and land reserve of 300 mm sq.ft, as compared to 276 mn sq.ft of land bank and Rs.22, 202 crore debt of DLF Ltd, 5,500 acres of land and Rs.13,00 crore of debt of Lodha Developers Ltd and Prestige Estates Projects Ltd with Rs.5,500 crore of debt and 42 mn sq.ft of land bank. For more please look at the Figure above.  

This obviously makes the shares of Unitech Ltd, very attractive to buy at the CMP of Rs.5.43 in the BSE and Rs.5.45 in the NSE for short term targets of Rs.9.50-13-15.50.