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Thursday, June 02, 2016

Unitech Ltd: Buy
CMP: Rs.3.94
Face Value: Rs.2
Book Value: Rs.36.60
Market Cap: Rs.1,030.82 Cr
Medium Term Target: Rs.25
Long Term Target: Rs.36
PhotoBusiness Insider
Introduction: Established in 1971, Unitech Ltd is amongst India’s leading business groups, with an outstanding track record in large-scale, integrated, Real-Estate Development and Infrastructure Development in India.

The real-estate development journey for Unitech Ltd, since it started working on its first real estate project- South City, spread over 300 acres in Gurgaon, has been truly remarkable. Today, Unitech’s land reserves are spread across all major hubs of economic activity in the country and the Company focuses on large, mixed-use developments. The Company’s diverse portfolio includes residential, commercial, special economic zones (SEZs), IT Parks, industrial & logistic parks, hospitality, retail and entertainment projects. The Company’s infrastructure related businesses include General construction, Design, manufacturing, erection & commissioning of transmission towers, Facility & property management services and township management services.

Be it firms like SOM, Callison and HOK in real estate– Unitech has a history of successful partnerships with leading global organizations. Its blue-chip customer portfolio in real estate includes clients like Fidelity, Google, HSBC, Sun Life, Marriott, Reebok, IBM, RBS, Ernst & Young, Bank of America and LG.

Shareholding Pattern: The promoters  hold 26.77%, while the general public holds 73.23%. In the general category, the Foreign Portfolio Investors, hold 13.06% while Financial Institutions/Banks and Insurance Companies, hold 0.95% and 0.88%, respectively. 

Triggers
(i) The Book Value of the shares of the company is Rs.36.60, while the CMP is only Rs.3.94. This difference is too high to be sustained. Soon the market is expected to take the share price to some rational levels. 

(ii) At the current market price of Rs.3.94 the market cap of the company is only Rs.1,030.82 Cr, which is less than the total income of the company in FY16, i.e. Rs.1,328.21 Cr. Now if we consider its nearest competitor, DLF Ltd, then we find that it has a market cap of Rs.23,857.68 Cr, while its FY16 turnover was only Rs.3,572.59 Cr, which means its market cap is around 6.68 times FY16 turnover. Now if we apply this rule to Unitech Ltd, then the stock price with suitable discounting, should be trading above Rs.10. 

(iii) At the time of announcement of results, Sanjay Chandra, Managing Director of Unitech said that the company's focus has been primarily on completing the ongoing projects and delivering the finished product to its customers. Balance receipts from these ongoing projects combined are sufficient not only to sufficient to meet the remaining construction expenses but also to service the debt, if any, against these projects. 

(iv) The company has been taking various measures, such as creation of project specific escrow accounts, to boost customer confidence and improve conditions so as to generate liquidity needed for completing the ongoing projects. Apart from improving collections, company is also mobilising funds from banks and financial institutions. With these measures company is hopeful of completing the ongoing projects in the next few quarters in a phased manner.

(v) Let us roll back and see what the broad issues were over the last few years for the Real Estate sector. To begin with, the sub-prime crisis led global economic meltdown in 2008 and its aftermath squeezed liquidity from the system and real estate demand largely shifted from investors to final property users. This was followed by a phase where the Government of India and the Reserve Bank of India (RBI) focussed solely on managing inflation and adopted a tight monetary policy that drove domestic interest rates to very high levels affecting financing costs of developers and end-user demand, as EMIs also increased substantially. Also, the extant policy framework virtually put a freeze on the capital flows to the real estate sector. Finally, in the period between 2011 and 2014, the Indian economy witnessed a major slowdown and the investor and consumer confidence hit major lows. In this economic uncertainty many real estate companies, held back on critical long term investment decisions like buying a house.

Today, the good news is that there are several positive external developments. To begin with, there has been a revival in economic growth. The GDP growth which slumped in FY2013, increased first to 6.6% in FY2014 and then to 7.2% in FY2015 and now to 7.9% (~6MFY17).

This has helped stimulate investor confidence in the economy. In another significant development, with inflation under control the RBI has eased monetary policy a bit  and now the interest rate is on the downward trajectory.  The Government of India has also indicated a proactive reform agenda to stimulate growth. This included positive announcements on infrastructure spending, manufacturing and focus on greater skill development and job creation. While much of this is still at a policy level, one expects it to trickle, within the next few quarters. All these is expected to have a positive impact on the shares of real estate companies across India. 

(v) Broadly speaking, the macro-economic outlook for India is for economic strengthening through higher infrastructure spending, increased fiscal devolution to the states, and continued reform to financial and monetary policy. The government underscored its intention to move steadily to tackle politically difficult structural issues that have stalled investment and limited economic performance in recent years. All these measures is likely to translate into positives for the real estate sector in the near future.

(vi) Unitech Ltd, one of the largest developers in the country by market value, is planning to raise Rs.1,300-1,400 crore in a bid to speed up construction of its existing projects and overcome a delivery backlog and liquidity crunch. It plans to raise the money by selling land and stakes in projects or even from a single-large transaction.

(vii) Unitech Ltd has also fully exited the wireless business and met all its liabilities and obligations to the tune of Rs.1,093.74 crore related to that business. Its prime focus now remains on executing projects and delivering them. Accordingly, cash generated, both operating as well as non-operating, is being utilized first to execute existing projects. Over the last couple of years, after it exited the telecom business and reached a settlement with its partner Telenor ASA in 2012, Unitech has been focusing on the real estate business.


(viii) Unitech Ltd has so much historically acquired land at relatively reasonable values that if it manages to raise the capital to undertake construction, it should be enough for the company’s turnaround. The promoters also have a background of executing large projects in the past. While Unitech has a large residential portfolio, it may also take advantage of the booming commercial office space business even in a market like NCR - - large companies continue to take up space and build offices, and Unitech has land with approvals...

(ix) As a vision of ushering India into a new era of urbanization induced growth, the NDA government has proposed to build 100 smart cities in India. The list of 98 cities has already been declared out of which 33 urban cities, have been successfully chosen over two rounds, that will start receiving govt. seed funding.  The govt. has so far allocated around Rs.48,000 crores as seed funding. Rest of the funding will be raised from private sector, municipal level tax & revenue collection & various foreign equity funds that are interested in investing -Betting on the economic potential of India. If successfully implemented, the mammoth project won't just enhance the standards of living in Indian cities but would be great boost to the real estate industry & urban infrastructure.

(x) The Real Estate Act and the constitution of the real estate regulator is a step in the right direction. The new norms state that a new project can only come into the market once it has all the necessary approvals in place. While, most of the large players like DLF Ltd, Oberoi Realty Ltd, Unitech Ltd, have more or less followed this practice, there are many other firms, especially smaller ones, who market projects without all the permissions in place and their trade-off against these big players, is obviously the price-tag. They sell houses cheaper than the big real estate firms, and not much could be done about that because that is the way the market worked. However, with the new norms and the real estate regulator in place, projects that don’t have all permissions simply won’t be able to enter the market; that is a great thing because it will create a level playing field for companies. Now consumers can only buy something legitimate with all approvals in place; and of course, they will have to pay a premium for that.  This will reduce the flow of new projects into the market and the resultant supply, as not only will new projects need approvals from the government, they will also need approvals from the new regulator. It will take some time for the new regulatory framework and infrastructure to be set up and, consequently, there will be a huge drop on the supply side. 

Even the remaining supply will be at a higher cost because companies have to service the cost of debt while they wait for permissions to come in and start selling a project. In the process Real Estate Projects could end up becoming more expensive. These regulations exist in developed markets like the UK and Singapore. But the cost of money in these markets is cheap when compared to India where cost of capital is very high. So clearly, a lot of real estate supply is going to be sucked out and the remaining supply is also going to come at a higher cost. In effect, prices could go up anywhere between 30 and 50 percent, especially with the cost of capital during the construction phase compounding and weeding out of low cost real estate players. 

Conclusion: It has been seen from the chart the scrip looks to have bottomed out around Rs.3.90. The formation of a doji pattern after a white candle, gives more ammunition to the bulls. 

In such circumstances, and considering the above points, the investors can start accumulating the stock of Unitech Ltd at the CMP of Rs.3.94, for a medium target of Rs.25 and Long Term (12-18 months) target of Rs.36. 
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