It’s a case of double whammy for Unitech Ltd, one of India’s largest real estate firms. It is faced with problems both in its core realty business and its telecom joint venture, Uninor. Unitech’s shares have fallen by 11.5% in the past seven trading sessions. This is higher than the 10% drop in the BSE Realty index of the Bombay Stock Exchange. Since mid-August, Unitech has been underperforming the realty index, after having outperformed by around 17% until then.
While most real estate stocks have corrected owing to concerns about rising interest rates and the scam involving home loans, Unitech has the added problem of its involvement in the 2G spectrum issue, thanks to its 33% equity holding in Uninor. So far, a delay in roll-out obligations in some of Uninor’s assigned circles has resulted in penalty payouts by Unitech.
Graphic by Ahmed Raza Khan/Mint
Of course, the bigger concern now is the controversy shrouding the issuance of the telecom licences itself. Analysts say the worst case scenario could mean cancellation of licences and the best case scenario could be repricing the spectrum licence at current valuations. At this juncture, both options seem to threaten the investment made by Unitech into the telecom business (book value of around Rs.2,200 crore).
On the core realty business front, revenue and profit prospects seem bright for the next two quarters of fiscal 2011. Sluggish construction activity and labour shortage due to the Commonwealth Games had led to a 15% and 2% year-on-year (y-o-y) drop in operating profit and net profit, respectively, during the September quarter. This was despite a 25% growth in revenue. But analysts expect a 15-20% y-o-y increase in revenue during the December quarter. Besides, operating profit margin is expected to expand to 35% against 24% a year ago.
But while short-term performance should be good, rising interest rates threaten the outlook on profit in the medium term. Indeed the firm has a healthy debt-equity ratio (0.5) relative to peers. But as interest rates rise, the high risk-profile of the sector would limit access to low-cost funds.
A report by Ambit Capital Pvt. Ltd says, “Net profit could grow at a slower rate due to the consolidation of telecom debt from 2Q FY11, which will result in higher interest outgo.”
Unitech shares trade at a 30-33% discount to estimated fiscal 2012 net asset value. Yet, even though valuations seem attractive, upsides will be capped because of the negative sentiment.
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