Unitech has one of the highest debt-equity ratio among Indian real estate developers. Even adjusting telecom-related debt, gross debt of property business is approximately Rs80 billion.
The company’s interest coverage ratio (EBITDA/Gross interest) remains dangerously high at 2.2x declining to 1.9x by FY10. We believe that weak pricing and slow execution are likely to stretch Unitech’s balance sheet.
The company has launched only about five new projects (6m sqft) this year. We are still skeptical about the company’s ability to drive volumes in the residential segment in FY09 due to weak market sentiment.
The Telenor deal hardly improves Unitech’s tight cash-flow situation. Unitech’s cash inflow will benefit by merely $60 million from the first tranche of equity infusion. Repayment of shareholder’s loans of approx $150 million by Unitech Wireless to Unitech is only subject to exercise of an option.
We do not anticipate any further cash inflow to Unitech from the deal. However, the deal sufficiently capitalizes Unitech Wireless to fund its capex requirements over next two years.
We are introducing our first earnings cut since our March 2008 initiation on the back of poor execution in H1FY09. Penetration of new markets has been significantly delayed exposing Unitech to increased competition.
It is also affected by the lack of full possession of land bank and a large chunk secured by loans, which significantly dents near-term monetization potential through plot sales.
We have cut our volume recognition (under PoCM) by 44% and 45% for FY09 and FY10. We are also building 10% price correction for the next three years. Our earnings consequently decline by 38% and 62% in FY09 and FY10, respectively.
We now value Unitech at 5x (12x earlier) one-year forward earnings. Our multiple is consistent with global trough property bear market multiples over a 20-year horizon.
The price target has also been revised to Rs40e. Our NAV of Rs76 incorporates 10% pricing correction over next three years and maximum yearly sales in any city not exceeding 6m sqft.