The current rising interest rate environment is softening the demand for residential and commercial units. The prices of real estate properties in some major metropolitan areas are already 10-15% off their peaks.
Furthermore, with inflation rates hovering around 12%, Unitech’s construction costs are likely to increase significantly, thereby pressuring its margins.
To limit the exposure to a possible decline in real estate prices, while securing financing for its projects without increasing its already significant leverage, it is looking to monetize several of its upcoming projects through private equity deals.
Unitech’s current land bank is approximately 14,000 acres, consisting of 750 mn sq. ft. of salable area, which is expected to be developed over the next 10 years.
It also plans to acquire more land at strategic locations, but for now, is focusing on the development of the Mumbai market and on building its hospitality business.
The company has also announced plans to sell a 26% stake of its telecom arm to a yet-to-be-identified strategic foreign partner. It is considering raising up to Rs80 billion of debt over the next five years to fund its telecom operations.
The stock is currently trading at a 33% discount to our fair value estimate of Rs214. We estimate its NAV per share to be Rs252, which incorporates a substantial decline in real estate prices.
Considering a weak demand scenario, we believe Unitech should trade at a discount to its NAV, which we assumed to be 15%.