Unitech will have to repay debt of Rs11 billion over the next two weeks and meet further debt obligations of Rs15 billion over the next three months.
Given the weak operational cash flow situation, it will have to resort to asset sales and / or debt restructuring over the near-term. Forced asset sales in the current environment could further erode equity value in our view.
The management has indicated that it is in the process of raising Rs8 billion to tide over the near-term liquidity crisis. Failure to do so could lead to forced sale of underlying assets (primarily land).
Fitch has downgraded Rs59 billion of Unitech’s long-term and short-term debt (approximately 60% of total debt). Long-term debt of Rs44 billion has been downgraded to speculative grade ‘B (ind)’ from investment grade ‘BBB ind’.
Short-term debt of Rs15 billion has been downgraded to F4 (ind) from F3 (ind), which, according to Fitch, “indicates a highly uncertain capacity for timely payment of financial commitments relative to other issuers or issues in the country.
Capacity or meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment”.
Despite easing of borrowing restrictions over the last month, we believe lenders are likely to remain wary of excessive lending due to Unitech’s weak cash flow situation.
The company has launched only about five new projects (6m sqft) this year. Ability to drive volumes in the residential segment in its key National Capital Region (NCR) market in FY10 will be limited due to ‘finished’ inventory build-up.
Delays in new launches in Chennai, Cochin and Hyderabad and lower likelihood of launching new commercial / retail projects in FY10 due to a stretched balance sheet impacts our estimates.
Leasing progress at UCP suggest a steep 89% decline in demand in first nine months of FY09 indicating a potential vacancy level of 50% when first phase of properties are completed in March 2009.
We are lowering our FY10E and FY11E revenue estimates by 28.7% and 31.8%. Our EPS estimates fall more steeply by 40.3% and 41.5% in FY10E and FY11E respectively due to high financial leverage. Our new target price is Rs23 (P/E of 5x on FY11E EPS of Rs4.62.