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Saturday, December 6, 2008

Unitech - Fair Value Is Much Higher

Indiabulls Securities Research has upgraded its rating on Unitech from hold to buy in its December 3, 2008 research report.

"Unitech’s consolidated revenue declined 3% yoy, from Rs 10.1 billion in Q2’08 to Rs 9.8 billion in Q2’09. Unitech’s second quarter net profit declined 12.5% yoy to Rs 3.6 billion (Rs 2.2 per share) in Q2’09, from Rs 4.1 billion (Rs 2.5 per share) in Q2’08."

"We believe that the stock has a long-term upside potential as the Company has a huge land bank at diversified locations, a strong asset base, and the expertise and execution skills. Our fair value estimate for the Company is therefore Rs 46 per share, which represents a 76.6% upside to the current share price. Hence, we upgrade our rating on the stock from Hold to Buy," says Indiabulls Securities' research report.

Strong asset base offsets short-term liquidity concerns
Unitech reported a moderate financial performance in Q2’09 due to the liquidity crisis and a slowdown in the real estate sector. The EBIDTA margin improved considerably because of a drop in the construction cost.

We upgrade our rating from Hold to Buy due to the following reasons:
Huge land bank spread across the country: Unitech has 13,923 acres of land spread across all major cities of the country. Nearly 70% of the land has been purchased from the government with clear titles. Approximately 70% of the land bank spreads across the four cities of Kolkata (35%), NCR (14%), Chennai (12%), and Vizag (9%)

Operating margins likely to fall but remain at higher levels:
The operating margin is likely to decline from the current 59.9% due to the expected fall in property prices and a shift in focus towards low-margined middle income housing. However, lower steel and cement prices are expected to partially offset the decline in the margins.

Short-term liquidity likely to improve:
Unitech is struggling with shortterm liquidity concerns due to its high leverage and debt obligation of Rs. 27 bn due by the end of FY09. We believe that it can tide over the current situation through the sale and monetization of its assets

Attractive valuation:
Unitech’s stock currently trades at a 43.4% discount to our fair value estimate of Rs. 46, which incorporates the substantial decline in real estate prices across all segments. We believe that the stock has a long-term upside potential as the Company has a huge land bank at diversified locations, a strong asset base, and the expertise and execution skills.
Source: IndiaBulls Securities Research Ltd.

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