We initiate a buy on Unitech, with a target of Rs. 120-150, a mild correction up to Rs. 78 is possible in short term, and hence we initiate an accumulate call with a target price of Rs. 140 in next 6 months. Over last 5 trading sessions share has been consolidating its gains made over last 2 months. Our first call of buying Unitech 35 for a target of Rs.51 with an upward bias was based after discounting all future bad news. Since then dark clouds have passed over and there is a lot of positive news flow in the counter.



Unitech touched its peak of Rs. 546.80 in Jan’08 and since then Unitech stock has fallen and is currently trading at discount of 84% to that price. One year of global turmoil has taken maximum toll on leveraged companies. Unitech had a total debt of ~ Rs. 10,000 Crore with Debt to Equity Ratio of 2.4 (TTM) Company had to pay 2500 Crore of debt by March’09, global credit crisis squeezed liquidity out of the system, which made it difficult for highly leveraged companies like Unitech pay its short term and long term debt. As a result of major turmoil company had to reschedule and restructure major percentage of its short term debt and some portion of long term debt.



Highlights:



Company has achieved major breakthrough in terms of handling its liquidity:

1. April 16th: Company raised USD 325 million or 1600 crores through a sale of shares to institutional buyers, in an attempt to part-retire its short-term debt.Company will reduce its outstanding Debt to 6000 crores by FY2010 from 10,000 crores in 2008. Post the issue Promoter stake in the company will be diluted to 51% and arnings will get diluted by 25% going forward. Company also has Boards permission for a second QIP.



2. Sold off 2 Hotel property at around Rs. 500 Crore and commercial property Saket at around Rs. 500 Crore..



3. Rolled of 75% of Rs. 2500 crores due by March’09.



4. Company has raised Rs.1000 crores long term debt with maturity of 3-5 years, to replace short term debt.



5. Closed Telenor deal and expecting first payment within this week. Company has declared that this money would be used to pay off debts taken by Unitech for Unitech wireless.



Although money was raised by company at highly discounted value which will dilute company’s future earnings by 25%, as total equity has increase from 162 crores to 204 rore. These deals have ensured long term sustainability of Unitech which will enable company to payback its debt and help it focus on its core strength of Construction. The company's 8000 acres of land bank, which company has said will keep it busy for next 10 years.



Company’s has made mistakes in the past for which it has paid the price as stock price are still ruling at more than 80 percent discount to its 2008 high’s, but the fact that with clear focus of promoters to utilise existing land bank and ell assets to achieve financial de-leverage. We believe this along with improved liquidity and increased credibility to raise long term debt is enough reason to start marking its assets to the prevailing market rates.



Unitech is one of India’s largest real estate companies with over 3 decades experience in real estate development. India’s second largest real estate company by market cap, with land bank of 14000 acres spread across 15 cities in India. The company, which used to be an NCR developer a few years ago, with over 84% of its and bank in non-NCR regions at present. Unitech is planning to develop its land bank through a mix of 51 projects in the residential, commercial, retail and hotel segments he Company has diversified into residential, commercial, retail, entertainment and hospitality projects.



Outlook and Valuation



Company has a debt of around Rs. 7800 crores (May’09) with interest cost of around 14%, however most of the interest payment has been capitalized and the interest will be paid when the asset for which the loan was taken is sold. Thus, Unitech Ltd. paid interest of only Rs 97 Crore during the quarter.



This along with delay in projects across the industry at lower expected Operating margins of around 40%. Interest costs will affect NPM which we expect will go down sharply down to around 25% in FY10E.



Company’s ability to execute projects timely along with its execution abilities will always provide opportunity to price is properties at a premium to the market.



With huge debt problem and ability to pay suppliers and sub contractors taken care of we can focus company’s profitability and ability to churn out products like a factory to

have higher sales and consequently much higher cash flows will remain key.



With lower margins for low cost projects we expect Operating profit margins to be near 40% as against 60% for last 3 years. Higher interest cost albeit lower overall Debt levels will bring Net Profit margins to be around 25%. We estimate FY12E P/E ratio



Unitech Wireless-Telenor Telecom Deal



Unitech has a pan-India GSM license and has already got the crucial spectrum for 22 circles. It had paid Rs 1,650 Crore as license fee for the pan-Indian license, for which Unitech Wireless had received a valuation of more than Rs 11,000 Crore. Unitech has so far invested Rs 138 Crore as equity in the telecom venture. Addition Unitech Telecom has also borrowed around Rs 2,000 Crore from the holding company.



Unitech needed a partner for its telecom venture which finally ended with Telenor coming in for 67% stake in the venture by paying Rs 6,120 Crore.



Investment Advice:



At the beginning of 2008 when all analysts rated Unitech as buy at CMP of Rs. 600 they mentioned following downside risks.



- Tightening of Interests rate;?

?- Restricted Overseas borrowing and change in FDI regulations;

- Rise in steel and cement prices;?

?- Delay in completion of planned projects;

?-  Overall decline in Indian Economics.

 ?

All the downside risks along with massive unexpected slump in Real Estate markets and tight credit markets got realized as a result of which we saw deep and long correction in Real Estate markets pushing Unitech stock prices down by 95%.



- Interest rates on Home Mortgage are below 2007 rates. ?

- Government is considering change in current FDI rules to allow Unitech with Overseas borrowing. ?

- Government has been quick to boost Indian Economy through its Fiscal stimulus. ?

- Raw material prices have dropped by more than 50% giving some respite to developers. ?



Real Estate markets have started looking up with prices settling at 20% discount to Jan’ 2008 prices.



We believe that Real Estate markets in India are yet to bottom out, however we also believe that share markets either discounts or overprice the reality and in this case all bad news has been discounted. The fact is that company holds 14000 acres of land, 8000 acres of which will be developed in next 10 years is enough reason to stay invested and even buy the share at these levels.



Key Risks:



We believe following risks are already hurting the company’s financials and will continue to do so in coming 2-3 quarters.

?

- Slowdown in employment industry hiring will continue to hurt residential demand and commercial demand to some extent.



- Uncertain economic scenario is putting off investors and buyers alike, who are waiting for situation to improve and may be get even at lower prices.



- Profitability of the company will remain low for multiple reasons



1) Higher Raw material costs



2) Lower profitabability on existing properties due to lower costs as it was capitalized.



3) Company’s plans to build low price, lower margins mass market residential properties in future.



Main risk that we see will put downwards pressure on the stock price will not be Company risk as was the case with the initiating call at Rs. 35 in March, rather Macro Economic Risks of India as a country and Real Estate as a sector are much greater, thus if India.



Unitech is the second largest Real Estate Company in India. With reduction in debt levels, expanded Equity and of Assets and Qualified institutional Placements, we believe long term sustainability of the company is no more a concern.

We expect Unitech to outperform Nifty and DLF in the long term. We see valuation of Unitech around Rs. 200 a share. We expect short term correction to Rs.78 after which we share can bounce back to 120 months.