Unitech: Significant value, little to show

Street awaits progress on sales pick-up and asset monetisation

The Unitech stock has benefited from the rally in realty scrips, on expectations that economic growth will help tide over demand concerns and improve liquidity.

The stock, more than doubled since April, could react to two triggers. The first is news on asset sales and the second, increased sales of its current projects. With an improved economic environment what the Street is also looking at is the substantial value unlocking that could happen, given Unitech's vast landbank in the National Capital Region (conservatively valued at Rs 80-100 a share). While this is substantially more than the current price (Rs 28), most analysts continue to be bearish, given no improvement in cash flows or asset sales. Another imponderable is how the 2G case involving the promoter will pan out.

For the March quarter, Unitech reported a loss of Rs 51 crore (after writing off investment worth Rs 103 crore in the telecom business) as against a profit of Rs 30 crore in the year ago quarter.

On the operational front, what has been plaguing Unitech is the slow movement of its projects. Its pre-sales have come down on the back of poor demand and no major launches. Pre-sales have declined with FY14 collection of Rs 1,502 crore (down 46 per cent year-on-year). While currently the company is developing a total area of 55.90 million square feet, the focus has been on completing the 25.22 million square feet of projects (nine million square feet yet to be developed) launched prior to 2009. Unitech's Managing Director Sanjay Chandra, while highlighting sluggish demand and high construction and finance costs, said the focus was primarily on ensuring that construction activity at the on-going projects didn't suffer while managing a tight cash flow situation.

While faster execution will improve cash flows, given slow-moving sales and muted cash flows, analysts believe that Unitech must reduce its debt, which has been increasing over the last few years. It is up 20 per cent to Rs 6,316 crore (Rs 24 per share) at end-March 2014 from a FY10 level of Rs 5,280 crore. While the company will be able to meet its interest expenses, analysts believe some asset sales will be required if Unitech is to improve its position. JPMorgan analysts led by Saurabh Kumar feel Unitech’s free cash flows are very finely balanced and need significant reduction in interest costs to get to a comfortable level. Analysts believe the company needs to sell Rs 3,000 crore of land assets to cut its interest outgo by Rs 400-500 crore to improve its cashflow to interest position.