Unitech is India's second largest listed real estate developer with a land bank of nearly 10,700 acres spanning across India, making it amongst the largest diversified developer in the country. Unitech has a differentiated business ideology of fast capital conversion and has a focus on acquiring large parcels of land for integrated development. The management believes in developing land parcels for selling built-up space (as a developer) rather than retaining them for rental income (as a landlord). However, we believe that current stock price does not price the significant execution and absorption risks, arising out of mega development plans by various developers in the next 3 years. Also, with increasing number of developers getting listed the premium enjoyed by a handful of players including Unitech is slowly eroding.
We believe that its valuations are stretched at 1.63x NAV of Rs. 280 and 1.15x FY09 NPV of Rs 395. We initiate coverage on Unitech with an Underperformer rating, with a 12 month price target of Rs 395 based on 1x our FY09 NPV valuation of Rs 395/ share. Huge premium to NAV and NPV: We estimate Unitech's NAV (Current market value of undeveloped land bank) to be Rs 280 and the stock currently trades at 1.63x (63% premium) its NAV. We believe that the huge premium to NAV is difficult to justify as real estate companies cannot keep buying land at current prices and valuing them on NPV terms on a sustainable basis. This is due to sharply increasing supply of high quality built up space in the property markets. We estimate Unitech's NPV to be Rs 395 which is our price target, as we believe that a premium on NPV is not justified in a consolidating real estate market scenario with prices & transaction volumes stagnating and even declining.
Execution and subsequent absorption concerns: We estimate that Unitech will develop over 563 million sq ft (including JVs, MoUs and sole development rights) of usable space in the next decade (2008 – 2019) and in excess of 50 million sqft in the next three years. Other big developers have their huge development plans on similar lines. Based on the implied volumes for the industry, we believe that there are significant execution risks attached to building on this mammoth scale. The ability to execute these mega plans on time and costs basis remains a big concern, which is not factored in the stock price. We also remain very apprehensive about the market's ability to absorb such large quantities at historically high real estate prices.
Evaporating scarcity premium: The Indian real estate industry is getting more transparent and institutionalized. Many real estate developers have chosen to raise money (over Rs. 500 Billion in last 1 year) from the equity market, and more real estate companies are planning to raise money. We believe that this will increase the options for investors to get an exposure to the Indian real estate industry. Consequently, the scarcity premium enjoyed by a small set of companies including Unitech would be slowly eroded.
Valuations stretched at current levels: On account of all these factors we rate the company an underperformer with a 12 month price target of Rs 395,. The stock currently trades at a 15% premium to our price target. Our price target is at 1.4x NAV, 1.0x NPV and 12.7x time FY09 earnings. On the other hand, the ability of Unitech at monetizing its assets (which it has successfully done in the past with Unitech Corporate Parks) at higher than our expected NPV estimates remains a key risk to our price target.
We believe that its valuations are stretched at 1.63x NAV of Rs. 280 and 1.15x FY09 NPV of Rs 395. We initiate coverage on Unitech with an Underperformer rating, with a 12 month price target of Rs 395 based on 1x our FY09 NPV valuation of Rs 395/ share. Huge premium to NAV and NPV: We estimate Unitech's NAV (Current market value of undeveloped land bank) to be Rs 280 and the stock currently trades at 1.63x (63% premium) its NAV. We believe that the huge premium to NAV is difficult to justify as real estate companies cannot keep buying land at current prices and valuing them on NPV terms on a sustainable basis. This is due to sharply increasing supply of high quality built up space in the property markets. We estimate Unitech's NPV to be Rs 395 which is our price target, as we believe that a premium on NPV is not justified in a consolidating real estate market scenario with prices & transaction volumes stagnating and even declining.
Execution and subsequent absorption concerns: We estimate that Unitech will develop over 563 million sq ft (including JVs, MoUs and sole development rights) of usable space in the next decade (2008 – 2019) and in excess of 50 million sqft in the next three years. Other big developers have their huge development plans on similar lines. Based on the implied volumes for the industry, we believe that there are significant execution risks attached to building on this mammoth scale. The ability to execute these mega plans on time and costs basis remains a big concern, which is not factored in the stock price. We also remain very apprehensive about the market's ability to absorb such large quantities at historically high real estate prices.
Evaporating scarcity premium: The Indian real estate industry is getting more transparent and institutionalized. Many real estate developers have chosen to raise money (over Rs. 500 Billion in last 1 year) from the equity market, and more real estate companies are planning to raise money. We believe that this will increase the options for investors to get an exposure to the Indian real estate industry. Consequently, the scarcity premium enjoyed by a small set of companies including Unitech would be slowly eroded.
Valuations stretched at current levels: On account of all these factors we rate the company an underperformer with a 12 month price target of Rs 395,. The stock currently trades at a 15% premium to our price target. Our price target is at 1.4x NAV, 1.0x NPV and 12.7x time FY09 earnings. On the other hand, the ability of Unitech at monetizing its assets (which it has successfully done in the past with Unitech Corporate Parks) at higher than our expected NPV estimates remains a key risk to our price target.
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