Unitech’s decision to transfer or demerge its non-core operations into a separate company called Unitech Infra is a positive move. This will enable Unitech Infra, which will have telecom, property management, infrastructure and development businesses under its fold, raise funds without being hindered by the lending norms to the real estate sector.
Analysts feel while the move may not bring about significant value accretion in the short term, it will ensure greater focus, separate managements, and gains for investors if the new company is listed in the future.
Unitech Infra
The demerger, effective from April 1, will give existing equityholders a share in the new entity for each share held in Unitech.
The parent company will hold 35 per cent stake, while promoters and public will hold 31.7 per cent and 33.3 per cent, respectively, in the new entity. Unitech Infra has a net worth of Rs 4,979 crore, which will enable it to bid for large projects. Unhinged from its parent, the new entity can now raise money as an infrastructure company with easier access to domestic as well as overseas borrowing instruments.
With a debt of Rs 350 crore and a low debt to equity ratio, the new company has the flexibility of leveraging up to two times to fund its projects. However, growth in the business will depend on Unitech’s ability to source large projects, over and above its in-house realty projects.
While the opportunities in the infrastructure sector are enormous (the road sector itself is worth Rs 3 lakh crore under the XI Five-Year Plan), Unitech Infra will face tough competition from established players. While this is a new opportunity, investors will also keep an eye on sales and debt situation at the parent company.
Demand’s back
For Unitech, which was struggling to get its business going in the latter half of FY09, the revival in demand as well as the liquidity infusion through equity placement has eased the pressure.
The company sold about 16.6 million square feet of space in FY10, of which 3.45 million square feet was booked in the March quarter. The company is currently developing 35 million square feet projects, of which about 40 per cent is likely to be completed in the current financial year. While the company’s focus on affordable homes has increased its volumes and about half of its overall sales will be in this segment, it may depress margins going ahead. For FY10, the company is expected to report revenues of Rs 2,700 crore, a 4 per cent drop over the previous year. Debt, which had shot up to Rs 10,000 crore at one time, has come down substantially and is about Rs 6,300 crore today.
Conclusion
Analysts peg the value of the demerged entity at Rs 15-20 per share and have revised their guidance following the restructuring move. A sum-of-the-parts calculation pegs the value of Unitech between Rs 94 and Rs 120 a share.
At the current price of Rs 85, the stock is trading at 17 times its fully diluted FY11 earnings per share of Rs 5. Considering the restructuring move, the reduction in debt, the revival of the real estate segment, focus on mid-income housing and over 7,500-acre land bank, its revenues and profits should look up over the next two financial years. Expect a return of 15-20 per cent over the next one year.
