Unitech: Cramped growth

A lack of funds might hurt the firm's plans.

The Unitech stock fell over 5 per cent on Monday in an otherwise steady market. From its recent peak of Rs 538, the real estate developer's share price has come off by 53 per cent to Rs 253 currently.

One reason for this has been the company's inability to mop up a planned Rs 4,000 crore, partly through a listing on the Singapore Stock Exchange and partly through a placement to institutional investors.

While the Rs 3,288 crore firm is understood to be exploring a private equity option for a project in Mumbai, it may fall short of funds to complete other projects that have been planned.

Also, access to funds is becoming more difficult and money itself becoming costlier, the Delhi-based company might not be able to complete all its planned projects so volumes, say analysts could be lower by about 17-18 per cent in FY09 and about 15 per cent in the following year.

As of now, Unitech hopes to construct about 40 million sq ft over the next three years. Moreover, the somewhat difficult market conditions, in which demand has clearly become weaker, has prompted analysts to revisit their price assumptions: many are now pencilling in a lower price for both residential properties of about 5-10 per cent as also lower rentals of about 10 per cent for both offices and retail space.

That has resulted in a reduction in the forward net asset value for Unitech by about 15 per cent value to Rs 365 per share. Given the weak market sentiment, analysts believe Unitech should trade at about a 10 discount to then rather than a premium as was earlier the case.

That would mean a target price of around Rs 330 leaving an upside of 30 per cent from current levels. However, should prices or residential property fall further or rentals for commercial property soften, in the wake of an economic slowdown, real estate players, including Unitech will see their NAVs at even lower levels. Unitech is expected to close FY08 with revenues of Rs 4,350 crore and a net profit of Rs 1,650 crore.