Unitech Equity Research Report

Equity Research Report Unitech Ltd. 2009

1 Security Analysis and Portfolio Management

Equity Research Report

Unitech Ltd.

Submitted to

Prof. Pooja Mordani

Submitted by

Manoj Chandiramani – PG – 08 – 09



Acknowledgement

I take up this opportunity to acknowledge the invaluable assistance of

various people who helped in the successful completion of this

project. My most sincere gratitude is reserved for

Prof.Pooja.Mordani , for being a moral inspiration at all times.

I would like to thank all the official of India Infoline Ltd. For

providing the relevant information for my project.

Last but not least, I would like to thank all my friends for their

encouragement and suggestions, which helped me immensely in the

completion of this project.

Manoj Chandiramani

PG – 08 - 09



Contents

Industry Analysis ................................................................................................................. 4

Sector Analysis .................................................................................................................... 9

Company Analysis .............................................................................................................. 12

Fundamental Analysis ....................................................................................................... 13

1. Efficiency Ratio‟s .................................................................................................... 13

2. Profitability Ratios .................................................................................................. 16

3. Coverage Ratios ...................................................................................................... 19

4. Market Based Ratios ............................................................................................... 20

The Earning Multiplier Approach ..................................................................................... 22

Unitech Financial Statement .............................................................................................. 23

Analysis Table ................................................................................................................ 24

Technical Analysis .............................................................................................................. 25

Parameters Considered For The Technical Analysis ...................................................... 26

Conclusion ......................................................................................................................... 27

Bibliography ...................................................................................................................... 28



Industry Analysis

Powerful demographic impetus about one in every sixth person on earth lives in India, and the

growth rate of the population is still rapid. The present fertility rate is just over three children per

woman. Although considerably lower than in the 1960s or 70s when women gave birth to an

average of five to six children, it is still far higher than in, say, China (1.7 children per woman)

or Europe (1.4 children per woman).

Since the lower birth rate is primarily a reflection of better living conditions in India, the rate of

population growth has moderated to just 1.5% p.a. Since 1970, the improved conditions have

also caused life expectancy to increase by 15 years to around 65 years at present.

In addition, during this period, infant mortality has been halved. The high birth rates and fall in

infant mortality over the past few decades imply that India‟s population is very young.

One in every three Indians is under the age of 15, and only one in three is older than 35. This

compares it favorably against China, where nearly 50% of the population is older than 35, and

roughly 60% in Europe.

The three demographic trends, i.e. high but falling birth

rate, increasing life expectancy and declining infant

mortality, are expected to persist in the coming years. Only

during the third decade of this century will the population

growth rate drop below 1%. Consequently by 2030, India

looks set to be the most populous country on earth. By

2050, roughly 1.6 billion people will live on the Indian

subcontinent, 200 million more than in China.

The already impressive number of 700 million people of

employable age1 in India is expected to grow by another

250 million in the next 20 years. Additionally, the valuable

economic reform policies implemented since the early

1990s have created the proper foundation for translating population growth into powerful

economic growth.



The Economy is booming.

In the past ten years, real GDP accelerated to an average of 6% p.a., growing much faster than in

earlier decades. In 2005, real GDP is expected to accelerate at least 8% from the previous period,

with investment to remain a strong impetus to growth. There are at least three reasons for its

sustained acceleration.

First, the economic liberalization in the early 1990s has integrated the country into world trade.

This has benefited the services sector in particular, with many companies from the United States

and Europe discovering the subcontinent as an attractive off shoring destination.

Second, India possesses a vast pool of highly skilled technicians

and engineers. Some 200,000 engineers graduate from Indian

universities each year, roughly six times as many as in Germany.

But even this large number of graduates may fall short of

meeting the strong demand for highly skilled staff. A survey of

Indian headhunters revealed that the number of urban jobs soared

by 21.5% in 2005, with a further 23% forecast for 2006.4

This implies that salaries for university graduates are on course

to increase markedly. This is already an ongoing phenomenon. In

a publication on salary trends in Asia, Hewitt Associates, a

consultancy, illustrated that salaries in India rose by an average of 13.5% in 2005 from 2004, the

steepest climb among the countries reviewed. In the IT industry, pay packets were almost 18%

bigger.5

Third, public spending on road and transportation infrastructure is expected to climb. This is key

to the government‟s long-term growth strategy – and will serve as a positive stimulus to the

construction industry. High growth trend in the long term6 The current engines of economic

growth – population trend, human capital, openness of the economy and rising investment – will

remain the key drivers of India‟s economic growth in the long run.

High growth trend in the long term

The current engines of economic growth – population trend, human capital, openness of the

economy and rising investment – will remain the key drivers of India‟s economic growth in the

long run.

Deutsche Bank Research‟s long-term growth model, Formel-G, depicted India as the growth star

performer over the period 2006 to 2020 among 34 developed and developing economies. This

puts it



ahead of China and Turkey. GDP per capita

in terms of purchasing power parity (PPP) is

expected to climb by almost 4% a year over

the next 15 years, with purchasing power

doubling over the period.

Real GDP is expected to average 5.5% –

with potential to rise even further to 6%,

reflecting India‟s huge efforts to build up its

infrastructure.

Still major tasks ahead

This development, however, is taking place from a very low base. GDP per capita in nominal

and PPP terms in 2005 was only roughly USD 1,100 and USD 2,800 respectively, reflected in

several social indicators which remain inadequate. For example, although literacy standards in

recent decades have risen to about 65%, this still leaves around 400 million people who are

illiterate, lending little scope for pay increases. In addition, of the 40 million people registered as

out of work (equivalent to an unemployment rate of around 10%) the large majority presumably

comes from this category.

But even this masks the true scale of the unemployment

problem, given that of the roughly 400 million people in the

workforce; only about 27 million belong to the organized sector.

This implies that more than 330 million people are in the non-

organized sector; hence, most are underemployed. The low

industrial base in India could explain the insufficient work for

unskilled labor and why more than 70% of the population still

lives in rural areas

Regional differences important

In a vast and heterogeneous country as India it is evidently important whether a property is

situated in a rapidly expanding or a stagnant region.

India has 28 states, six union territories and the capital Delhi. Huge income disparities exist

between these regions. In Delhi, for example, average net domestic product (NDP) per person is

150% above the national average, while Bihar in India‟s northeast – home to no less than 90

million – is only 31% of the Indian mean.



Major regional differences also exist in terms of economic

momentum. Taking only the larger states with a population

of at least 50 million, net domestic product per capita rose by

between 1.5% p.a. in Uttar Pradesh and 5.5% in West

Bengal from 1993 to 2001. It is interesting to note that there

are no trends towards convergence between the regions – at

least, not in the past ten years. In fact, a positive correlation

can sooner be established between the level of NDP per

capita from 1993 and the average growth rate up to 2001.

Although not very marked, this does become more

pronounced if the statistical “blip” Tripura is excluded from

the sample. This suggests that, if at all, the gap between the

regions has become wider rather than narrower during the upswing.

Finally, the existence of clear business clusters is also striking. In some smaller states the

manufacturing sector is virtually nonexistent, whereas in Goa, Gujarat or Jharkhand industry

accounts for almost one-third of economic output.

Cities form the hubs of development

For centuries cities have been the centre for economic and cultural development. On the one

hand, urban marketplaces enable cost-efficient barter processes, resulting in a meaningful

division of labor. And on the other, cities guarantee economies of scale for the funding of public

goods such as education.

Indian cities are customarily divided into three groups: Tier I comprises the capital Delhi, the

financial centre Mumbai and the IT hub Bangalore. Tier II consists of Hyderabad, Pane and

Chennai, the cities targeted by companies as alternative off shoring destinations and now possess

a well-trained pool of labor. The cost advantage of Tier II cities over those in Tier I is estimated

at 15 to 20%. But given the rising costs in Tier II cities as well in recent years, companies are

increasingly eyeing Tier III cities. These are cities with populations of more than a million but

are not yet completely established as outsourcing and off shoring destinations. Their absolute

cost advantage over Tier I cities is estimated at between 15 and 30%.9 According to the last

official estimate by the Census of India, there were a total of 27 cities with more than one million

inhabitants in 2001, in which nearly 75 million people lived. By 2005 this had risen to 35 cities

With a population of more than one million and almost 500 with at least 100,000 inhabitants.



However, given that many cities sprawl beyond the official city boundaries, it makes more sense

to focus on urban areas. In 2001 35 such agglomerations with at least one million people existed,

inhabited by around 108 million people in total.

Meanwhile, almost 150 million people are believed

to live in the 44 urban areas housing a million

people and more. The Mumbai and Delhi regions

alone are home to almost 20 million people each.

But these staggering figures must not be allowed to

detract from two facts. First, India is still a

predominantly rural society. While more than 300

million Indians now live in an urban environment,

this means that nearly 800 million people are still at

home in rural areas. The degree of urbanization, or

the proportion of people living in the cities, has

risen steadily in recent decades to just over 28% at

present. This still compares much lower than in

China with 40%. Second, the urban population

expanded more rapidly from 1981 to 1991 than in

the following ten years up to 2001. The rate of

growth in the city-dwelling population has slowed by around 0.5 of a percentage point.

Cities will continue to grow

The United Nations Population Division (UNDP) expects the degree of urbanization to grow

over 40% by 2030, implying that urban population will grow by 2.5% per annum in the next 25

years.

Hence, while the rural population increases only marginally,

urban population will double by 2030 to around 600 million

people.

Applying this average to the biggest urban agglomeration areas

in the country, it follows that in 2030 Mumbai will have a

population of roughly 35 million and Kolkata and Delhi just less

than 30 million then. This could still be considered a

conservative estimate as it puts urbanization in India then only at

China‟s level today. Assuming that India‟s industrial activity and

high-end services grow at above average pace, the rural exodus

could speed up sharply, similar to the development in China.



Were India‟s urban population to increase at a similar pace to the Chinese urban population

between 1980 and 2000 (by more than 4% p.a.), the number of people living in Indian cities

would soar from 320 million today to 900 million in 2030.

Urbanization would then exceed 60%, roughly in line with the current level in many east

European countries. Further, were the mega centers to expand at the same rate, the Mumbai

agglomeration area would have a population of over 50 million by 2030, and the Delhi and

Kolkata agglomerations a good 40 million. There are two clear outcomes following from this.

First, India‟s cities must gear up to a dramatic increase in size. Their infrastructure (schools,

roads, airports, seaports etc.) and housing capacities will need to expand massively. Second, the

accelerated rate in urbanization throws into particularly sharp focus the possibility that

established centers (i.e. Tier I cities) are already straining the limits of their capacities, leading to

above-average expansion in the second-tier cities.

Sector Analysis

The Indian real estate sector plays a significant role in the country's economy. The real estate

sector is second only to agriculture in terms of employment generation and contributes heavily

towards the gross domestic product (GDP). Almost five per cent of the country's GDP is

contributed to by the housing sector. In the next five years, this contribution to the GDP is

expected to rise to 6 per cent.

According to Jones Lang LaSalle, faster economic growth in Brazil, Russia, India and China

(BRIC) could result in the property markets of those nations recovering at a faster rate than the

UK and US real estate markets. It has also been suggested that India's property sector could

begin to improve from late 2009 and may attract up to US$ 12.11 billion in real estate investment

over a five-year period.

The IT and ITES sector alone is estimated to require 150 million sq ft of office space across

urban India by 2010. Organized retail is also responsible for the growth in commercial office

space requirement. The organized retail industry is likely to require an additional 220 million sq

ft by 2010. Moreover, growth is not restricted to a few towns and cities but is pan-India, covering

nearly all tier-I and tier-II cities.

Almost 80 per cent of real estate developed in India is residential space, the rest comprising of

offices, shopping malls, hotels and hospitals. According to the Tenth Five-Year-Plan, there is a

shortage of 22.4 million dwelling units. Thus, over the next 10 to 15 years, 80 to 90 million

housing dwelling units will have to be constructed with a majority of them catering to middle-

and lower-income groups.

Moreover, a report by leading international property consultants, Jones Lang LaSalle Meghan

and Cushman & Wakefield India in association with Shopping Centers Association of India,



named Mall Realities India 2010, states that over 100 malls of over 30 million sq feet of new

shopping centre space are projected to open in India between 2009 and end-2010.

Apart from the huge demand, India also scores on the construction front. A McKinsey report

reveals that the average profit from construction in India is 18 per cent, which is double the

profitability for a construction project undertaken in the US.

Foreign institutional investors (FIIs) have also shown confidence in the country‟s construction

sector and are shoring up investment. With the BSE Sense touching a 15-month high, the market

capitalization of FII investment in construction has gone up a whopping 422 per cent in the past

six months.

The real estate sector is also likely to get a boost from Real Estate Mutual Funds (REMFs) and

Real Estate Investment Trusts (REITs). In fact, according to a CRISIL paper, the REITs would

have the potential to hold at least 5 per cent share of the total global real estate market by 2010,

the size of which would turn to US$ 1,400 billion in the next 3 years. The paper titled, „Indian

REITs; Are We Prepared', says that by 2010, REITs alone would hold a market size of US$ 70

billion of the total real estate market as its concept is gaining ground in countries like India and

other developing nations.

Foreign direct investment (FDI) into India in the real estate sector for the fiscal year 2008-09 has

been US$ 12.62 billion approximately, according to the latest data given by the Department of

Policy and Promotion (DIPP).

New Projects

Zuni Group Global is planning to invest about US$ 247.5 million for setting up five-star

business hotels and luxury residential properties over the next three years.

Accor Hospitality, the largest hotel chain in Europe, with 4,000 hotels in 90 countries

will invest US$ 130 million to come up with 50 hotels in India by 2012.

An investment of US$ 627.3 million will be made by industries in the Aerospace and

Precision Engineering Special Economic Zone at Auditable, Andhra Pradesh.

Hiram Properties, part of Chennai-headquartered diversified Hiram Group, is planning to

invest around US$ 1.02 billion in various residential and commercial projects.



Government Initiatives

The government has introduced many progressive reform measures to unlock the potential of the

sector and also meet increasing demand levels. The stimulus package announced by the

government, coupled with the Reserve Bank of India's (RBI) move allowing banks to provide

special treatment to the real estate sector, is likely to impact the Indian real estate sector in a

positive way. RBI has decided to extend exceptional concessional treatment to the commercial

real estate exposure and restructured it to June 30, 2009.

100 per cent FDI allowed in realty projects through the automatic route.

In case of integrated townships, the minimum area to be developed has been brought

down to 25 acres from 100 acres.

Urban Land (Ceiling and Regulation) Act, 1976 (ULCRA) repealed by increasingly

larger number of states.

Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at

US$ 10 million and US$ 5 million, respectively.

Full repatriation of original investment after three years.

51 per cent FDI allowed in single-brand retail outlets and 100 per cent in cash-and-carry

through the automatic route.

The Union Ministry of Commerce & Industry has initiated steps to reduce the time taken to

develop special economic zones (SEZs) by simplifying procedures to get the tax-free industrial

enclaves notified.

Developers will now be able to get their land classified as an SEZ at the initial stage of approval

by submitting legal documents that prove land ownership.

Budget 2009-2010, has also given sops to the realty sector. Developers of affordable housing

projects (units of 1,000-1,500 sq ft) have been granted a tax holiday on profits from projects

initiated in the 2007-08 financial year. Such projects would have to be completed before March

1, 2012.

At the same time, the finance minister allocated US$ 207 million to grant a 1 per cent interest

subsidy on home loans up to US$ 20,691, provided the cost of the home is not more than US$

41,382. This subsidy is expected to give a further boost to the housing sector.



Company Analysis

The Indian real estate sector plays a significant role in the country‟s economy. The real estate

sector is second only to agriculture in terms of employment generation and contributes heavily

towards the gross domestic product (GDP). Five per cent of the country's GDP is contributed to

by the housing sector. In the next five years, this contribution to the GDP is expected to rise to 6

per cent.

The real estate sector in India has observed a quiet revolution over the past decade thanks to

India‟s booming economy which has led to an increased demand for both commercial and

residential space. According to a study by a leading industry chamber, the Indian real estate

sector is expected to grow at 30 per cent over the next decade, attracting foreign investments

worth US$ 30 billion.

The real estate sector is also likely to get a boost from Real Estate Mutual Funds (REMFs) and

Real Estate Investment Trusts (REITs). In fact, according to a Crisis paper, the REITs would

have the potential to hold at least 5 per cent share of the total global real estate market by 2010,

the size of which would turn to US$ 1400 billion in the next 3 years.

India‟s image as an investment destination has also steadily moved up the value chain over the

last six years with increasing transparency in the real estate sector. According to the Jones Lang

LaSalle 2008 Real Estate Transparency Index, India scores highest among BRIC (Brazil, Russia,

India and China) nations with a large number of listed real estate players that adhere to the

stringent guidelines by the Securities and Exchange Board of India (SEBI).



Fundamental Analysis

RATIO ANALYSIS OF UNITECH AND DLF

1. EFFICIENCY RATIO’S

Efficiency Ratios are the financial statement ratios that measure how effectively a business uses

and controls its assets.

The important Ratios under this head are:

Debtor’s Turnover Ratio: Net Credit Sales

Average Debtor‟s + Average Bills Receivable‟s

Average Debtor‟s = Opening Balance of Debtor‟s + Closing Balance of Debtor‟s

2

Average Bills Receivable‟s (Br) = Opening Balance of B/R + Closing Balance of B/R

2

This ratio measures the whether the amount tied up in Debtors is reasonable when compared to

credit sales and has the company been efficient in converting the Debtors into Cash. The higher

the number of times the debtors are converted into cash shows the efficiency of the company is

positive and also shows that the company has a low credit period.

Name of the Company Unitech DLF Industry

Average

Ratios (in times) 2007 -

2008

6.69 6.76 2.97

Debtor’s Collection

Period (Days)

55 54 129

Both the companies have nearly the same ratio, i.e. they are able to recover their money in a

period of around 55 days which is also better than the industry standard of 129 days. This also

shows that both the companies have good collection management.



Creditor’s Turnover Ratio: Net Credit Purchases

Average Creditor‟s + Average Bills Payable

Average Creditor‟s (Cr‟s) = Opening Balance of Cr‟s + Closing Balance of Cr‟s

2

Average Bills Payable (Bp) = Opening Balance of B/P + Closing Balance of B/P

2

This ratio measures the number of times the creditors are paid during the year. The higher the

number of times the creditors are paid during the year, it increases the credibility of the company

in the eyes of Banks, Financial Institutions, Credit Rating Agencies and new suppliers who

would be willing to extend the credit facility to the company.


Average


2008

1.21 2.79 -

Creditor’s Collection

Period (Days)

301 131 -

Although the amount of creditors of DLF is more compare to those of Unitech, it is less in

comparison with the amount of purchases DLF does. Thus there is a huge gap in terms of the

ratio. DLF pays in a period of around 130 days & on the other hand Unitech pays in a period of

around 300 days. The reason for the same is that Unitech has a low cash reserve and even the

company has a good credit standing in the market as it is more than 30 days years old. On the

other hand DLF has sufficient cash reserve due to which they may be paying off their creditors

frequently.

Inventory Turnover Ratio: Cost of Goods Sold

Average Inventory

Cost of Goods Sold: Opening Stock + Purchases – Closing Stock

Average Inventory: Opening Inventory + Closing Inventory

2

This ratio indicates how many times the company‟s inventory has been sold during the year. A

considerable amount of company‟s capital may be tied up in financing raw materials, work-in-



progress & finished goods. It is important to ensure that the level of stocks is maintained to meet

the customer‟s requirement.


Average


2008

1.96 1.43 0.38

Inventory turnover

Period (Days)

186 255 960

The Inventory Turnover ratio of Unitech is better than both its rival & industry standards. In real

estate sector it takes time for the Inventory to get sell as the cost is too much high compare to

other manufacturing and service sectors. Then also Unitech is able to convert its inventory faster

than DLF and other Industry players.

Total Asset Turnover Ratio: Total Sales

Total Assets

Total Assets: Fixed Assets + Investments + Current Assets

This ratio measures the number of times the Total Assets have helped to generate sales. A low

ratio signifies an idle capacity which is bad for the company.


Average

Ratios (%) 2007 - 2008 0.24 0.16 0.23

Here we can see that the assets of Unitech are a bit effectively utilized compared to DLF as the

ratio is a bit higher. Even Unitech has done better than the industry standards also.

Fixed Asset Turnover Ratio: Total Sales

Fixed Assets

This ratio indicates the number of times the total fixed assets have helped in generating the sales

of the company.




Average

Ratios (%) 2007 - 2008 27.82 1.70 6.12

Here there is a drastic difference in the ratio of both the companies. Although the sales of

Unitech are almost half the sales of DLF, the amount fixed assets hold by DLF is almost half the

value of its sales. Therefore the ratio of Unitech is much better than that of DLF. Even here

Unitech has achieved good efficiency compared to industry standards.

Sales/ Capital Employed Turnover Ratio: Net Sales

Capital Employed

Capital Employed: Fixed Assets + Investments + Working Capital

This ratio explains the number of times Capital has helped to Increase Sales.


Average

Ratios (%) 2007 - 2008 0.27 0.28 0.31

In both Total Asset turnover ratio & Fixed Asset turnover ratio, Unitech had performed better

than DLF but here both the companies have performed equally well although they are behind the

industry standards.

2. PROFITABILITY RATIOS

Gross Profit Ratio: Gross Profit *100

Sales


Average

Ratios (%) 2007 - 2008 64.23 61.07 -

As appropriate data was unavailable on Cost of Goods Sold (COGS), Industry Average could not

be determined. There is a slight difference in Gross Profit Ratio between both the companies. On

the positive side, both the companies have healthy gross profit margin. The main reason is the

growth in the company‟s sales. Both the companies have created a business model which



consists of differentiated products in the market place, diverse portfolio, large scale of operations

and large land reserve.

Diverse portfolio comprises of residential, commercial, Information Technology (IT) parks,

Retail, Amusement parks, Hotels and Special Economic Zones. Unitech had bought the

properties at lower rate in the past and sold them at the price when market was demanding higher

prices. The Unitech was also able to control its operating expenses and hence Unitech gross

profit ratio is slightly higher than compared with DLF.

Net Profit Ratio: Net Profit after Tax *100

Sales


Average

Ratios (%) 2007 - 2008 48.73 56.35 46.31

Earlier in Gross Profit Ratio, Unitech is slightly better than DLF. However Net Profit ratio of

DLF is better than Unitech. In spite of DLF is better than Unitech both companies have

performed above the industry average. As Unitech depends more on debt, there is high payment

of interest compare to DLF in relation to the sales. Even non – operating expenses i.e.

administrative expenses of Unitech is higher than DLF. Thus DLF has utilized effectively their

non - operating expenses. Hence the Net Profit of DLF is higher than Unitech.

Return on Total Assets: Net Profit after Tax *100

Total Assets


Average

Ratios (%) 2007 - 2008 5.95 10.98 8.62

Return on Total Assets of Unitech is the lower than DLF and Industry Average. The value of

Total Assets of DLF is 35% more than Unitech but the Net Profit of DLF is 150 % more than

Unitech. DLF has 85% of land reserves in 7 Metro Cities and generated profits due to efficient

operational activities. Hence DLF has efficiently utilized the Total Assets and generated profit.

Return on Shareholder’s Funds: Net Profit after Tax *100

Shareholder‟s Funds




Average

Ratios (%) 2007 - 2008 48.08 22.84 26.16

Return on Shareholder‟s Fund of Unitech is higher than DLF and Industry Average. The Equity

Capital base of DLF is 5 times greater than Unitech and the Net Profit is 1.5 times greater than

Unitech. Thus Return on Shareholder‟s ratio of Unitech is much better compared to DLF as

numbers of Equity Shareholders are higher.

Return on Equity Shareholder’s Funds: Net Profit after Tax *100

Equity Shareholder‟s Funds


Average

Ratios (%) 2007 - 2008 48.08 22.84 26.16

There are no Preference Shares issued in Unitech so Return on Equity Shareholders Funds is

same as return on Shareholder‟s Fund.

Return On Capital Employed: Net Profit After Tax

Capital Employed


Average

Ratios (%) 2007 - 2008 10.04 13.07 11.71

Return on Capital Employed ratio calculates the return on Capital i.e. employed by the providers

of Capital. Ratio of Unitech is lower than DLF and Industry Average. In the Turnover Ratio, the

Ratio of Sales to Capital Employed of both the companies is similar but Net Profits Ratio of DLF

is better than Unitech. Both the companies have been able to raise loans and have invested their

capital in Real Estate space of Housing, Retail, Commercial, IT parks and other activities of the

business. Unitech has acquired new parcels of land in North and South India. DLF‟s 85% of land

reserves are in 7 Metro cities. Hence DLF is able to earn better Returns on its Capital Employed.

Thus comparing the overall Profitability of both companies, DLF leads Unitech and generates

higher profits.



3. COVERAGE RATIOS

Interest Service Coverage Ratio: Earnings before Interest and Tax

Interest


Average

Ratios (times) 2007 –

2008

4.88 4.97 6.00

Unitech and DLF cover their interest payment by approx. 5 times. However both companies are

below the Industry Average. Debts (Loans) of the companies are very high still they are able to

cover their Interest payment due to high profits these companies earns. Despite companies are

able to cover its interest, the ratio is comparatively low i.e. approx 5 times. Thus in long term it

would not beneficial for the both companies to sustain.

Debt Service Coverage Ratio: Earnings before Interest and Tax

Interest + Repayment of Debt


Average

Ratios (times) 2007 –

2008

1.80 1.01 0.31

Debt Service Coverage Ratio of Unitech is higher than DLF and Industry Average. Unitech has

repaid a small margin of its enormous Debt while DLF comparatively has repaid higher debt as

DLF was able to earn higher profits and has also raised Equity Capital. Hence DLF reducing its

long term risk.

Unitech and DLF have taken high amount of loans and they have earned sufficiently to cover

interest but DLF is in better position compared with Unitech.



4. MARKET BASED RATIOS

Earnings per Share (EPS): NPAT – Preference Shares

No. of Equity Shareholders


Average

Ratios (Rs.) 2007 –

2008

6.34 15.48 -

Earnings Per share indicate the capital productivity of the company. The Net Profit after Tax

(NPAT) of DLF is 150% higher than Unitech and has more no. of equity shares. EPS of DLF is

doubled than that of Unitech which implies that DLF has better capital productivity than Unitech

and also has better economic performance compared to Unitech. This leads to greater investor

confidence in the company for DLF.

Dividend per Share (DPS): Total Equity Dividend

No. of Equity Shareholders


Average


2008

0.25 4.10 -

Dividend Per share explains the portion of the Net Profit distributed to the Equity Shareholders

as dividend. Unitech has allotted 12.5% as rate of dividend i.e. Rs. 0.25 per share dividend of the

Net Profit. DLF has issued Interim dividend and Final dividend of around 13 % each as rate of

dividend i.e. Rs. 4 per share dividend of the Net Profit. Unitech has issued a lower dividend as

they had issued bonus shares for two consecutive years and wants to retain earnings for their

future projects. On the other hand, DLF, in its First year of its IPO, has already issued bonus

shares with Interim and Final dividend to gain more investors trust and confidence in the

company and distributing more profits for its shareholders.



Dividend Payout Ratio: Dividend per Share

Earnings per Share


Average


2008

0.03 0.26 -

Looking at the ratios of both companies we can conclude that Unitech currently is following a

conservative policy and DLF after its first IPO has adopted a liberal policy by issuing interim

and final dividend of Rs. 2 per share.

Dividend Yield Ratio: Dividend per Share

Market Price per Share


Average

Ratios (%) 2007 - 2008 0.88 2.70 -

Dividend Yield Ratio indicates how much the investor receives on the investment at the current

market price. The Market Price of Unitech is Rs. 28.20 and DLF is Rs. 151.70 as on 27th

February, 2009. As we know Unitech is following a conservative policy and DLF has liberal

policy. An investor would earn 0.88% as dividend on its investment in Unitech compared to

2.70% in DLF. So investors would like to invest in a company that pays higher dividend on its

investment. Hence DLF would be the investor choice as it offers higher dividend than its

competitor Unitech.

Price Earnings Ratio (P/E): Market Price per Share

Earnings per Share


Average


2008

4.44 9.79 -

Price Earnings Ratio measures the Earnings per Share discounts the Market Price per Share. The

Market Price of Unitech is Rs. 28.20 and DLF is Rs. 151.70 as on 27th

February, 2009. DLF

Price Earnings Ratio is higher than Unitech which indicates DLF is a high risk company



compared to Unitech. A risk taking investor would invest in DLF as they would be able to earn

more than investing in Unitech. While a risk adverse investor would put its money in Unitech

and would earn lower compared to DLF shareholder.

Looking at the Market Based Ratios, we can say that investors certainly favor Real Estate

Sector‟s No.1 Company DLF in terms of Revenue and Market Capitalization.

The Earning Multiplier Approach

In the Earning Multiplier the Goal is to find out the value anchor which is nothing but the

intrinsic value of the share in appropriate terms.

Step 1

We need to find the estimated figures for the next year. This can be done by calculating the

CAGR of all the required parameters. Once the CAGR is calculated then this represents an

appropriate growth figure which can give us the projected figures. Going in the normal flow the

PAT can be calculated. Once the PAT is figured out we can subtract preference dividend from it

and divide it by the number of outstanding shares to calculate the estimated EPS.

Step 2

We need to calculate the P/E ratio for the estimated year. As a result we use the formula of

Dividend payout ratio divided by the product of the sustainable growth rate and the required rate

of return. The DPR can be calculated by dividing the dividend / share by the earning /share. The

sustainable growth rate can be divided by the product of the Average ROE over the previous 5

years and the Average Retention Ratio for the previous 5 years. The required rate of return is

calculated using the CAPM model. Once we get all these figures we can use the formula given

above to calculate the appropriate P/E Ratio.

Step 3

We have both the Projected EPS and the Appropriate P/E. Multiplying them will give us the

Value Anchor which is the intrinsic value of the share.

The table below will give us all the figures that we need for the calculation of the value anchor

Risk Free Rate is taken as 7.09%

Market Return rate is taken as 17.05

Beta of Unitech is 1.63 as per the BSE Website



Unitech Financial Statement

Company >> Finance >> Profit & Loss

Unitech Ltd

Industry :Construction - Housing - Large

(Rs in Crs)

Year Mar 05(12) Mar 07(12) Mar 07(12) Mar 08(12) Mar 09(12)

CAGR

Multiple Mar 10 E

INCOME :

Sales Turnover 509.33 653.3 2,503.97 2,804.12 1,837.07 0.38 701.91

Excise Duty 0 0 0 0 0 0.00

Net Sales 509.33 653.3 2,503.97 2,804.12 1,837.07 0.38 701.91

Other Income 17.85 21.45 95.67 165.61 617.84 1.43 43.30

Stock Adjustments 2.64 2.96 0.51 -19.11 -3.18

Total Income 529.82 677.71 2,600.15 2,950.62 2,451.73 0.47 745.21

EXPENDITURE :

Raw Materials 52.13 53.14 63.67 22.02 18.6 -0.23 40.29

Power & Fuel Cost 0 0 0 0 0

Employee Cost 16.5 29.44 59.41 89.32 97.97 0.56 25.76

Other Manufacturing Expenses 374.03 423.11 889.23 1,010.08 592.57 0.12 419.63

Selling and Administration Expenses 12.87 16.49 30.39 44.13 42.66 0.35 17.37

Miscellaneous Expenses 6.85 8.59 15.44 17.59 11.12 0.13 7.73

Total Expenditure 462.38 529.35 1,057.08 1,183.14 762.92 470.48

Operating Profit 67.44 148.36 1,543.07 1,767.48 1,688.81 274.72

Interest 21.92 37.14 193.71 393.39 722.13 115.38

Gross Profit 45.52 111.22 1,349.36 1,374.09 966.68 159.34

Depreciation 2.14 3.1 4.54 8.58 10.04 0.47 3.15

Profit Before Tax 43.38 108.12 1,344.82 1,365.51 956.64 156.19

Tax 14 37 360 334 215 35.10

Deferred Tax -0.54 0.78 0.27 -0.67 1.5 1.00

Reported Net Profit 29.92 69.64 983.55 1,030.68 739.66 120.09

Statutory Appropriations 0 0 0 0 0 0.00

Appropriations 1.9 23.26 604.48 70.48 596.92

Dividend 5 16.23 40.58 40.58 20.44

Preference Dividend 0 0 0 0 0

Earnings Per Share-Unit Curr 23.43 53.93 12.03 6.31 4.53 0.74

Retained Earnings 24.92 53.41 942.97 990.1 719.22

Retention Ratio 0.8328877 0.76694428 0.95874129 0.96062793 0.97236568

ShareHolders Funds 173.91 913.29 4,768.17 10,263.28 10,538.56

ROE 0.17204301 0.07625179 0.20627411 0.10042404 0.07018606

DPR 0.21340162 0.30094567 3.37323358 6.43106181 4.51214128



Analysis Table

The following table will give us the Appropriate Figures.

Required Rate 18.6378%

Sustainable

Growth 11.2321333%

DPR 2.996159679

PE 40.45766294

RF 7.09%

RM 17.05%

EPS 0.74

Beta for Unitech 1.63

Value Anchor 29.93 Rs.

Current Value 98.55 Rs.

The Market return has been calculated by taking into consideration the average return of all the

listed stocks on nifty and turns out be around 17.05%.

The Value Anchor turns out be around 30 but the market price as of today is around 98.55 as a

result we can conclude that this share is highly overvalued. It‟s nothing but the demand and the

market forces that have taken the share to so much heights. I recommend a strong sell call since

its value is highly hyped and the stock price can a take a beating anytime in the near future.

All the above figures have been reconfirmed with capitaline and are more or less the same.

Hence we conclude that all these figures are true to the date.



Technical Analysis



Parameters Considered for the Technical Analysis

The Technical have been taken for a period of 1 year from the present date. This chart has

been sourced from www.icharts.in on October 9, 2009.

The Relative Strength Index is 14 days.

The Moving Averages taken here are 20, 50, and 100 which represent a fairly longer

view of the security under consideration.

The MACD is 26 and 12.

The Slow Stochastic Range taken here is 5.

Considering all these parameters we will provide a buy sell or hold calls for the security

for different horizons.

Let‟s analyze the stock in a chronological manner to interpret the behavior of the stock.

1. October 2008- November 2008 – The Price line cut the 20 day moving average line

from the top which indicated a sell call. To be more on the conservative side the price

line and the 20 day moving average line cut the 50 day and the 100 day moving

average line which indicated a sure shot sell call. We can see the stock dropped a

whooping 50 points from 82.5 to 32 which is a 60% decrease in the stock. Also the

slow stochastic Is way below 20 and the D line Cuts the K line from the top

indicating sell call. The RSI figures could not be available for that period. Bur

overall it‟s a sure sell Call.

2. Early December 2008 – Also in this period all the indicators that are, MACD and

Stochastic are indicating a bearish call. The stock hits a major low of 27 Rupees in

this period.

3. Late December 2008 – Here all the 3 indicators show a favorable response and they

indicate a likely pick up in the stock price. Also in the slow stochastic the D line Cuts

the K line from the bottom indicating buy call. The RSI is healthy. MACD also

indicates a buy call. Adding to all of this by looking at the 20 day moving average

line the price line cuts the 20 day moving average line from the Bottom indicating a

buy call. Also this is a short term buy call since the price line is cutting the 20 day

moving average line and not the other longer moving averages. It merely cuts the 50

day moving average. The Stock Price rises to about 48 Rupees during this interval.

4. January 2009 – Looking at this period the RSI and MACD are more or less the

same. The Slow Stochastic K Line cuts the D Line from Top indicating sell call. Also

the price line cuts both the 20 day and 50 day moving average from the Top

indicating a sell call. In this period the stock price falls to about 27 again.

5. February 2009 – March 2009 – This period is more or less the same. The stock

prices are hardly showing any signs of volatility since volumes are pretty less. It‟s a

completely range bound and a flat stock to enter into at this stage.

http://www.icharts.in/



6. March 2009 – April 2009 – Considering the moving averages the price line cuts all

the moving averages in short span of time indicating an immediate buy call. Also the

20 day cuts the 50 day from the bottom indicating a stronger buy call. The RSI and

MACD also show a favorable buy call response. The stock Price rises to about 55 in

this period.

7. May 2009 – June 2009 – The stock price is steadily rising as the RSI increases and

the clues from moving averages given earlier. MACD is also more or less on a stable

front. The Stock Price here is in the range of 50 – 55 Rs.

8. Late June 2009 – August 2009 – Here the price line cut the 20 Day Moving Average

Line from top indicating a sell call but since the RSI was high indicating the stock

continued to be in the overbought zone. The other technical tools were on a neutral

stand the stock price did not fall much.

9. Sept 2009 Onwards – In this period the price line cut the 20 Day Moving Average

Line from top indicating a sell call. Slow Stochastic is showing a buy call since the K

is cutting the D from the bottom indicating a buy. MACD is also indicating a sell. The

stock will more or less in the oscillating zone from now on. Trading in options with

ATM prices would be a recommended suggestion as compared to taking extreme cash

or future positions.

Conclusion

Unitech is one of the most liquid stocks in the Indian stock markets and was the first real estate

company to be part of the National Stock Exchange‟s NIFTY 50 Index. Company has over

600,000 shareholders.

Unitech Wireless, the mobile telecom venture of Unitech, is working towards roll out of services

by the end of this year. Telenor, a global telecommunications major, has acquired a significant

stake in Unitech Wireless.

Unitech has the most diversified product mix comprising residential, commercial/Information

Technology (IT) parks, Retail, Hotels, Amusement Parks and Special Economic Zones. Unitech

is known for the quality of its product and is the first real estate developer to have been certified

ISO 9001:2000 certificate in North India. The Unitech brand is well recognized in India and was

given the title of “Super brand” by Super brand India in October 2007. The Company is also the

recipient of the CW Architect and Builders Award, 2008 for being one of India‟s Top Ten

Builders.

As a Company, Unitech has grown in leaps and bounds in the last five to six years. In 2002-03,

the value of work done by the Company was a little over Rs.1 billion. In 2007-08, this had

increased to over Rs.20 billion. This is a remarkable growth story. And, it was not achieved by a

reckless spirit of adventure but by adopting a well calibrated business strategy. We created a

relatively lower cost pan-India land bank carefully identifying high potential areas. Over the



years, we have followed a capital light business model and have been quite prudent with the

usage of capital. The high growth strategy that the company adopted in the recent years,

however, necessitated the company to take considerable amount of debt. It was a manageable

level under the normal circumstances especially considering that the company was about to

commence conversion of it‟s newly acquired land into projects.

However, 2008-09 was not an ordinary year of economic crisis. With rapid deleveraging by

global financial intermediaries there was a significant flight of capital from emerging economies

like India. Even domestic lenders became highly risk averse.

On the demand side, too, there was a crisis situation. With low consumer confidence and job

insecurity, demand for housing came to a virtual standstill. There have been delays in payment of

installments by customers of ongoing projects. Commercial and retail properties also had almost

no takers. These developments had an adverse affect on the Company‟s balance sheet. Total

outstanding debt was in excess of Rs. 10,000 crores as of 30th Sep‟08 of which over Rs. 2,500

crores was due for repayment before 31st Mar‟09. Due to the tight liquidity environment,

average cost of debt rose during the quarter Oct‟08~Dec‟08.

With cash inflows slowing down and with commitments to repay old debt, Unitech was facing an

asset liability mismatch and had to quickly put in place a strategy to deal with the situation.

Bibliography

www.capitaline.com

Unitech Annual Report 2008-2009

BNP Paribas Reports

Enkay Shares Reports

Financial Management Books

http://www.capitaline.com/

Documents

Unitech Equity Research Report