Unitech

Strong demand, ramp up in execution and a fortified balance sheet augur well for Unitech's earnings growth for the next 2-3 years.

Investors can consider buying the stock of this real estate developer. At the current market price of Rs 70, the company's stock discounts its expected consolidated per share earnings for FY-12 by nine times. If the current revival does not witness any major speed-breakers, we expect Unitech's revenues to grow by over 50 per cent annually over the next two years to FY-12.

Unitech has had an impressive fiscal year, selling over 50 per cent of the 24.4 million sq ft of projects it launched. In terms of value, this would convert to Rs 5,550 crore of booking, much of it expected to convert into revenue over the next two years (as revenues are accounted for based on completion). Most of the sales came from the residential segment, which had a mix of high end and mid-sized homes.

The pace of booking, added to the fact that most of the projects are located in places such as Gurgaon, Noida and Mumbai – markets that have shown decisive signs of revival – provide comfort on the likelihood of absorption of these properties.

The massive launch has, however, raised concerns over Unitech's execution capabilities. Apart from increasing the work force to about 20,000, that construction work has commenced in over 53 per cent of the recent launches shows progress on execution.

Faster execution has also accelerated the pace of bringing revenue to books. In the latest ended quarter, Unitech's consolidated revenue at Rs 775 crore was 58 per cent higher than year ago numbers; sequentially too, sales grew by 53 per cent. But operating profit margins of Unitech suddenly crashed to 24 per cent (from 50 per cent levels).

The company attributed this to cost hikes – a result of construction delays during the slowdown period – being accounted now. While these margins may not be a continuing feature, we expect margins to come down to 30-35 per cent levels, as budget homes start contributing significantly to revenues.

However, Unitech's recent tie-up with local Mumbai players for slum rehabilitation projects with an estimated saleable area of 42 million sq. ft, if successful, holds potential to prop profit margins to earlier levels.

Unitech's debt restructuring and equity addition together resulted in bringing down its debt:equity ratio to 0.5 from 1.5 a year ago. With projects in full swing, advances from customers (at Rs 7,730 crore) may help meet the working capital requirement.