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Unitech: Profits jump four fold - Views on News from Equitymaster
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Unitech: Profits jump four fold
Nov 20, 2007

Performance summary
  • 2QFY08 topline grows 135% YoY due to improved product mix.
  • Operating margins expanded by 17.2% YoY.
  • In 1HFY08, apartment sales were 4 msqft when compared to 14 msqft in FY07.
  • PAT grows 298% YoY mainly due to higher other income and lower taxes.

Consolidated financial snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 4,306 10,135 135.4% 7,348 18,843 156.5%
Expenditure 2,895 5,064 74.9% 5,138 8,715 69.6%
Operating profit (EBDITA) 1,411 5,071 259.5% 2,209 10,128 358.4%
Operating profit margin (%) 32.8% 50.0%   30.1% 53.8%  
Other income 98 508 419.1% 496 796 60.6%
Interest 216 790 265.1% 363 1,391 283.5%
Depreciation 17 30 78.0% 31 62 101.6%
Profit before tax 1,275 4,759 273.1% 2,312 9,472 309.7%
Tax 241 660 173.8% 505 1,706 237.9%
Minority interest 3 7   5 15  
Share in associates 1 9   2 7  
Profit after tax/(loss) 1,030 4,101 298.2% 1,800 7,758 330.9%
Net profit margin (%) 23.9% 40.5%   24.5% 41.2%  
No. of shares (m)         1,623.4  
Diluted earnings per share (Rs) *         11.7  
P/E ratio (x) *         33.0  
* On trailing twelve month basis

What is the company’s business?
Unitech is a real estate company with market capitalization of over US $ 11 bn. The company has over three decades of experience in infrastructure and real estate development and is a leading player in the National Capital Region (NCR) and Kolkata markets. The company has a diversified product mix spanning across residential, office/IT parks, retail malls, amusement parks, hotels/convention centre and SEZs. The company has land reserves of nearly 10,700 acres with a developable area of approximately 500 msqft.

What has driven performance in 2QFY08?
Growth due to improved product mix: Unitech recorded a topline growth of 135% YoY during 2QFY08, which was mainly driven by improved product mix. The company is and will slowly move towards more profitable segments like commercial offices, retail, hotels etc mainly because if one looks at the main business segment i.e. residential then the company in 1HFY08 have recorded apartment sales of about 4 msqft which when compared to the entire annual FY07 sales of 14 msqft clearly indicates a sharp dip in sales. Of the total developable area of Unitech, over 75% is for residential and of which almost 65% is apartment sales. Any downturn in this segment could significantly impair company’s revenues.

Segment information 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
I. Real estate            
Revenues 3,383 8,303 145.4% 5,419 15,912 193.6%
Profits 1,513 4,978 229.0% 2,334 10,015 329.1%
Margins 45% 60%   43% 63%  
             
II. Construction            
Revenues 557 518 -7.0% 1,110 893 -19.5%
Profits 63 15 -75.8% 134 21 -84.3%
Margins 11% 3%   12% 2%  
             
III. Consultancy            
Revenues 55 772 1292.8% 115 1,052 818.0%
Profits 55 374 574.9% 115 678 492.0%
Margins 100% 48%   100% 64%  
             
IV. Hospitality            
Revenues 19 26 32.8% 39 51 29.8%
Profits 2 3 88.9% 3 6 78.8%
Margins 9% 13%   8% 12%  
             
V. Electricals            
Revenues 156 140 -10.4% 418 294 -29.7%
Profits (12) 8 165.9% 0.4 (0.1) -115.0%
Margins -8% 6%   0% 0%  
             
VI. Others            
Revenues 136 377 177.9% 247 641 159.2%
Profits 14 53 270.4% 22 69 210.9%
Margins 10% 14%   9% 11%  

Lower construction costs boost margin: Unitech’s operating margins expanded by 17.2% YoY during 2QFY08. This was mainly due to sharp fall in construction and employee costs. Whereas the sales have risen by 135% YoY, the construction costs have risen only by 76% YoY thereby boosting margins. As a percentage of sales, the construction costs have come down from 64% in 2QFY07 to 48% in 2QFY08. Employee costs too, as percentage of sales, have come down from 3.3% in 2QFY07 to 2.3% in 2QFY08.

Higher other income and lower taxes aids bottomline: Unitech recorded a whopping 298% YoY growth in bottomline during 2QFY08. This was mainly due to higher other income, which grew by 420% YoY. Lower taxes also contributed to rise in net profits as effective tax rates have come down from 19% in 2QFY07 to 14% in 2QFY08. Taxes were primarily lower as in 2QFY08, most of the revenues were from the projects, which enjoyed section 80 (IB) tax benefits.

What to expect?
At the current price of 387, the stock is trading at a multiple of 33 times its trailing twelve months earnings. The company has already announced five major projects in the residential area totaling 749 acres. It has also bagged a major project in Vishakapatnam spread over 1,750 acres. Going forward, the move will be to diversify to more profitable segments like commercial offices and retail malls, as being heavily relied on the residential sector can be risky.

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