Parsvnath + Unitech – ICICI Direct

ICICI Direct has initiated coverage on two of North India’s large realty players, Parsvnath Developers and Unitech Ltd with a Outperformer and Performer rating.

Parsvnath Developers:
Parsvnath Developers is developing more real estate than any other realty company in India. Parsvnath has a pan-Indian presence across 47 cities in 17 states. It is developing 153 million sq ft of saleable real estate over the next 4-5 years. Its land bank is mostly fully paid up and has clear title. Further, the cost of its land under development is about Rs 260 per sq ft.

The 153 million sq ft the company is developing is spread over 33 residential project (32.63 million sq ft), 22 commercial project (4.73 million sq ft), 18 integrated townships (77.55 million sq ft) and 4 IT parks (6 million sq ft). ICICI believes the company will be able to withstand any downturn in any segment by having presence in all segments.

Parsvnath’s proven execution capabilities, diversified land reserves and better visibility in earnings make the stock an attractive investment bet. Factoring in a price escalation of 2.5% annually, the projected NAV comes to Rs 423. ICICI has assumed a 10% premium to arrive at our target price of Rs 465.

Unitech Ltd:
Unitech, the second largest listed realty company, has a pan-India presence and operates across all segments. Unitech is the second largest listed real estate company in India. The company plans to develop about 215 million sq ft by FY10, which is expected to generate free cash of Rs 30,000 crore.

The company follows a strategy of mostly outright sales, rather than leasing out its properties. The key focus remains on an efficient allocation and churn of capital. Pre-sales contribute a considerable amount to the company’s overall funding requirement. Unitech intends to derive about 65-70% of its revenues from the residential segment as it offers highest return with lowest risk.

Unitech is gradually expanding its operations beyond the National Capital Research (NCR) with two key objectives – to de-risk its portfolio from exposure to a single region and leverage on the growth opportunities in other cities. Factoring in a price escalation of 2.5% annually, the NAV comes to Rs 404 at a discount rate of 14%. Given its execution capabilities, diversified land reserves, and low-risk high return model, we believe it should trade at a 15% premium to its NAV. This gives us a target Rs 465 over a 12-month timeframe.