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Monday, April 26, 2010

Shareholders to benefit from Unitech demerger plan

Unitech Ltd will demerge its infrastructure business into a separate firm—Unitech Infra Ltd. What does this mean for shareholders?

Unitech, with consolidated annual revenue of around Rs2,500 crore, is primarily a real estate firm. Unitech Infra, its 100% subsidiary, has interests in construction, transmission towers, hotels, information technology special economic zones (SEZs)/parks, industrial parks, amusement parks, facilities management services and telecom (Uninor). It had a revenue of Rs326.7 crore and a net profit of Rs56.5 crore for the nine months to December.

Post-demerger, assets worth Rs4,900 crore along with debt of Rs350 crore will be transferred from Unitech to the infrastructure entity. This will include 550 acres of land held under various infrastructure projects, a 40% stake held in a corporate park and around 33% in the telecom venture. In return, every shareholder of Unitech will be offered one share of Unitech Infra.

Unitech shareholders will then hold 35% in Unitech Infra, promoters will hold around 31.7%, while the balance 33.3% will remain with the public. Unitech shareholders will see value unlocking when Unitech Infra goes public later this year.

But long-term value will accrue for Unitech shareholders only as each infrastructure business vertical expands and gains visibility. Promoters say the demerger will strengthen focus on non-core businesses. In fact, demergers are the flavour of the infrastructure sector now, as promoters seem to prefer diluting equity in each business vertical rather than in the parent firm. As each business grows, shareholders in the parent company stand to gain, since the per share value of their investments in subsidiaries increases.

A report by Antique Research says that “the demerger will provide enhanced flexibility in raising funds for hotels, SEZs, BOT (build, operate and transfer) projects, etc., since debt-raising in Unitech, which is primarily a real estate company, has limitations”. The flip side of this is that the firm could see additional debt in the near term, which could affect profit margins.

Unitech has played the sector well. Its recent launch of mid-segment residential projects has helped. It sold around 3.5 million sq. ft in the March quarter compared with 3 million sq. ft in the preceding quarter. According to analysts who were at the demerger presentation, Unitech has surpassed its annual sales target of Rs6,000 crore and also been ahead of its peers in terms of deliverables.

The shares reacted positively to the news of the demerger. Being the parent company for the infrastructure business, which is the sweet spot for investors now, growth in each business vertical will not only add to earnings, but also improve valuations of the parent. The catch, however, is whether the company can balance expansions with profitability in the subsidiary.

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