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Best Performing Stock Advice for Today - Neutral Rating on GAIL Stock With a Target Price of Rs.346
 

Best Performing Stock Advice for Today - Neutral Rating on GAIL Stock With a Target Price of Rs.346

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GAIL (India) Limited Company registered a turnover of Rs. 26902.25 Cr, up by 19% in H1FY14 but Other income was down 8% to Rs 279.6 Cr. Narnolia Securities Limited recommend neutral view on the stock.

GAIL (India) Limited Company registered a turnover of Rs. 26902.25 Cr, up by 19% in H1FY14 but Other income was down 8% to Rs 279.6 Cr. Narnolia Securities Limited recommend neutral view on the stock.

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    Best Performing Stock Advice for Today - Neutral Rating on GAIL Stock With a Target Price of Rs.346 Best Performing Stock Advice for Today - Neutral Rating on GAIL Stock With a Target Price of Rs.346 Document Transcript

    • IEA-Equity Strategy India Equity Analytics 10th Jan, 2014 Daliy Fundamental Report on Indian Equities GAIL : "Neutral" Edition : 181 10th Jan 2014 Company registered a turnover of Rs. 26902.25 Cr, up by 19% in H1FY14 compared to corresponding previous year period. There was fall of 10% in operating profits of the company to Rs 2971.72 Cr for H1FY14. The Other income was down 8% to Rs 279.6 Cr while Interest cost grew 99% to Rs 169.36 Cr. .......................................... ( Page : 2-4) CMC : "Reduced" 9th Jan 2014 We had initiated this stock at a CMP of Rs 1208 (5th June 2013) and now, it achieved its target of Rs1690, we advice to book profit on the stock because of its premium valuation at current price. However, sentiment could take a knock in the short run, since investors may prefer paying a premium for stock with better earnings visibility........................................ (Page : 5-6) KPIT Tech: "On billion dollar journey" "Reduced" 8th Jan 2014 We had initiated this stock at a CMP of Rs 115 (14 Jan 2013) and now, it achieved its target of Rs 177. Despite better expectation of growth and attractive visibility of its expansion through inorganic initiative and focus into emerging verticals, we advice to book profit on the stock because of its premium valuation. However, sentiment could take a knock in the short run, since investors may prefer paying a premium for stock with better earnings visibility.......................................... ( Page : 7-8) IT Industry: 3QFY14E results preview : "As usual flattish 3rd quarter" 7th Jan 2014 For 3QFY14E, Indian IT players would report muted earnings growth because of seasonal weakness like furloughs and holidays impacts, already it is understood fact by consensus. Post result, earning guidance for FY15E and forward looking statement by most of companies would be considered as an important fact. Considering recent demand environment scenario and healthy growth outlook of US and Europe, we are expecting to see positive outlook on the sector for the year 2014................................. ( Page : 9-12) ; SHREE CEMENT: "BUY" 7th Jan 2014 We are positive on the stock as it always beats its peers group with lower operational cost. Looking at the strategy of the company and expansion plans for FY15 the stock may outperform among cement players with the rise in cement demand.Shree cement follows a multi brand strategy and sells cement under the highly recognized brands of Shree Ultra, Bangur and Rockstrong which together enjoy the largest market share in high value markets of Rajasthan, Delhi and Haryana. After a good monsoon and election we are expecting a good performance from shree cement for the H2FY14, thus at CMP Rs.4460/- we are bull at a target Price Rs.4791/- ............................................ ( Page : 13-15) ORIENTAL BANK "Neutral" 6th Jan 2014 We have now neutral rating on the stock led by trading closer to our target price of Rs.221. At this price stock would trade at 0.5 times of one year forward book and 6.5 times of earning. In the absence of comfort earning and non visibility of ROE improvement, make us compel to value bank in the range of 0.4-0.5 times forward book. Impairment of asset and high operating leverage would remain high according to the management. On both front we would be getting more clarity after the quarterly result. ................... ( Page : 16-18) UNION BANK : "BUY" 6th Jan 2014 Net interest margin of the bank is likely to expand on the back of RBI’s decision to leave policy rate (repo) unchanged and softening bond yield to 8.75%. This would result of reducing cost of fund and fair amount of portfolio gain. Bank borrowed higher amount of repo than MSF during the quarter. Moreover bank is getting deposits from FCNR which would give margin of one percent plus to the bank. We value bank at Rs.163/share which would be 0.5 times of one year forward book and 5.4 times of one year forward earning .................................. ( Page : 1921) Narnolia Securities Ltd,
    • GAIL Company Update CMP Target Price Previous Target Price Upside Change from Previous Neutral 348 532155 GAIL 395/273 44,047 399457 6168 Stock Performance 1M 0.6 1.7 About The Company GAIL (India) Limited is a gas utility company. The Company is engaged in transport through pipeline; manufacture of basic chemicals, fertilizer and nitrogen compounds, plastics and synthetic rubber in primary forms; extraction of crude petroleum; extraction of natural gas and electric power generation, transmission and distribution. The company operates in five segments viz Gas Transmission Business ,LPG Transmission Business, Gas Trading Business, Petrochemical Business and LPG and Liquid Hydrocarbon Business. 1HFY14 Financial Highlights : Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Cap (Rs Crores) Average Daily Volume Nifty Absolute Rel. to Nifty "NEUTRAL" 10th Jan' 14 1yr -5.6 -8.7 YTD -5.0 -20.0 Share Holding Pattern-% Current 1QFY14 4QFY13 Promoters 57.3 57.3 57.3 FII 17 16.7 16.3 DII 21.6 22 22.2 Others 3.9 3.9 4 1 yr Price Movement Vs Nifty Company registered a turnover of Rs. 26902.25 Cr, up by 19% in H1FY14 compared to corresponding previous year period. There was fall of 10% in operating profits of the company to Rs 2971.72 Cr for H1FY14. The Other income was down 8% to Rs 279.6 Cr while Interest cost grew 99% to Rs 169.36 Cr, The net profits for H1FY14 was Rs 1723.84 Cr down by 19 %in comparison to 2HFY13. The company during the first half of the current financial year, earned the revenues of Rs. 23,437 Cr from Natural Gas Trading up 24% YoY as compared to corresponding period of the last year. The revenues from Natural Gas Transmission increased by 9% YoY to Rs. 2,066 Cr for H1FY14. The net sales from LPG and Liquid Hydrocarbons business increased by 11% YoY to Rs. 2,043 Cr as against Rs. 1,842 Cr for the same period of last year. The net sales from Petrochemicals business increased by 54% to Rs 2,237 Cr for 1HFY14. The revenues from LPG transmission increased by 72% to Rs. 189 Cr in 1HFY14. 1HFY14 Production Highlights : During 1HFY14, Petrochemical Production was 231 TMT, up by 20 % YoY it was 193 TMT in 1HFY13.The Petrochemical Sales were 229 TMT, up by 37 % against 167 TMT in the corresponding period in the previous year. The LPG and Other Liquid Hydrocarbon production were 685 TMT, against 684 TMT in 1HFY13. The LPG transmission was 1,428 TMT. The Natural Gas transmission was 97.25 MMSCMD, against 107.72 MMSCMD. The Natural Gas stood at 80.33 MMSCMD in 1HFY14 as against 81.92 MMSCMD in 1HFY3. Highlights of Conference Call: →The company has commissioned Kochi pipeline on 25th August 2013. →Company has shared Rs 698.68 Cr towards LPG subsidy in the quarter ended September 2013 compared to Rs 785.67 Cr in the corresponding previous year period. →Ministry of Petroleum and Natural gas has capped subsidy burden of Gail (India) at Rs 1400 Cr for FY'14. →Capex incurred during H1FY'13 was Rs 2525 Cr as Rs 1500 Cr on Petrochemical, Rs 400 Cr on pipeline expansion, Rs 270 Cr on E&P and Rs 360 Cr towards equity contribution. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 2QFY14 13944.6 1405.5 915.7 10.1% 6.6% 1QFY14 12855.6 1136.7 606.5 8.8% 4.7% (QoQ)-% 8.5 23.6 51.0 120bps 180bps 2QFY13 11361.2 1380.3 985.4 12.1% 8.7% Rs, Crore (YoY)-% 22.7 1.8 -7.1 (200bps) (210bps) (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 2
    • GAIL Continued → Projected Capex for FY'14 is Rs 5000 Cr and Rs 3500 Cr in FY'15. → The company has borrowed Rs 585 Cr during Q2FY'14. → Total borrowings stood at Rs 10632 Cr at the end of September 2013 quarter-out of which 56% loan is foreign currency loan. Almost 90% of foreign currency loan is financially or naturally hedged. → The company anticipates increase in gas availability in near future. It expects around 20-25 mmscmd of gas over a period of 3-4 years including 11-12 mmscmd of gas from domestic sources and 10-15 mmscmd from LNG. →GAIL has shared Rs 698.68 Cr towards LPG subsidy in the quarter ended September 2013 compared to Rs 785.67 crore in the corresponding previous year period Recent Events GAIL management indicated that, MoPNG has in-principle agreed to provisionally cap GAIL’s FY14 subsidy at INR14b, implying 2HFY14 subsidy to be nil. As per our view the final decision will be post Finance Ministry consent. Risk & Concern Uncertainty on under recovery sharing Near-term gas supply visibility which may lead to under-utilization of new pipelines View and Valuation : The stock is currently trading at Rs 346 and business outlook going forward ,management guidance does not provide us with much convincing thought .We donot see much upsides attached with the stock in current business scenario. We therefore recommend NEUTRAL view on the stock. Graphical Dipiction 2QFY14 SEGMENTAL SALES TURNOVER (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 3
    • GAIL SALES TREND Sales increased by 22% YoY driven by higher revenues from the natural gas trading and petrochemical segments (Source: Company/Eastwind) EBITDA & OPM% (Source: Company/Eastwind) Adj PAT & NPM % Higher Depcreciation owing to capitalization of assets with respect to new pipelines and higher interest cost resulted in a NPM decline (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 4
    • CMC "Book Profit" 9th Jan, 2014 "On track to deliver" Company update Book Profit CMP Target Price High Price (08.01.2014) Upside Change from Previous 1657 1690 1729 - Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume Nifty 517326 CMC 1780/1107 5020 20884 6175 Stock Performance 1M 15.0 15.4 Absolute Rel. to Nifty 1yr 29.2 24.6 YTD 40.0 35.8 Share Holding Pattern-% Promoters FII DII Others Current 51.12 23.32 17.83 7.73 1 year forward P/E 4QFY13 3QFY13 51.12 51.12 19.87 21.84 20.46 19.05 8.55 7.99 We had initiated this stock at a CMP of Rs 1208 (5th June 2013) and now, it achieved its target of Rs1690, we advice to book profit on the stock because of its premium valuation at current price. However, sentiment could take a knock in the short run, since investors may prefer paying a premium for stock with better earnings visibility. We believe, CMC will continue with its efforts to enhance revenue contribution of high margin System Integration (SI) and ITES segments. Further, its high focus on education space will also add margin in near term. Considering recent healthy demand environment across the IT space with favorable supply side scenario, we remain confident on the stock for better earning visibility and stable margin picture. For 3QFY14E, we expect to see 2-1.5% (QoQ) sales growth in USD term and 1-1.5% (QoQ) in INR term, PAT is expected to decline by 2-3% (QoQ) led by a marginal growth in the forex loss. We expect 50-100bps improvement in EBITDA margin to 15.5-16%, sequentially. Key things to watch: Outlook for deal pipeline, updates on SMAC(social, mobility, analytics, cloud) and guidance on forward looking statement. Healthy Deal pipeline: The deal pipeline is in line with the last year. It indicated that pursuing good number of deals in the Developed and as well emerging markets. Considering current sound demand environment across geographies (like US and Europe) and verticals Company is more optimistic for clients acquisition and deal executions ahead. Now, CMC is focusing on new emerging segments like IMS (Infrastructure Management Services), Cloud, Big data, Mobility and Analytics. Considering its impressive client as well as market response, company is expecting to quantify into revenue. Its new and emerging projects like Mining Management System, GPS System and Port & Cargo Management System would play a major role for generating revenue. View and Valuation: View and Valuation: CMC expects the growth momentum to improve in the quarters ahead and the revenue growth to be higher than the NASSCOM guidance in FY14. The Company remains a strong with excellent earning visibility led by joint effort of market strategy by TCS (contributes 59% of sales) in its product and solutions. Considering the company’s premium valuation, we advice “Book Profit” on the stock. At a CMP of Rs 1657, stock trades at 16.3x FY14E earnings. Our view could be change with management guidance and post earnings of coming quarter. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 2QFY14 560.75 88.41 67.3 15.8% 12.0% 1QFY14 486.61 77.04 53.12 15.8% 10.9% (QoQ)-% 15.2 14.8 26.7 110bps 2QFY13 458.64 76.59 49.4 16.7% 10.8% Rs, Crore (YoY)-% 22.3 15.4 36.2 (90bps) (120bps) (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 5
    • CMC Financials; Rs, Cr Net Sales Purchases of stock-in-trade Employee Cost Subcontracting and outsourcing cost Other expenses Total Expenses EBITDA Depreciation Other Income EBIT Interest Cost PBT Tax PAT Growth-% Sales EBITDA PAT Margin -% EBITDA EBIT PAT Expenses on Sales-% Employee Cost Subcontracting Cost Tax rate Valuation CMP No of Share NW EPS BVPS RoE-% Dividen Payout ratio P/BV P/E FY10 870.73 99.35 276.16 173.56 159.94 709.01 161.72 9.85 18.75 151.87 3.17 167.45 24.23 143.22 FY11 1084.40 99.28 345.13 262.35 170.17 876.93 207.47 10.46 11.80 197.01 0.22 208.59 32.42 176.17 FY12 1469.34 145.40 440.22 446.11 213.63 1245.36 223.98 21.37 17.46 202.61 0.02 220.05 68.59 151.46 FY13 1927.87 188.56 521.65 679.73 222.88 1612.82 315.05 23.20 13.17 291.85 0.18 304.84 76.76 228.08 FY14E 2239.31 201.54 593.42 794.96 235.13 1825.04 414.27 41.95 22.39 372.33 0.2 394.52 86.79 307.73 FY15E 2600.41 234.04 702.11 923.15 273.04 2132.34 468.07 60.69 26.00 407.38 0.25 433.14 99.62 333.52 -7.4% 27.7% 23.3% 24.5% 28.3% 23.0% 35.5% 8.0% -14.0% 31.2% 40.7% 50.6% 16.2% 31.5% 34.9% 16.1% 13.0% 8.4% 18.6% 17.4% 16.4% 19.1% 18.2% 16.2% 15.2% 13.8% 10.3% 16.3% 15.1% 11.8% 18.5% 16.6% 13.7% 18.0% 15.7% 12.8% 31.7% 19.9% 14.5% 31.8% 24.2% 15.5% 30.0% 30.4% 31.2% 27.1% 35.3% 25.2% 26.5% 35.5% 22.0% 27.0% 35.5% 23.0% 1340.0 1.50 510.68 95.48 340.45 28.0% 18.6% 3.94 14.03 2079.6 1.50 654.02 117.45 436.01 26.9% 19.9% 4.77 17.71 994.8 3.00 772.19 50.49 257.40 19.6% 23.2% 3.86 19.70 1410.0 3.03 946.26 75.27 312.30 24.1% 19.4% 4.51 18.73 1657 3.03 1192.11 101.56 393.44 25.8% 20.1% 4.21 16.32 1657 3.03 1454.91 110.07 480.17 22.9% 21.2% 2.78 15.05 (Source: Company/Eastwind) Rating and Price Target Chart Updation Detail Date 5-Jun-13 4-Jul-13 18-Jul-13 21-Oct-13 20-Dec-13 9-Jan-14 Update Detail Initiation Company Update Result Update Result Update Company Update Company Update CMP View Target Price 1208 BUY 1380 1315 BUY 1490 1318 BUY 1490 1334 BUY 1490 1510 BUY 1690 1729 Profit Booking 1690 (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 6
    • KPIT Tech. "Book Profit" 7th Jan' 14 "On billion dollar journey" Company update Book Profit CMP Target Price Previous Target Price 180 177 - Upside Change from Previous - Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume Nifty 532400 KPIT 186/92 3445 144511 6162 Stock Performance Absolute Rel. to Nifty 1M 24.7 25.5 1yr 64 61.1 YTD 57.2 54 Share Holding Pattern-% Promoters FII DII Others Current 22.87 36.42 11.12 29.59 Price Performance 1QFY14 4QFY13 24.25 24.3 32.79 30.8 10.93 11.8 32.03 33.1 We had initiated this stock at a CMP of Rs 115 (14 Jan 2013) and now, it achieved its target of Rs 177. Despite better expectation of growth and attractive visibility of its expansion through inorganic initiative and focus into emerging verticals, we advice to book profit on the stock because of its premium valuation. However, sentiment could take a knock in the short run, since investors may prefer paying a premium for stock with better earnings visibility. The company expects better earnings, confident of generating a positive cash flow for FY14E, after considering the balance payments for existing M&A deals. KPIT ‘s Management is confident to report USD Revenue for FY14 to be in the range of USD 465 Mn to USD 475 Mn, and INR PAT for FY14 to be in the range of INR 2,309 Mn to INR 2,388 Mn. They expect better H2FY14E than H1FY14E. KPIT expects to close some more deals in next quarter, which will again drive growth and expects the company’s growth to be stronger in the 2H FY14E. For 3QFY14E, we expect to see 4% (QoQ) sales growth in USD term and 2.7% (QoQ) in INR term, PAT is expected to grow by 3-4% (QoQ) led by a marginal growth in the forex. We expect 50-100bps improvement in EBITDA margin to 16-16.5%, sequentially. Key things to watch: Outlook of deal pipeline, Updates on SAP and Revolo, and acquisition plan. Close to Revolo launch and working on cloud based IB tool: The unit has been in the process of conducting trials in 40 vehicles. As per the management, by next year it could be a part of revenue. It is also working on cloud based BI tools as well as Analytics tool for opportunities in warranty management. Robust pipeline of large deals: During the quarter, company closed 2 larges deals in excess of USD 10 mn 1 in Europe and 1 in the US and have created a robust pipeline of larger deals. We expect this large set of deals would reveal stronger 2HFY14 performance with judicious mix of volume and value growth. View and Valuation: Despite all previous ups and down in IT sector, global demand environment is on the way of recovery and growth. Impressive organic growth despite inorganic thrust (acquired 10 companies in the last 10 yrs), Potential option value from success of its hybrid engine venture Revolo (on trial) . KPIT has targeted to reach USD 1billion in revenues by 2017. We expect KPIT to grow its revenues at a CAGR of 24% over FY12-14E.Considering the company’s premium valuation, we advice “Book Profit” on the stock. At a CMP of Rs 180, stock trades at 13.8x FY14E earnings. Our view could be change with management guidance and post earnings of coming quarter. Rs, Crore Financials 2QFY14 1QFY14 (QoQ)-% 2QFY13 (YoY)-% Revenue 702.76 613.21 14.6 567.02 23.9 EBITDA 108.1 96.6 11.9 94.1 14.9 PAT 66.7 60.1 11.0 48 39.0 EBITDA Margin 15.4% 15.8% (40bps) 16.6% (120bps) PAT Margin 9.5% 9.8% (30bps) 8.5% (100bps) (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 7
    • KPIT Tech Financials Rs, Cr Net Sales-USD Net Sales Employee Cost Other expenses Total Expenses EBITDA Depreciation Other Income Extra Ordinery Items EBIT Interest Cost PBT Tax PAT PAT (excluding EO Items) Growth-% Sales EBITDA PAT Margin -% EBITDA EBIT PAT Expenses on Sales-% Employee Cost Subcontracting Cost Tax rate Valuation CMP No of Share NW EPS BVPS RoE-% Dividen Payout ratio P/BV P/E Rating and Price Target Chart FY10 153.76 731.64 265.92 304.70 570.62 161.02 30.80 1.20 -26.45 130.22 2.74 102.23 16.91 85.32 111.77 FY11 224.07 987.05 529.95 308.82 838.77 148.28 41.12 6.74 0.00 107.16 3.78 110.12 15.49 94.63 94.63 FY12 306.71 1500.00 771.78 511.97 1283.75 216.25 44.49 13.82 10.05 171.76 7.32 188.31 43.67 144.64 134.59 FY13 410.46 2238.63 1140.79 762.32 1903.11 335.52 47.16 11.74 -1.30 288.36 13.99 284.81 76.55 208.26 209.56 FY14E 465.00 2790.00 1422.90 906.75 2329.65 460.35 62.58 13.95 -45.17 397.77 21.37 345.17 93.20 251.98 297.15 FY15E 558.00 3320.10 1726.45 1095.63 2822.09 498.02 88.34 16.60 16.60 409.68 18.61 424.28 116.68 307.60 291.00 -7.8% -12.2% 129.4% 34.9% -7.9% 10.9% 52.0% 45.8% 52.8% 49.2% 55.2% 44.0% 24.6% 37.2% 21.0% 19.0% 8.2% 22.1% 22.0% 17.8% 11.7% 15.0% 10.9% 9.6% 14.4% 11.5% 9.6% 15.0% 12.9% 9.3% 16.5% 14.3% 9.0% 15.0% 12.3% 9.3% 36.3% 20.8% 16.5% 53.7% 14.5% 14.1% 51.5% 17.2% 23.2% 51.0% 0.0% 26.9% 51.0% 0.0% 27.0% 52.0% 0.0% 27.5% 115.00 7.90 387.11 10.80 49.00 22.0% 6.4% 2.35 10.65 168.05 8.70 603.19 10.88 69.33 15.7% 6.8% 2.42 15.45 122.90 17.80 712.55 8.13 40.03 20.3% 4.9% 3.07 15.12 99 19.28 1036.23 10.80 53.75 20.1% 7.9% 1.84 9.17 180 19.28 1272.42 13.07 66.00 19.8% 6.3% 2.73 13.77 180 19.28 1557.46 15.95 80.78 19.8% 7.3% 2.23 11.28 Updation Detail Date 14-Jan-13 29-Jan-13 3-May-13 5-Jul-13 25-Jul-13 13-Sep-13 24-Oct-13 22-Nov-13 8-Jan-14 Update Detail Initiation Result Update Result Update Company Update Result Update Company Update Result Update Company Update Company Update CMP View 115 BUY 116 BUY 106 BUY 120 BUY 132 BUY 147 BUY 144 BUY 146 BUY 180 Profit Booking Target Price 145 145 145 145 145 162 162 177 177 (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 8
    • IT Industry: 3QFY14E results preview "As usual flattish 3rd quarter" Price performance of our coverage: (Source: Eastwind) Index Performance: ↑59.5% ↑6.9% (Source: Eastwind) CNX IT v/s USD/INR ↑59.5% ↑6.9% For 3QFY14E, Indian IT players would report muted earnings growth because of seasonal weakness like furloughs and holidays impacts, already it is understood fact by consensus. However, this quarter would report better earning and margin growth than same quarters of last year. Because of stable currency movement, margin could be seen flattish or marginally inched up. Post result, earning guidance for FY15E and forward looking statement by most of companies would be considered as an important fact. Considering recent demand environment scenario and healthy growth outlook of US and Europe, we are expecting to see positive outlook on the sector for the year 2014. Key facts of 3QFY14E earnings: Seasonal Impacts on (QoQ) earnings, while better on YoY: For 3QFY14E, we expect to see lower rate of earning growth impacted by furloughs and holidays, already YoY growth would be a favorable. The December quarter has traditionally been a soft quarter for the IT sector. On USD term, revenue of top-4 IT players could be reported at a range of 2-3.3% sequentially. We expect Tier-1 IT to report constant-currency revenue growth of 1.4-3% (QoQ). Stable Margin and flat currency movement: During the quarter, margin for IT Industry will largely be flattish or see marginal decline on sequential basis. Across the tier-1 IT players, Infosys could improve its margin because of cost rationalization and slow pace of currency benefit TCS will maintain its previous quarters margin picture. While, margin of HCLTech and Mindtree could see some dip because of wage hike during the quarter. New discretionary spending: Because of better economic scenario, demand environment expansion has taken place. Now, domestic IT players have been able to retain its market share in US and successfully improved its market share in Euro region, at a same point pricing pressure has turned out. During the quarter, most of multimillion-dollar projects have been bagged from Euro region. During the current fiscal, out of 27 large projects 11 orders deputed from Euro (including UK) region and only 3 from US. Management commentary and forward looking statement: Post revealing 3QFY14E earnings, street will closely watch on the response of its clients budgeting cycle to assess the strength of the demand environment and its sustainability. Most of companies will comment on earning guidance, margin outlook and order pipeline for FY15E. Taking recent attractive supply side scenario, we would like to see hiring guidance and commentary on maintaining utilization rate and attrition rate. Movement of INR-USD and Other Currencies v/s USD 1QFY12 ↑13% INR/USD Average Closing EUR - USD Average Closing GBP-USD Average Closing AUD-USD Average Closing 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 44.65 44.59 45.73 48.86 50.84 53.08 50.29 51.4 54.09 56.8 55.19 52.85 54.14 54.97 54.17 54.28 55.93 59.54 62.08 62.59 61.97 61.84 1.41 1.45 1.4 1.36 1.35 1.3 1.31 1.33 1.28 1.26 1.25 1.29 1.3 132 1.32 1.28 1.31 1.3 1.33 1.35 1.36 1.38 1.62 1.61 1.61 1.57 1.57 1.55 1.57 160 1.57 1.56 1.58 1.62 1.61 1.62 1.55 1.52 1.54 1.51 1.55 1.6 1.61 1.66 1.06 1.07 1.05 0.99 1.01 1.02 1.05 1.03 1.01 1.02 1.04 1.04 1.03 1.03 1.04 0.99 0.92 0.93 1.04 0.91 0.93 0.89 (Source: Company/Eastwind) (Source: Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 9
    • IT Industry: 3QFY14E results preview Results preview TCS Key things to watch - Comments on volume, demand environment, deal closures from US, pricing, and discretionary spends. Rs, Cr 3QFY13 2QFY14 3QFY14E (QoQ)-% (YoY)-% Sales 16069.93 20977.24 21606.56 3.0% 34.5% EBITDA 4660.49 6632.95 6300.3 -5.0% 35.2% PAT 3549.6 4633.33 5096.66 10.0% 43.6% EBITDA Margin 29.0% 31.6% 31.0% (60bps) 200bps PAT Margin 22.1% 22.1% 23.6% 150bps 150bps We expect company is likely to report 3.5% (QoQ) revenue growth in USD term. On a constant currency basis, the growth will be 3% QoQ. Margins are likely to decline marginally because of Flattish currency movement Forex loss as a hedging will reduce the net income growth. INFY Street would like to see some up gradation in given revenue guidance from 9-10% to 12% for FY14E. Rs, Cr 3QFY13 2QFY14 3QFY14E (QoQ)-% (YoY)-% Sales EBIT PAT EBITDA Margin PAT Margin 10424 2677 2369 25.7% 22.7% 12965 3346.9 2407 25.8% 18.6% 13069.1 3424.1 2695.8 26.2% 20.6% 0.8% 2.3% 12.0% 40bps 200bps 25.4% 27.9% 13.8% 50bps (190bps) We expect revenue growth of 2.2% in USD term for3rd qtr FY14E, sequentially. Margin is expected to remain stable and benefits from cost optimisation initiatives are offset by the negative impact of the rupee appreciation by 1.2% during the quarter. We expect Infosys to increase their FY2014 guidance to ‘at least 12%’ from 9-10% earlier. The company needs a quarterly run rate of average 2% for the next two quarters to achieve 12% for FY14E. WIPRO Rs, Cr Key things to watch – 4th quarter revenue guidance, margin commentary, visibility of growth/hiring in software services. 3QFY13 2QFY14 3QFY14E (QoQ)-% (YoY)-% Sales EBITDA PAT EBITDA Margin PAT Margin 9587.5 2050.2 1598.1 21.4% 16.7% 10990.7 2503.8 1932 22.8% 17.6% 11342.40 2552.04 1984.16 22.5% 17.5% 3.2% 1.9% 2.7% (30bps) (10bps) 18.3% 24.5% 24.2% 10bps 80bps The company had guided a strong 3QFY14 USD revenue growth guidance of 1.8-3.6% QoQ for IT services .We expect IT services revenue growth to be closer to the higher end of this range and to be 3% QoQ in USD terms. The large deals won in the previous quarter are ramping up as expected and company could reveal its orders pipeline. (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 10
    • IT Industry: 3QFY14E results preview HCLTECH Key things to watch - outlook for pricing/volumes and deal ramp up and deal re bid, margin commentary, visibility of growth/hiring in software services. Rs, Cr 2QFY13 1QFY14 2QFY14E (QoQ)-% (YoY)-% Sales EBITDA PAT EBITDA Margin PAT Margin 6273.8 1416.6 974.3 22.6% 15.5% 7961 2093 1416 26.3% 17.8% 8160.03 2080.81 1472.64 25.5% 18.0% 2.5% -0.6% 4.0% (80bps) 20bps 30.1% 46.9% 51.1% 290bps 250bps Expect revenue growth of 3% in $-term QoQ and margins to be down by 50-100bps which is largely attributable to the wage hikes effective from October 1, 2013 for some employees.. TECHM Key things to watch – Outlook for deal pipeline, outlook on BT/AT&T (the biggest clients), updates on SMAC(social, mobility, analytics, cloud) and comments on synergies Rs, Cr 3QFY13 2QFY14 3QFY14E (QoQ)-% (YoY)-% Sales EBITDA PAT EBITDA Margin PAT Margin 3523.7 756.9 455.9 21.5% 12.9% 4771.5 1110.85 718.2 23.3% 15.1% 4819.22 1084.32 754.11 22.5% 15.6% 1.0% -2.4% 5.0% (80bps) 50bps 36.8% 43.3% 65.4% 100bps 270bps We expect revenue growth guidance of 2.5% in USD term and and full integration of Complex IT. Expect margins to be don by 50-100bps (QoQ) - wage hikes deferred to 4QFY14 CMC Rs, Cr Key things to watch – Outlook for deal pipeline, updates on SMAC(social, mobility, analytics, cloud) and guidance on forward looking statement. 3QFY13 2QFY14 3QFY14E (QoQ)-% (YoY)-% Sales EBITDA PAT EBITDA Margin PAT Margin 492.97 83.2 61.07 16.9% 12.4% 560.75 88.41 67.3 15.8% 12.0% 566.36 87.79 65.62 15.5% 11.6% 1.0% -0.7% -2.5% (30bps) (40bps) 14.9% 5.5% 7.4% (140bps) (80bps) We expect revenue growth guidance of 1.5% in USD term and expect margin ramp up by 40bps. HEXAWARE Rs, Cr Key things to watch: Key stance on dividend policy, deal wins and revenue growth momentum and outlook for order win. 4QCY12 3QCY13 4QCY13E (QoQ)-% (YoY)-% Sales EBITDA PAT EBITDA Margin PAT Margin 507.52 109.02 66.20 21.5% 13.0% 621.1 147.74 98.7 23.8% 15.9% 629.17 147.86 103.64 23.5% 16.5% 1.3% 0.1% 5.0% (30bps) 60bps 24.0% 35.6% 56.5% 200bps 350bps Expect 3% US$ revenue growth. Hexaware discontinued quarterly guidance since the previous quarter. Expect 30-50bps decline in margin. (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 11
    • IT Industry: 3QFY14E results preview KPIT Key things to watch: Outlook of deal pipeline, Updates on SAP and Revolo, and acquisition plan. Rs, Cr 3QFY13 2QFY14 3QFY14E (QoQ)-% (YoY)-% 563.3 87.9 59.9 15.6% 10.6% Sales EBITDA PAT EBITDA Margin PAT Margin 702.8 108.1 66.7 15.4% 9.5% 721.97 115.52 69.40 16.1% 9.7% 2.7% 6.9% 4.0% 70bps (90bps) 28.2% 31.4% 15.9% 50bps 120bps We expect to see revenue growth by 4% (QoQ) in USD term. PERSISTENT Key things to watch: Commentary on deal pipeline and contribution from IPled revenue Rs, Cr 3QFY13 2QFY14 3QFY14E (QoQ)-% (YoY)-% 333 82.4 49.5 24.7% 14.9% Sales EBITDA PAT EBITDA Margin PAT Margin 432.4 100.8 60.8 23.3% 14.1% 436.06 104.65 66.88 24.0% 15.3% 1% 4% 10% 70bps 80bps 30.9% 27.0% 35.1% (70bps) 40bps We expect overall revenue growth at 3% in USD term due to healthy growth in IP led business and $1mn HP deal. PAT is expected to grow by 10% (QoQ) despite a marginal growth in margin due to the forex gain of Rs 5-6 cr v/s 9 cr of same previous quarter. NIITTECH Rs, Cr Key things to watch: Updates on new deal win, revenue traction from all geographies & inorganic initiatives. 3QFY13 2QFY14 3QFY14E (QoQ)-% Sales 514.4 587.3 593.50 1.1% EBITDA 81.3 88.6 86.06 -2.9% PAT 56.6 60.4 57.38 -5.0% EBITDA Margin 15.8% 15.1% 14.5% (60bps) PAT Margin 11.0% 10.3% 9.7% (60bps) We expect the company to report 1% QoQ growth in USD terms. Due to the lower other income, we expect the net income to decline by 5%. (YoY)-% 15.4% 5.9% 1.4% (130bps) (130bps) View and valuation: Company TCS INFOSYS HCLTECH WIPRO TECHM CMC NIITTECH KPIT HEXAWARE PERSISTENT eCLERX TATAELXSI ZENSARTECH CMP Upside View Target (06.01.14) % 2239.6 BUY 2360 5.4% 3514.2 BUY 3622 3.1% 1251.3 BUY 1415 13.1% 558.05 NEUTRAL 450 1817.65 BUY 2330 28.2% 1734.45 REDUCE 1693 379.85 BUY 408 7.5% 181.55 REDUCE 177 138.65 BUY 141 1.4% 990.05 REDUCE 960 1064.6 BUY 1360 27.7% 413.65 REDUCE 210 397.95 BUY 400 0.5% FY13 71.82 164.2 58.10 25.0 85.48 75.27 36.28 10.80 11.1 46.12 64.25 10.63 40.03 EPS-Rs FY14E 90.74 181.1 71.87 25.15 144.15 101.56 44.03 13.07 13.1 63.40 71.61 17.53 57.16 FY15E 102.37 208.2 83.49 27.4 161.64 110.07 53.38 15.95 14.3 76.92 83.65 19.76 74.62 FY13 31.19 21.40 21.54 22.28 21.26 23.04 10.47 16.81 12.49 21.47 16.57 38.91 9.94 P/E-x FY14E 24.68 19.40 17.41 22.19 12.61 17.08 8.63 13.89 10.61 15.62 14.87 23.60 6.96 FY15E 21.88 16.88 14.99 20.37 11.25 15.76 7.12 11.38 9.69 12.87 12.73 20.93 5.33 FY13 36.42% 24.8% 30.72% 21.7% 35.91% 24.10% 20.0% 20.10% 27.2% 18.1% 43.8% 16.94% 23.22% RoE-% FY14E 36.22% 23.0% 29.10% 18.9% 38.31% 25.81% 19.6% 19.80% 27.0% 20.5% 37.9% 23.55% 26.07% FY15E 32.95% 22.2% 26.39% 17.8% 30.38% 22.92% 19.3% 19.75% 26% 20.4% 34.4% 22.37% 26.34% key macro indicators in US economy and recent interaction by Industry experts bring some optimistic view in the IT sector. The meaning full recovery has been seen in US labor market. At the same time, business investment and consumer confidence appear to be coming back. We believe, uptick in discretionary spend could be sustain over the next 12-18ms. Commentary on demand outlook, deal pipeline and discretionary spending will be key topic to discuss post results. At a same, management commentary would also be monitor able. Hence, with strong medium term earnings visibility, better demand environment and optimistic management comments, we are positive on (In order of preference) TCS, INFY, and HCL tech from large cap coverage and TECHM, eClerx and NIITTech from Mid cap space. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 12
    • SHREE CEMENT. Company Update Buy CMP Target Price Previous Target Price Upside Change from Previous 4460 4791 NA 7% NA Market Data BSE Code NSE Symbol 500387 SHREECEM 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume (Nos.) Nifty 5210/3413 15502 3875 6191 Stock Performance-% 1M 0.1 0.0 Absolute Rel. to Nifty 1yr -4.8 -8.0 YTD -5.1 -9.2 "BUY" 7th Jan' 14 As on Mid June, the company's gross debt stood at Rs.12.9bn, including Rs.3.1bn of long-term debt maturing within a year and cash and cash equivalents of Rs. 25.7bn. We believe net cash balance of INR12.8bn coupled with future cash flows should result in smooth execution of its expansion plan. A very good strategy for capacity expansion has ensured that leverage remains under control like in the past.We are positive on the stock as it always beats its peers group with lower operational cost. Looking at the strategy of the company and expansion plans for FY15 the stock may outperform among cement players with the rise in cement demand.Shree cement follows a multi brand strategy and sells cement under the highly recognized brands of Shree Ultra, Bangur and Rockstrong which together enjoy the largest market share in high value markets of Rajasthan, Delhi and Haryana. After a good monsoon and election we are expecting a good performance from shree cement for the H2FY14, thus at CMP Rs.4460/- we are bull at a target Price Rs.4791/- with degrowth in EBIDTA : Volume Growth With Q1FY14 performance Net sales declined 5.8% to Rs.1248 Cr as weak cement pricing in its key northern market offset the benefits from higher cement and power volumes. While cement and clinker dispatches rose 7.2% YoY to 3.26mmt, realizations weakened 12.7% YoY and 7.2% QoQ at INR3,334/ mt.On the volumes front, while the 7.2% increase in cement dispatches positively surprised, a 36% growth in power sales lagged our estimate of a 128% growth. EBIDTA for the cement segment declined 39% at Rs.249 Cr (-37% YOY) on account of weak prices coupled with higher operational costs. Lower effective tax rate (2.8% vs 16.5%) stemmed the decline in net profits to INR1.7bn, a degrowth of 24.5%. On the expansion front : Share Holding Pattern-% 1 yr Forward P/B The 2m-ton Line-IX clinker unit at Ras, Rajasthan, was commissioned in Jun’13.Line X of similar capacity along with 25MW of WHRS (at the same location) is expected by Jun’14.Two grinding units of 2m tons each, at Ras and in Bihar,are being constructed and expected by Jun’14.For the greenfield clinker-cumgrinding unit (Chhattisgarh) and 2m ton grinding unit (Ras), equipment order have been placed; commissioning is for Mar‐Jun’15.We expect Shree to be a 21.5m-tpa company by Jun’15.It plans to foray into high demanding eastern. It has set its eye on 'Mission 2015', i.e. achieving a production capacity of 25mmt by 2015.Total capex for these expansion is Rs.3,000 crore which is spread over next 2 years. 6000 Cement : Theme Report 2QFY14 64.8 8.2 5.7 21.3 Promoters FII DII Others 1QFY14 4QFY13 64.8 64.8 8.1 7.8 5.9 5.6 21.2 21.8 PRICE 1.5x 2x 3.5x 4x Industry’s profitability deteriorated to multi‐year low during 2QFY14 as all companies reported sharp decline in their operating profits. Weak demand on account of a strong & timely monsoon led to muted volume growth and weak cement prices. Regional & smaller players hit the hardest .The industry’s profitability suffered on weak demand & rising costs; Fuel costs have largely remained stable.Capex slowdown continues to impact demand off‐take. Sand mining bans also hurting construction activities & cement demand.Infrastructure execution remains uncertain; rural pick up on good monsoon can lead to demand growth. The storm seems over but headwind persists Outlook is cautious. 2.5x 3x 5000 4.5x 4000 3000 2000 1000 Sep-13 Sep-12 Mar-13 Sep-11 Mar-12 Sep-10 Mar-11 Sep-09 Mar-10 Sep-08 Mar-09 Sep-07 Mar-08 Sep-06 Mar-07 Sep-05 Mar-06 Sep-04 Mar-05 Sep-03 Mar-04 Sep-02 Mar-03 Mar-02 0 Source - Comapany/EastWind Research Financials : Net Revenue EBITDA Depriciation Tax PAT Q1FY14 1248 249 114 5 172 Y-o-Y % -5.7 -36.8 21.3 -88.9 -24.6 Q-o-Q % -13.9 -35.7 -14.3 -68.8 -39.4 Q1FY13 1324 394 94 45 228 Q4FY13 1449 387 133 16 284 (In Crs) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 13
    • SHREE CEMENT. OUT LOOK : EBIDTA Margin 40 35 30 25 20 15 10 5 0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q5FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 From the view company Operations in the high utilisation North and Central markets, capacity expansions underway, low gearing and strong RoE are fundamental positives. We believe although, near term challenges in terms of a slowdown in demand for cement would remain, strong balance sheet and better efficiency in terms of cost remains a key positive for this company to overcome challenges.Company Management is bull for the rest two quarters of FY2014 as according to them demand has already buttom out.We are positive on the stock as it always beats its peers group with lower operational cost. Looking at the strategy of the company and expansion plans for FY15 the stock may outperform among cement players with the rise in cement demand.Shree cement follows a multi brand strategy and sells cement under the highly recognized brands of Shree Ultra, Bangur and Rockstrong which together enjoy the largest market share in high value markets of Rajasthan, Delhi and Haryana. After a good monsoon and election we are expecting a good performance from shree cement for the H2FY14, thus at CMP Rs.4460/- we are bull at a target Price Rs.4791/- Company Description : Shree Cement (SCL) is a cement producer operating in the two segments cement and power. As of June 30, 2012, the company had a cement capacity of 13.5 million tonnes per annum (MTPA) and power capacity of 560 MW. This includes 300 MW (150 MW x2) thermal power plant commissioned at Beawar. The company's waste heat recovery power plants have a total capacity of 46 MW. The company’s brands include Shree Ultra,Bangur Cement and Rockstrong Cement. It has manufacturing facilities at Beawar and Ras in Ajmer and Pali district and grinding units at Khushkhera, Suratgarh and Jaipur, respectively, in Rajasthan and Roorkee in Uttarakhand. Source - Comapany/EastWind Research 1,550 1,500 REVENUE GROWTH 60.00 50.00 Expenditure EBITDA Depriciation Interest Cost Net tax expense / (benefit) PAT ROE% 2569 885 676 98 4252 1646 873 235 619 23.1 10.00 (10.00) 4029 1561 436 193 365 20.8 20.00 1,200 FY13 5590 188 5779 30.00 1,250 FY12 5898 163 6061 1,400 1,300 FY11 3454 203 3656 40.00 1,350 P/L PERFORMANCE Net Revenue from Operation Other Income Total Income 1,450 1004 26.1 Narnolia Securities Ltd, FY14E Source - Comapany/EastWind Research 14
    • SHREE CEMENT. B/S PERFORMANCE Share capital Reserve & Surplus Total equity Long-term borrowings Short-term borrowings Long-term provisions Trade payables Short-term provisions Total liabilities Intangibles Tangible assets Capital work-in-progress Long-term loans and advances Inventories Trade receivables Cash and bank balances Short-term loans and advances Total Assets RATIOS P/B EPS Debtor to Turnover% Creditors to Turnover% Inventories to Turnover% FY10 FY11 FY12 FY13 35 1798 1833 1789 318 28 171 472 4906 0 752 967 299 358 82 416 415 4906 FY10 4.4 212.3 2.3 4.7 1.0 35 1951 1986 1472 217 16 185 267 4940 0 1167 729 308 404 108 499 429 4940 FY11 3.6 118.6 3.1 5.3 1.2 35 2699 2734 818 143 17 584 178 5973 0 1521 97 205 503 181 459 363 5973 FY12 3.8 177.5 3.1 9.9 0.9 35 3809 3844 443 534 18 81 87 6160 0 1782 133 378 530 315 369 326 6160 FY13 4.2 288.2 5.6 1.4 0.9 CASH FLOWS Cash from Operation Changes In Working Capital Net Cash From Operation Cash From Investment Cash from Finance Net Cash Flow during year FY10 FY11 FY12 FY13 1566 -64 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Trading At : 7000 6000 5000 4000 3000 2000 1000 0 6000 5000 4000 3000 2000 NIFTY SHREECEM 1000 0 Narnolia Securities Ltd, Source - Comapany/EastWind Research 15
    • ORIENTAL BANK Company Update CMP Target Price Previous Target Price Upside Change from Previous NEUTRAL 216.5 221 2 - Market Data BSE Code NSE Symbol 500315 ORIENTBANK 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty Stock Performance 1M Absolute 15.2 Rel.to Nifty 14.9 365/121 6329 1.98 lac 6211 1yr -36.8 -42.2 YTD -53.8 -59.2 Share Holding Pattern-% Current 1QFY14 4QFY1 3 Promoters 58.0 58.0 58.0 FII 10.0 10.1 9.6 DII 24.0 24.6 25.2 Others 8.1 7.3 7.2 ORIENT BANK Vs Nifty "NEUTRAL" 6th Jan 2014 We have now neutral rating on Orient Bank largely due to trading closer to our target price Rs.221. At this price stock would trade at 0.5 times of one year forward book and 6.5 times of forward earning. We haven’t revised the multiple on account of non visibility of ROE improvement in near to medium term. Asset quality and operating leverage is likely to remain at elevated level in FY14. Provision coverage ratio at the end of 2Q was 30% implying very little cushion to its future earnings. Balance sheet size is likely to grow at below of industry average. Despite of comfortable Tier-1, capital infusion of Rs.150 cr would be book value dilutive. Inability to increase CASA and expected higher operating leverage in 2HFY14 restrict valuation multiple to move in the range of 0.4 to 0.5 times of one year forward book in our view. Asset quality pressure likely to persist but guided better recovery in agriculture portfolio During the last quarter Orient Bank reported flesh slippage at 3.2% (annualized basis) and asset impairment of 11.1% which would be likely to be flat in full year according to management. However management expects better recovery in agriculture portfolio in 2HFY14 led by better harvest. At the end of September bank has total restructure portfolio of Rs.9421 cr in which most came from infrastructure segment (about 49%). Power sector contributed 18% of total infrastructure standard restructure. But as per management most of power sector exposures are from government sector where chances of fresh slippage are very low. In line with management guidance we model 3.3% of GNPA for FY14 and 3.4% in FY15E keeping view of better recovery and controlled fresh slippage. Balance sheet size likely to grow below of Industry average Bank management is caution about impairment of asset and taken tight measurement in lending norm especially in large corporate. Recently large ticket size fresh slippage emerges from large corporate. Bank management has taken caution outlook towards the corporate loan and tighten sanction and disbursement norm. As the result corporate loan grew by 7% YoY in 2QFY14. We observe that corporate loan constituted about 70% of total credit and rest came from retail loan. With lower growth in corporate segment, overall credit growth is likely to be muted in full year and would be below of industry average. Financials NII Total Income PPP Net Profit EPS 2011 4178 5138 3245 1503 51.5 2012 4216 5456 3141 1142 39.1 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. Rs, Cr 2013 2014E 2015E 4701 5719 6710 6356 7419 8410 3691 2968 3364 1328 1032 1165 45.5 35.4 39.9 (Source: Company/Eastwind) 16
    • ORIENTAL BANK Operating leverage would be remain at high led higher retirement expenses Operating expenses to total asset of the bank is much higher than its peers group largely due to higher expenses towards retirement. Cost-Income (CI) ratio of the bank remained high at 60% as against industry average of 45%. Bank is likely to provide higher employee provision in 2HFY14 as indicated by management. We factor CI ratio of 60% in full year but we understand that ratio may go higher than anticipated. We will get more clarity after the third quarter result and post conference call. Capital infusion of Rs.150 cr despite of 8.9% of Tier-1 capital According to basel-111 norm, Tier-1 capital was 8.9% which was comfortable for required business growth in our view but recent capital infusion of Rs.150 diluted our estimated ROE by 10 bps. Bank may use the additional fund in credit growth without adequate support of deposits. Low cost deposits stick to 24.5% from last few quarters; exert pressure in expanding NIM and ROE We note that bank’s CASA ratio stick to 24.5% from FY10 to 2QFY14 which undoubtedly escalate cost of deposits from 5.8% in FY10 to present of 7.8%. We donot expect interest rate would be come down in surging inflation imperil. Inability to increase CASA and rising interest rate would keep NIM under pressure. However management guided NIM at 2.85 -2.87% in FY14. Lower visibility of comfort earnings and book value dilution on account of capital infusion, we expect ROE would be 7-10% in near term which will attract valuation multiple of 0.4 to 0.5 times book. Valuation Band Source:Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 17
    • ORIENTAL BANK Financials & Assuption P/L 2011 2012 2013 2014E 2015E Interest/discount on advances / bills Income on investments Interest on balances with Reserve Bank of India Others Total Interest Income Others Income Total Income Interest on deposits Interest on RBI/Inter bank borrowings Others Interest Expended NII NII Growth(%) Other Income Total Income Employee Other Expenses Operating Expenses PPP( Rs Cr) Provisions Net Profit Net Profit Growth(%) 8954 2774 335 25 12088 960 13048 7474 23 413 7910 4178 43.7 960 5138 1048 844 1892 3245 1742 1503 32.4 12075 3671 34 35 15815 1240 17055 11213 38 348 11599 4216 0.9 1240 5456 1357 959 2315 3141 1999 1142 -24.0 13758 3854 31 61 17705 1655 19359 12553 111 340 13004 4701 11.5 1655 6356 1576 1089 2665 3691 2363 1328 16.3 16609 4865 78 14 21568 1700 23267 15254 149 446 15849 5719 21.7 1700 7419 2626 1825 4451 2968 1678 1032 -22.3 19101 5457 78 14 24651 1700 26351 17251 172 517 17941 6710 17.3 1700 8410 2977 2069 5046 3364 1907 1165 12.9 139024 15.6 5639 15.4 95908 14.9 42075 17.6 155965 12.2 5259 -6.7 111978 16.8 52101 23.8 175898 12.8 7679 46.0 128955 15.2 58555 12.4 196963 12.0 8498 10.7 148298 15.0 65747 12.3 220598 12.0 9854 16.0 170543 15.0 73745 12.2 9.3 6.6 7.8 5.4 7.7 5.5 10.8 7.0 9.2 7.2 7.3 7.2 10.7 6.6 9.0 7.1 5.9 7.1 11.2 7.4 10.1 7.7 5.9 7.7 11.2 7.4 10.1 7.8 7.0 7.8 380 1.0 7.5 409 0.6 6.4 403 0.6 5.5 435 0.4 5.1 464 0.4 4.5 Key Balance sheet data Deposits Deposits Growth(%) Borrowings Borrowings Growth(%) Loan Loan Growth(%) Investments Investments Growth(%) Eastwind Calculation Yield on Advances Yield on Investments Yield on Funds Cost of deposits Cost of Borrowings Cost of fund Valuation Book Value P/BV P/E Source: Company/Eastwind Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 18
    • UNION BANK Company Update CMP Target Price Previous Target Price Upside Change from Previous BUY 128.9 163 26.5 - Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty 532477 UNIONBANK 281.6/97.1 3231 6.87LAC 6211 Stock Performance 1M Absolute 6.3 Rel.to Nifty 6.0 6th Jan, 2014 Union Bank is trading at 0.4 times of one year forward book and 4.2 times of one year forward earning which we believe attractive for entry. We are looking margin expansion on the back of RBI’s decision not hiking the policy rate (repo rate) and bond yield settle at 8.75% which was much lower as compare to April-June quarter. Bank borrowed more money on the repo and less on MSF and bond yield softened to 8.75% which would result on fair amount of portfolio gain. Moreover bank has taken more money through FCNR (Foreign currency Non-Resident) which is less costlier than deposits and would help to reduce the cost of fund and hence margin accretive. We value bank at Rs.163/share which would be 0.5 times of one year forward book and 5 times of one year forward earning. Stable asset quality on sequentially but restructure pipeline still high At the end of 2QFY14, bank has impairment assets (GNPA+ restructure) at 8.7% of total advance which is lower as compare to its peers. Fresh addition to restructure 1yr -53.8 -59.2 YTD -53.8 -59.2 Share Holding Pattern-% Current 1QFY14 4QFY1 3 Promoters 57.9 57.9 57.9 FII 10.2 11.7 10.6 DII 17.8 17.7 18.0 Others 14.2 12.8 13.5 UNION Bank Vs Nifty "BUY" loans were at 2.8% of loans at Rs.1534 cr higher from 2.2% of loans at Rs.1068 cr in 1QFY14. Management guided another Rs.3000 cr of loans are in pipeline led mostly from SEB. Fresh slippage reported by bank was stable at 3.1% as against 3% in first quarter. Out of total fresh slippage, 50% came from 4 corporate accounts (Power, manufacture, Iron & Steel and services). Bank made lower provisions as compare to growth in GNPA as the result provision coverage ratio declined by 320 bps to 42.1% from 45.3% on sequential basis. Margin declined by 10 bps in 2QFY14 but expect to expand in 2HFY14 Margin declined by 10 bps to 2.54% largely due to increase of cost of fund. Yield on advance was stable at 10.6% QoQ despite to tight liquidity environment whereas cost of fund increased by 10 bps QoQ. With the recent RBI decision not to hike repo rate along with higher FCNR deposits, bank’s margin would be expanded in 2HFY14. Union bank has borrowed fewer amounts for repo than MSF and during quarter bond yield settle at 8.75% which would result on fair amount of portfolio gain and reduce the cost of fund. Financials NII Total Income PPP Net Profit EPS 2011 6216 8255 4305 2082 39.7 2012 6793 9241 5254 1787 29.9 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. Rs, Cr 2013 2014E 2015E 7543 7654 8602 10095 10389 11337 5583 5298 5782 2158 1851 1967 36.2 31.0 33.0 (Source: Company/Eastwind) 19
    • UNION BANK Comfortable earnings and ROE improvement would be possible Stable yield on loan sequentially indicated that bank is able to deliver comfort earning on the back of shifting low yield mix loans to borrowing other market instrument. Although bank has stable CASA ratio but would be getting benefit from FCNR deposits and unchanged repo rate along with MSF. So cost of fund would be lesser as compare to previous quarter in our view. This would help bank to expand margin and ROE improvement. Balance sheet is expected to grow at 16-17% in FY14 as per management. View & Valuation Union Bank is trading at 0.4 times of one year forward book and 4.2 times of one year forward earning which we believe attractive entry point. We are looking at margin expansion on the back of RBI’s decision not hiking the policy rate (repo rate) and bond yield settle at 8.75% which was much lower as compare to April-June quarter. Bank borrowed more money on the repo and less on MSF and bond yield softened on 8.75% which would result on fair amount of portfolio gain. Moreover bank has taken more money through FCNR (Foreign currency Non-Resident) which is less costlier than deposits and would help to reduce the cost of fund and hence margin accretive. We value bank at Rs.163/share which would be 0.5 times of one year forward book and 5 times of one year forward earning. Valuation Band Source:Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 20
    • UNION BANK P/L 2011 2012 2013 2014E 2015E Interest/discount on advances / bills Income on investments Interest on balances with Reserve Bank of India Others Total Interest Income Others Income Total Income Interest on deposits Interest on RBI/Inter bank borrowings Others Interest Expended NII NII Growth(%) Other Income Total Income Employee Other Expenses Operating Expenses PPP( Rs Cr) Provisions Net Profit 12031 4003 161 258 16453 2039 18491 9538 113 585 10236 6216 48.3 2039 8255 2600 1350 3950 4305 2223 2082 0.3 16027 4570 331 101 21028 2448 23477 13406 141 689 14235 6793 9.3 2448 9241 2479 1508 3988 5254 3467 1787 -14.2 19140 5671 199 115 25125 2552 27677 16551 274 756 17582 7543 11.0 2552 10095 2755 1757 4512 5583 3425 2158 20.7 21539 6797 205 177 28717 2735 31452 19872 1191 0 21063 7654 1.5 2735 10389 3105 1985 5090 5298 3447 1851 -14.2 24769 7884 205 177 33035 2735 35770 23052 1381 0 24433 8602 12.4 2735 11337 3389 2166 5555 5782 3815 1967 6.2 202461 19.1 13316 44.5 150986 26.5 58399 7.3 222869 10.1 17909 34.5 177882 17.8 62364 6.8 263762 18.3 23797 32.9 208102 17.0 80830 29.6 305963 16.0 27694 16.4 239318 15.0 97094 20.1 354918 16.0 32124 16.0 275215 15.0 112629 16.0 8.0 6.9 7.2 4.7 5.2 4.7 9.0 7.3 8.3 6.0 4.6 5.9 9.2 7.0 8.3 6.3 4.3 6.1 9.0 7.0 8.5 6.5 4.3 6.3 9.0 7.0 8.5 6.5 4.3 6.3 243 1.4 8.7 245 1.0 7.8 290 0.7 5.8 313 0.4 4.2 337 0.4 3.9 Key Balance sheet data Deposits Deposits Growth(%) Borrowings Borrowings Growth(%) Loan Loan Growth(%) Investments Investments Growth(%) Eastwind Calculation Yield on Advances Yield on Investments Yield on Funds Cost of deposits Cost of Borrowings Cost of fund Valuation Book Value P/BV P/E Source: Company/Eastwind Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 21
    • N arnolia Securities Ltd 402, 4th floor 7/ 1, Lord s Sinha Road Kolkata 700071, Ph 033-32011233 Toll Free no : 1-800-345-4000 em ail: research@narnolia.com , w ebsite : w w w .narnolia.com Risk Disclosure & Disclaimer: This report/message is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Narnolia Securities Ltd. (Hereinafter referred as NSL) is not soliciting any action based upon it. This report/message is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any from. The report/message is based upon publicly available information, findings of our research wing “East wind” & information that we consider reliable, but we do not represent that it is accurate or complete and we do not provide any express or implied warranty of any kind, and also these are subject to change without notice. The recipients of this report should rely on their own investigations, should use their own judgment for taking any investment decisions keeping in mind that past performance is not necessarily a guide to future performance & that the the value of any investment or income are subject to market and other risks. Further it will be safe to assume that NSL and /or its Group or associate Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise, individually or otherwise in the recommended/mentioned securities/mutual funds/ model funds and other investment products which may be added or disposed including & other mentioned in this report/message.