Investment Funds Advisory for Today: Buy Stock of Powergrid and IFGL Refractories Ltd
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Investment Funds Advisory for Today: Buy Stock of Powergrid and IFGL Refractories Ltd

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See Private Sector Banks Result Review 3QFY14. Powergrid strong growth visibility and minimal operational risks. We valued stock for a 12 month period at a target price of Rs.118 also We rate a BUY ...

See Private Sector Banks Result Review 3QFY14. Powergrid strong growth visibility and minimal operational risks. We valued stock for a 12 month period at a target price of Rs.118 also We rate a BUY rating on the stock with an 12 months price target price of Rs 80.0 at 4.1x FY15E earnings of IFGL Refractories Ltd stock.

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Investment Funds Advisory for Today: Buy Stock of Powergrid and IFGL Refractories Ltd Document Transcript

  • 1. IEA-Equity Strategy India Equity Analytics 3th March, 2014 Daily Fundamental Report on Indian Equities Powergrid : "BUY" Edition : 216 3th Mar 2014 The stock is trading at 1.7x FY15E BVPS. We estimate to Power grid stock to trade at 1.8x BVPS. Valuation is very reasonable for a business model with RoE (16%), strong growth visibility and minimal operational risks. We valued stock for a 12 month period at a target price of Rs.118.With equity dilution overhang on the stock is removed, so we expect the stock price will drive by purely on its fundamentals, on our estimates we maintain a positive fundamental outlook for Power grid. Also, govt. stake coming down to 58% is a positive, as risk of further equity dilution is reduced . ............................................................ (Page : 2) IFGL Refractories Ltd :"Strong Fundamentals…..." "BUY" 3th Mar 2014 IFGL refractories is the flagship company of SK Bajoria group.Company manufacturing Continuous Casting Refractories and Special grade Refractories which find applications in steel industry. IFGL has grown as an Indian multinational with manufacturing facilities located in Brazil, China, Czech Republic, Germany, India, UK and USA. Krosaki HarimaCorporation Japan ,a subsidiary of world’s second largest steel maker NipponSteel Corporation holding about 15 % stake in IFGL. We expect IFGL will report its best ever performance in this full year. Considering industry’s improving prospects, stabilization of production from its newly built plant at Kandla SEZ and out performance of company in its financials, We don’t expect any scope for deep correction, hence recommending a BUY. ................................................................................... ( Page : 3-4) Private Sector Banks Result Review 3QFY14 3th Mar 2014 Private Banks are trading at significantly lower or reasonable valuation when compare to their historical trend due to possible deterioration in asset quality earnings pressure and political un-clarity. We prefer private banks over PSBs largely due to their capability to report healthy earnings, higher capital adequacy ratio and lower or stable asset quality. Our top picks in sector are HDFC Bank, ICICI Bank, Indusind Bank and DCB. ............................................................................ ( Page : 5-6) IT Industry: 3QFY14 results review : "Clear acceleration in growth" 28th Feb 2014 For IT Industry, 3QFY14 has carried out a quarter of mix set of numbers largely impacted by seasonality and furloughs impact. However, most of companies expressed its sanguine view for industry outlook and demand discretionary environment ahead. Post earnings, almost all companies management have expressed for better earnings outlook in near term . .................................................. ( Page : 7-12) Public Sector Banks Result Review 3QFY14 26th Feb 2014 Most of PSBs profitability were declined due to higher operating cost, surge in provisions and contingencies and creation of DTL special reserve. But declining profitability and deteriorating asset quality is not a concern but structure damage of balance sheet. Going forward banks with higher CASA base and healthy growth in deposits would able to protect margin and hence profitability. Post result we like SBI, Union Bank and UCO Bank due to their structural improvement in balance sheet, operating and financial metrics. ............................................................................ ( Page : 13-14) SHREE CEMENT. "BOOK PROFIT " 25th Feb 2014 The stock is trading at 4x in 1 yr forward P/B chart.we believe for the current market scenario the price is fare enough to trade.But looking at future capex plans and sluggish demand we belive the earnings and profitability of Shree cement may fall for the next two consecutive quarters.The profitability may fall due to incrising depriciation.Till now the company's depriciation level is stable but it may surprise further.so we recommend its a better pic to book profit. ................................................................. ( Page : 15-17) "BOOK PART PROFIT " AXIS BANK : 25th Feb 2014 We advice our investor to book part profit in Axis Bank as bank has achieve our target price level of Rs.1217. We still stick to our valuation on account of bank’s uncomfortable earnings and asset quality stress. Bank’s profitability was up by 19% YoY on the back of right back of investment depreciation provisions. Exposure to risky sector remained high which would keep asset quality under stress. These factors compel us to value bank at 1.5 times of FY14E’s book value......................................................... ( Page : 18-22) Narnolia Securities Ltd,
  • 2. Powergrid.. Update BUY CMP Target Price Previous Target Price Upside Change from Previous 95 118 NA 25% NA Market Data BSE Code NSE Symbol 532898 POWERGRID 1yr 9.5 3.8 YTD 8.1 4.0 Strong Capitalization : Power Grid’s adjusted PAT increased 4.3% YoY to Rs. 1,043 crore in Q3FY14 While asset capitalisation was below estimate Rs. 3050 crore, PGCIL commissioned another Rs. 3450 crore in January 2014 taking overall capitalisation to Rs. 13000 crore YTDFY14. Share Holding Pattern-% Promoters FII DII Others 3QFY14 57.9 25.4 8.6 8.2 Overall revenues increased 9.6% YoY to Rs.3685 crore due to lower than anticipated capitalisation (Rs.3050 crore) in Q3FY14 . Income increased 6.5%, 10.0% and 121.9% YoY in transmission, telecom and consultancy income, respectively. Other income declined 9.7% YoY to Rs.116 crore as cash was deployed across various upcoming projects. Margins declined 336 bps YoY to 87.4% due to 55.7% YoY rise in transmission & other expenses to Rs.333 crore. Tax expenses increased 7.5% YoY to Rs. 399 crore. Q3FY13 included a one-time income of Rs.167 crore as wage revision benefit. Adjusting the same, PAT increased 4.3% YoY to Rs.1,043 crore. The Central Electricity Regulatory Commission (CERC) issued the final tariff regulations for the period FY15-19 – these regulations form the basis of Power Grid’s earnings (regulated returns) from its core transmission business over the next five years.The Key take aways of these Regulations are Normative TAF (NATAF) for incentives lowered; no incentive for TAF >99.75% .Normative O&M charges raised (vs. draft), but still below FY14 levels. Stock Performance-% Absolute Rel. to Nifty 3rd march' 14 116/87 49490 22270 6277 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume (Nos.) Nifty 1M 8.2 9.5 "Buy" 2QFY14 1QFY14 57.9 69.4 19.4 14.7 8.8 7.6 13.9 8.3 1 yr Forward P/B Capitalisation of assets remains on track. Till Jan end the company has capitalised Rs 118bn of assets which is 70% of our full year estimate. Since last two months of the year usually account for the bulk of yearly commissioning we are confident that the co. will meet our estimate of Rs 170bn for FY14. Power Grid's Raichur-Solapur line has been connected to national grid. Management Says there were four trippings in the first week. Two were to increase reliability and were done intentionally, and the other two were because of a few glitches. For the last month there has been no tripping. View & Recommendation With equity dilution overhang on the stock is removed, so we expect the stock price will drive by purely on its fundamentals, on our estimates we maintain a positive fundamental outlook for Power grid. Also, govt. stake coming down to 58% is a positive, as risk of further equity dilution is reduced The stock is trading at 1.7x FY15E BVPS. We estimate to Power grid stock to trade at 1.8x BVPS. Valuation is very reasonable for a business model with RoE (16%), strong growth visibility and minimal operational risks. We valued stock for a 12 month period at a target price of Rs.118. Source - Comapany/EastWind Research Financials : Revenue EBIDTA Net Profit EBIDTA% NPM% Q3FY14 3685 3105 988 84 27 Y-o-Y % 9.4 6.0 -8.5 -3.1 -16.3 Q-o-Q % -7.9 -8.4 -16.9 -0.6 -9.8 Q3FY13 3369 2930 1080 87 32 Q2FY14 3999 3389 1189 85 30 (In Crs) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 2
  • 3. IFGL Refractories Ltd. V- "Buy" 3rd Mar' 14 "Strong Fundamentals…..." Buy 62 80 NA 29% 0% Result update CMP Target Price Previous Target Price Upside Change from Previous Market Data BSE Code NSE Symbol 52wk Range H/L Capital Mkt (Rs Crores) Average Daily Volume Nifty 532133 IFGLREFRAC 24/68 214 6,366 6,277 Stock Performance-% 1M (0.5) (3.6) Absolute Rel. to Nifty 1yr 75.7 68.5 YTD 100.2 89.7 Share Holding Pattern-% Promoters FII DII Others 3QFY14 71.3 0.0 2.2 26.5 1 yr Forward P/B 2QFY14 1QFY14 71.3 71.3 0.0 0.0 2.2 2.2 26.5 26.5 IFGL refractories is the flagship company of SK Bajoria group.Company manufacturing Continuous Casting Refractories and Special grade Refractories which find applications in steel industry. IFGL has grown as an Indian multinational with manufacturing facilities located in Brazil, China, Czech Republic, Germany, India, UK and USA. Krosaki HarimaCorporation Japan ,a subsidiary of world’s second largest steel maker NipponSteel Corporation holding about 15 % stake in IFGL. The company has a lot of subsidiaries with the ones in US and Germany seemingly doing well. For the latest December quarter,on a consolidated basis company reported a Sales of Rs. 195.7 Cr v/s Rs. 168.9 Cr. Net profit improved sharply from Rs. 9.5 Cr to Rs. 14.3 Cr. For 9 Month period EPS is Rs. 13.9 which is more than the full year figure of Rs. 7.3 of last year. We expect IFGL will report its best ever performance in this full year. Considering industry’s improving prospects, stabilization of production from its newly built plant at Kandla SEZ and out performance of company in its financials, We don’t expect any scope for deep correction, hence recommending a BUY. Industry revival to spur growth : Fate of refractory companies closely related with the growth of steel industry. Now steel industry world around showing some earlier signs of revival.As a global player ,IFGL is expected to get immense benefit from this revival.Its technical collaboration and equity participation with one of the world leaders also helping the company to adopt latest technology in manufacturing process. A major portion of company’s income is from exports and the currency valuation of currency is also positive for it. Steel industry in the US and in Europe is coming out of pro-longed recession and demand in India is also expected to pick up on account of major projects getting started. Increase in capital expenditure for capacity expansion by major steel producers both within India and internationally augurs well for the refractory industry Low leverage balance sheet and attractive valuations augurs well : IFGL reported debt equity ratio of 0.35x in Sep FY13, even after the series of acquisitions, and we expect it to gradually reduce over time to 0.28x in FY15E.Company having an uninterrupted dividend paying record for the past four years. Promoters holding more than 70 % stake (NIL pledged) in the company and another 7 % is held by large investors. At a time the steel industry is showing revival, We expect IFGL will report its best ever performance in this full year. Considering industry’s improving prospects, stabilization of production from its newly built plant at Kandla SEZ and out performance of company in its financials, We don’t expect any scope for deep correction, hence recommending a BUY. Valuation : At CMP of INR 62, IFGL is trading at P/E of 3.7x and 3.2x its FY14E and FY15E earnings. Company can post the EPS of Rs 16.8/18.6 in FY14/15E and RoE% of 20.3%/19.2% in FY14/15E . We rate a BUY rating on the stock with an 12 months price target price of Rs 80.0 at 4.1x FY15E earnings. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 3QFY14 194.7 27.2 14.3 14.0% 7.4% 2QFY14 201.4 29.9 19.1 14.8% 9.7% (Source: Company/ Eastwind Research) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (QoQ)-% -3.3% -8.8% -25.2% (80) bps (230) bps 3QFY13 169.0 18.3 9.5 10.9% 5.1% Rs, Crore (YoY)-% 15.3% 48.5% 50.3% 310 bps 230 bps (Standalone) 3
  • 4. Finolex Cables Ltd. Key financials : PARTICULAR 2009A 2010A 2011A 2012A 2013A 2014E 2015E 398 2 401 27 20 7 10 13 7 0 6 2 1.8 0.7 415 3 419 58 50 8 5 49 15 0 34 2 9.7 0.6 471 5 476 43 34 9 6 33 8 0 24 0 7.0 0.0 604 3 607 75 62 13 7 58 18 0 40 1 11.5 0.2 671 4 676 58 45 13 8 41 16 0 25 2 7.3 0.6 772 3 776 106 89 17 7 85 27 0 58 2 16.8 0.6 888 3 891 120 103 17 7 99 31 0 68 2 19.6 0.6 6.9% 1.5% 9.7% 3.7% 5.3% 2.8% 13.9% 8.0% 17.6% 1.1% 24.6% 15.6% 9.1% 5.1% 22.9% 0.0% 15.0% 8.3% 12.3% 6.6% 29.2% 0.5% 19.2% 11.9% 8.7% 3.8% 23.7% 1.9% 11.0% 7.1% 13.7% 7.5% 27.2% 1.0% 20.3% 14.6% 13.5% 7.6% 31.6% 1.0% 19.2% 15.0% 114 100 214 3 18 137 79 216 3 55 161 129 290 3 31 207 127 335 3 39 231 129 360 3 31 287 110 397 3 62 353 100 453 3 62 32.8 0.5 2.1 10.3 39.6 1.4 11.1 5.7 46.6 0.7 5.7 4.4 59.9 0.7 9.1 3.4 66.7 0.5 5.6 4.2 83.0 0.7 12.2 3.7 101.9 0.6 14.1 3.2 Performance Revenue Other Income Total Income EBITDA EBIT Depriciation Intrest Cost PBT TAX Derrivative Loss Reported PAT Dividend EPS DPS Yeild % EBITDA % NPM % Earning Yeild % Dividend Yeild % ROE % ROCE% Position Net Worth Total Debt Capital Employed No of Share CMP Valuation Book Value P/B Int/Coverage P/E (Source: Company/ Eastwind Research) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 4
  • 5. Private Sector Banks Result Review 3QFY14 Better than expected NII on the back of margin expansion and loan growth In our coverage universe, banks NII grew by 15.7% YoY largely due to stable margin and loan growth. Private sector banks are getting benefit from their high base CASA franchise and low share of high cost wholesale bulk deposit. HDFC Bank, ICICI Bank, Indusind Bank and DCB were continued to report 20%+ NII growth whereas Federal Bank, INGVYSYA Bank, J&K Bank saw some stress in their earnings. Well structure balance sheet led healthy growth at operating profit level Operating expenses in our coverage universe remained stable on sequential basis and on very positive note; they delivered on an average basis growth of 19.8% YoY at operating profit level. This was due to healthy NII growth, stable fee income and controlled operating leverage. We have highlighted above that banks with healthy operating profit would do better going forward as strong performance at operating profit level would be possible only in case of well structure balance sheet growth. Economic growth and stress in asset quality issue would be resolve with the passage of time. Although we have not seen any revival in economy nor improvement in asset quality in near term but private sector banks are trading significant discount as against their historical valuation due to possible fear of deterioration in assets. Profitability increased due to healthy NII growth, controlled CI ratio and stable asset quality Most of banking stocks are trading at lower side of valuation band due to earnings pressure, higher operating leverage and asset quality. In our coverage universe, bank reported profit growth of 16.6% YoY higher than our expectation led by margin Nifty Vs Bank Nifty during Year expansion, controlled operating leverage and stable asset quality. Although we saw some earnings pressure in many large and mid cap banks on which Axis bank’s profitability was boost up by right back of investment depreciation and Yes Bank’s provisions and contingencies was almost down by 100% which inflated profit growth by 21.4% YoY. Asset quality continues to persist and would take time despite of uptick in economy Private sector banks delivered better when compare to PSBs in term of asset quality at sequential basis. Sequentially banks reported stable asset quality with high coverage ratio which provided cushion to their earnings. But in our sense, asset quality pressure continues to persist because economy growth is likely to be tepid and it will take some time for recovery in domestic industrial activity and corporate balance sheet’s leverage to decline. According to S&P, with the uptick in economy, bank will have take some time for revival as banks have to struggle for capital base too for further growth but private banks have adequate capital base and healthy tier1 capital. Outlook of asset quality in system is not positive and it would remain challenge for banks in FY14. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 5
  • 6. Private Sector Banks Result Review 3QFY14 Well structure balance sheet growth and high CASA base would help to keep profitability up We like those banks which did well at operating profit level, keeping in mind that with slower pace of economy growth and rising interest rate scenario, asset quality pressure would persist. Provision and contingencies are already expected to remain high. Most of bank’s profitability was down owing to higher provisions against loan loss. With the recovery in economy loan growth and asset quality would improve with the passage of time but operating leverage and margin expansion are permanent structure of balance sheet. Banks with strong CASA base and adequate deposits growth that could support loan growth easily without depending upon external fund would do better in going forward. Outlook Private Banks are trading at significantly lower to their historical valuation or reasonable valuation due to their possible earnings pressure and asset quality issue. This is on account of sluggish economic growth and political un-clarity. Some banks in our universe are capable to generate high level of profit, have high capital adequacy ratio and lower level of stress. In our sense these banks would do better in current economy macro situation. Out top picks are HDFC Bank, ICICI Bank, Indusind Bank and DCB. Result Snapshot PRIVATE BANK AXISBANK CUB DCB DHANBANK FEDERALBNK HDFCBANK ICICIBANK INDUSINDBK INGVYSYABANK J&KBANK KARURVYSYA SOUTHBANK YESBANK Total NII 2984 198 94 57 546 4635 4256 730 416 647 305 350 665 15882 3QFY14E PPP Net Profit 2615 1604 135 89 46 36 -8 -119 356 230 3888 2326 4440 2533 647 347 274 167 441 321 153 107 216 141 615 416 13818 8198 NII 2937 190 91 82 548 4477 4044 700 440 682 298 364 672 15525 2QFY14 PPP Net Profit 2750 1362 141 84 40 33 18 -1.85 354 226 3387 1982 3888 2352 588 330 276 176 496 303 157 83 212 127 713 371 13020 7427 NII 2495 163 72 74 497 3799 3499 578 403 594 308 353 584 13419 3QFY13 PPP Net Profit 2311 1296 131 85 32 27 14 4 394 211 3024 1859 3452 2250 472 267 263 162 435 289 212 113 235 128 563 342 11538 7033 YoY Growth NII PPP Net Profit QoQ Growth NII PPP Net Profit 19.6 21.2 13.2 2.8 23.8 4.8 1.6 4.0 -4.9 -4.5 17.8 6.1 30.5 44.9 34.7 3.3 15.9 10.2 -23.6 9.8 -154.4 -9.7 -3084.3 9.1 -31.1 -0.4 -142.3 0.5 6352.4 1.8 22.0 21.6 28.6 28.6 25.1 12.6 3.5 5.2 14.8 14.2 17.3 7.7 26.3 37.2 29.9 4.3 10.1 5.1 3.3 8.9 4.3 1.3 3.3 11.2 -5.4 -5.2 -0.6 -11.1 -4.9 6.0 -0.9 -27.8 -5.5 2.4 -2.6 28.7 -0.7 13.9 18.4 -8.1 9.2 19.8 10.4 21.5 16.6 -3.7 -1.0 2.3 1.8 -13.8 6.1 11.3 12.0 10.4 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 6
  • 7. IT Industry: 3QFY14 results review "Clear acceleration in growth" Price performance of our coverage: Mix performance and margin sustainability, future outlook appears positive; For IT Industry, 3QFY14 has carried out a quarter of mix set of numbers largely impacted by seasonality and furloughs impact. However, most of companies expressed its sanguine view for industry outlook and demand discretionary environment ahead. The Top-4 companies responded a decent set of performance despite seasonally weak quarter with aggregate revenue of 2.8% in USD term (QoQ). Comparing with street expectation, Infosys and HCL Tech beat the street, while TCS and Wipro reported inline set of numbers. On margin front, they surprised positively with back-to-back quarters of margin improvement led by operational efficiencies and cost rationalization. Post earnings, almost all companies management have expressed for better earnings outlook in near term and they were confident to see stronger FY15E than FY14E on healthy growth prospect and a secular improvement in demand trend. (Source: Eastwind) Index Performance: ▲ 43% (Source: Eastwind) ▲ 9.4% (Source: Eastwind) Key takeaways from 3QFY14 earnings: USD revenue was marginally inline and Positive FY15E outlook: Reported USD revenues were in line or very marginally below our estimate during the seasonally weak quarter across the top tier. A part of this, companies management have given better outlook with margin expansion for FY15E, even NASSCOM aired the earning guidance of 13-15% for FY15E, better than FY14E and FY13. Margin ramped up across the Tier-1 and most of mid cap space: Despite flattish currency benefit, companies have been efficient to maintain its margin because of reinvested higher growth and efficient strategy to improve utilization. With macro improving and positive growth outlook, the operating advantage from investment is likely beginning to play out. SMAC and Digital were subject to discussion: Emerging verticals SMAC (Social, Mobility, Analytics and Cloud) and Digital transformation are expected to bring next generation of growth in IT Industry. A number of IT companies, especially tier-1 IT companies have expressed its priority area and strategy to pan-out growth opportunities on these emerging verticals. Current uptrend in discretionary spend is being driven by the same. Deal Pipeline remains healthy: During the quarter, weak seasonality marginally impacted order inflow. For near term, deal pipeline remains healthy and somehow, Pricing will be marginally under pressure in the traditional IT segment, Application Development and Management segment. While, we do not see any pressure on new emerging segments like SMAC, Digital, Infra, etc. Earning Performance v/s Estimates; INFY HCLTECH TECHM ZENSARTECH TATA ELXSI Outperform TCS WIPRO CMC MINDTREE HEXAWARE NIITTECH PERSISTENT ECLERX Inline KPIT Underperform (Source: Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 7
  • 8. IT Industry: 3QFY14 results review Companies Specific Earnings Review Company TCS INFY* WIPRO HCLTECH# TECHM CMC MINDTREE HEXAWARE$ NIITTECH KPIT PERSISTENT ZENSARTECH ECLERX TATA ELXSI 3QFY13 16069.9 10424.0 9587.5 6273.8 3523.7 493.0 590.1 507.5 514.4 563.3 333.0 525.5 170.8 156.7 Sales,cr 2QFY14 3QFY14E 20977.2 21606.6 12965.0 13069.1 10990.7 11342.4 7961.0 8160.0 4771.5 4819.2 560.8 566.4 769.5 792.2 621.1 629.2 587.3 593.5 702.8 722.0 432.4 436.1 599.7 590.6 214.6 218.5 190.0 195.5 EBITDA,cr 3QFY14 3QFY13 2QFY14 3QFY14E 3QFY14 21294.0 4660.5 6633.0 6300.3 6686.8 13026.0 2677.0 2837.0 3424.1 3258.9 11327.4 2050.2 2503.8 2552.0 2652.7 8184.0 1416.6 2093.0 2080.8 2125.0 4898.6 756.9 1110.9 1084.3 1136.3 561.0 83.2 88.4 87.8 90.8 790.6 120.4 159.8 153.9 154.1 620.0 109.0 147.7 147.9 139.4 587.3 81.3 88.6 86.1 95.1 677.9 87.9 108.1 115.5 103.5 432.8 82.4 100.8 104.7 104.3 594.1 70.1 102.5 87.5 87.3 219.5 66.8 92.8 90.5 88.8 200.1 16.5 32.4 40.4 43.6 *Infosys (net profit for 2QFY14 includes the one-time visa charge of Rs219 crore). 3QFY13 3549.6 2369.0 1598.1 974.3 455.9 61.1 87.7 66.2 56.6 59.9 49.5 48.7 49.8 8.8 PAT,cr 2QFY14 3QFY14E 3QFY14 4633.3 5096.7 5333.4 2407.0 2695.8 2874.9 1932.0 1984.2 2014.7 1416.0 1472.6 1495.0 718.2 754.1 1009.8 67.3 65.6 70.6 113.0 98.6 114.0 98.7 103.6 103.3 60.4 57.4 52.5 66.7 69.4 60.8 60.8 66.9 64.2 70.6 50.4 50.8 67.2 61.4 62.3 19.9 20.5 21.6 (Source: Company/Eastwind) # HCL Technologies (June year ending). $ Hexaware (Follow Callendar year) Growth and Margin Performance-% Company TCS INFY WIPRO HCLTECH TECHM CMC MINDTREE HEXAWARE NIITTECH KPIT PERSISTENT ZENSARTECH ECLERX TATA ELXSI Growth (QoQ)-% Sales EBITDA PAT 1.5% 0.8% 15.1% 0.5% 14.9% 19.4% 3.1% 5.9% 4.3% 2.8% 1.5% 5.6% 2.7% 2.3% 40.6% 0.0% 2.7% 4.8% 2.7% -3.6% 0.9% -0.2% -5.7% 4.7% 0.0% 7.3% -13.1% -3.5% -4.3% -8.8% 0.1% 3.5% 5.6% -0.9% -14.9% -28.0% 2.3% -4.3% -7.2% 5.3% 34.6% 8.5% Growth (YoY)-% Sales EBITDA PAT 32.5% 43.5% 50.3% 25.0% 21.7% 21.4% 18.1% 29.4% 26.1% 30.4% 50.0% 53.4% 39.0% 50.1% 121.5% 13.8% 9.1% 15.5% 34.0% 28.0% 30.0% 22.2% 27.9% 56.0% 14.2% 17.0% -7.2% 20.3% 17.7% 1.5% 30.0% 26.6% 29.7% 13.1% 24.5% 4.3% 28.5% 32.9% 25.2% 27.7% 164.4% 146.9% Margin-% EBITDA PAT 31.4% 25.0% 25.0% 22.1% 23.4% 17.8% 26.0% 18.3% 23.2% 20.6% 16.2% 12.6% 19.5% 14.4% 22.5% 16.7% 16.2% 8.9% 15.3% 9.0% 24.1% 14.8% 14.7% 8.6% 40.5% 28.4% 21.8% 10.8% Margin Change,(QoQ) EBITDA PAT (20bps) 290bps 310bps 350bps 60bps 20bps (30bps) 50bps (10bps) 560bps 40bps 60bps% (130bps) (30bps) (130bps) 80bps 110bps (130bps) (10bps) (50bps) 80bps 80bps (240bps) (320bps) (280bps) (290bps) 470bps 30bps (Source: Company/Eastwind) Tier-1 ; The top four IT companies delivered a decent performance in a seasonally soft quarter with an aggregate revenue growth of 2.8% QoQ. INFY and HCL Tech beat the street on growth and margin front, while TCS and Wipro reported inline set of numbers. Mid cap/Niche (Tier-2)-TECHM and Persistent outmatch peers; TECHM’s broad based revenue growth and deal signing was robust. Persistent system surprised positively on margin front for the second consecutive quarter led by higher utilization. Apart of this, Zensar Tech also reported good margin ramp up during the quarter. As a backbencher, KPIT, NIITTECH and Hexaware reported flat to below expected numbers. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 8
  • 9. IT Industry: 3QFY14 results review Operating Metrics across Tier-1 IT space Sales mix- Geogrpahy wise Discretionary spends continue to gain momentum in America and in specific pockets in Europe. (Source: Company/Eastwind) Sales mix- Segment wise During the quarter, manufacturing segment reported attractive growth. Whilea mong service offerings, Infrastructure Management Services (IMS) will be a key growth driver. (Source: Company/Eastwind) Utilization Rate-% Employee Addition; TCS INFY WIPRO HCLTECH Total Employee 290713 158404 146402 88332 Gross Addition 14663 6,682 -814 7593 (Source: Company/Eastwind) Attirition rate-% Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (Source: Company/Eastwind) 9
  • 10. IT Industry: 3QFY14 results review Key Takeaways from Conference Call; (1) TCS - Confident of beating NASSCOM's FY15 growth guidance of 13-15%, -FY15E will be better than the current fiscal, -Expect Europe to perform better than the US, -Chasing 20-25 large transformational deals, -Seeing an uptick in discretionary spends, - Lateral hiring 50000-55000 in FY15E, (2) INFOSYS -Management upgraded its earning guidance for FY14E from 9-10% to 11.5-12%. -They are seeing confidence coming back from client’s metrics. -The Company is looking to bring in about maximum 6,000 off-campus offers. (3) WIPRO -4QFY14: Revenues from IT Services business to be in the range of $ 1,712 million to $1,745 million* including the revenues from acquisition. -Expect better FY15E than FY14. -Hiring target for FY15E would be like FY14, will focus on onsite hiring. -Wage hike by 1st June ,2014. (4) HCLTECH: -The company is expecting to catch up more deal from US and Europe because of better demand environment ahead. -The company expects to see margin at a range of 21-22% in near term. -The wage hike is spread over two quarters or rather more than two quarters. Q3 and Q4 margin could be impact be 30bps. (5) TECHM -The Company aspires revenues of USD 5 billion by 2015. This expects to be through organic and inorganic initiatives (looking for USD 0.5 billion to 0.8 billion as acquisition targets) going forward. -Year 2014 would be better year than FY13, demand environment and Order pipeline is looking good. -Despite salary hike in 4Q, margin would be on place. Wage hike in 4Q could impact 200bps in margin front, but management is confident to mitigate. -Expecting utilisation rate to 77% from 75%(3QFY14) in near term. -The tax rate expected to be 26% for the FY'14. (6) CMC -CMC continues to target growth ahead of the overall IT industry; the company expects to grow faster than that in the current financial year. -Expects operating Profit margin at 16 percent for FY14E, -The company expects to maintatin its tax regime at 20-20.5% for coming quarter. For next year tax rate could be stand at a range of 20-21%. -Company’s hiring Plan; a net addition of 400-500 this year. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 10
  • 11. IT Industry: 3QFY14 results review (7) PERSISTENT SYS - Persistent is confident of doing more than 15% revenue ($) growth forFY14E. -They expect to maintain margin at 24-25% for FY14E. -Expects 20-21% growth in the next year from IP led business, which in turn will help improve margins going forward. -The Company’s focus on newer technologies like cloud, analytics, mobility and digital transformation are gaining traction. -The company is optimistic to see more deals on SMACS and IP led business. (8) NIITTECH -Company expects FY14 to be better than FY13 with respect to both revenue growth and EBIT margin. -Managent is very confident to maintain attrition at 12-13% and utilization at 77-80% in near to medium term. -It expects the growth momentum will sustain with holding the margins going forward. (9) ZENSARTECH - It expects double-digit growth in the Enterprise Services business for the FY15 on the back of healthy pipeline. - It anticipates good growth from the IMS for the FY'15. -Management has expressed its margin at a range of 16-17% (10) ECLERX -The billing rates expected to be flat to slight uptick for the FY15E. -Expect to see similar set of environment in FY 15E than FY14. -On margins, it indicated that it will continue to operate in the mid 30% (30-31%) going forward. -Tax rate is expected to see at 23% mark in FY15E. -It continues to look at inorganic opportunities. - Expects to maintain 51% of payout ratio. (11) MINDTREE -Management expects the strong traction in top 10/20 clients to continue. -Expects 4QFY14E revenue performance to be better than both 4QFY13 revenue performance (+2.8% QoQ) as well as 3QFY14 revenue growth (+2.5% QoQ). -Company expects to maintain operating margins at current levels in the near/medium term (12) KPIT -Management expects to see better revenue growth in 4QFY14E than 3QFY14. -The company is making significant changes in organization structure. -Margins are expected to improve going forward as the one off during the quarter will be absent. -Utilization will also go up as revenue growth is realized on the back two deals won this quarter which have a duration of 12 months. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 11
  • 12. IT Industry: 3QFY14 results review Industry Outlook: For FY15E, NASSCOM expects IT exports to grow by 13-15% and domestic market to grow by 9-12% based on broad feedback loop from companies and captives. We have seen a significant increase in global technology spending this year, creating opportunities for the Indian software services sector to post double-digit growth again in export as well as in the domestic markets. FY15E promises to be bigger and stronger than the last 3 years, which were marked by bloodbath in global markets due to Euro-zone crisis and falling consumer confidence in the US. Demand is set to pick up in sectors like BFSI, healthcare, retail and transportation globally in the year ahead. For FY15E, We expect that strong fundamentals should help to sustain earning momentum in FY15E. Foray into niche verticals and executions of large deal would play an important factor for better earning visibility in near future. There is a window of opportunity for competent large caps and midcaps to displace incumbents and gain some incremental business. In the past 4 quarters, large caps (four companies) have grown at 3.4% CQGR, while midcaps (five companies) at 3.2%which is comparable to larger peers. Concerns: US Immigration Bill to remain an overhang in short-to-medium term, However, hardening of regulatory related to visa approval in USA, Canada and Australia could spoil the party. Even, the approval of Immigration Bill attached with higher visa fee, wage requirements and enhanced audit by US agencies could turn the growth story of Indian IT players adversely. If passed in its current form, the Bill could hurt the margins of the Indian IT export sector, which derives almost 55-60% of its revenues from USA. Our top picks: TCS and HCLT are growing the fastest and with tremendous margin performance. Infy is accelerating growth … While all companies are accelerating its revenue growth and shaping up its margin because of favorable demand and supply environment. Across the tier-1 IT space, TCS, INFY and HCL TECH remain our best picks in order of our preference. These companies are very much optimistic to improve margin as well as operational efficiencies with healthy deal pipeline across emerging verticals as well as traditional IT Space under positive demand scenario. Hence, with strong medium term earnings visibility, better demand environment and optimistic management comments, we maintain our positive stance on (In order of preference) TECHM, PERSISTENT, ZENSARTECH, ECLERX and KPIT under mid cap space. View and valuation: Company TCS INFOSYS HCLTECH WIPRO TECHM CMC NIITTECH KPIT HEXAWARE PERSISTENT eCLERX TATAELXSI ZENSARTECH MINDTREE CMP (26.02.14) 2182.4 3803.85 1572.9 603.35 1821.65 1450.4 446.4 174.9 165.85 1119.25 1341.05 518.65 387.2 1632.7 View Target BUY BUY HOLD NEUTRAL BUY NEUTRAL HOLD BUY NEUTRAL HOLD BUY NEUTRAL BUY NEUTRAL 2510 3910 1560 2130 443 177 1065 1358 440 - Upside % 15.0% 2.8% -0.8% 16.9% -0.8% 1.2% -4.8% 1.3% 13.6% - FY13 71.82 164.2 58.10 25.0 123.97 75.3 36.28 10.8 13.90 46.1 64.25 10.6 40.03 89.7 EPS-Rs FY14E 95.00 188.0 79.36 31.1 155.37 86.0 43.33 12.6 15.04 61.4 71.61 24.0 52.70 100.9 FY15E 109.31 218.2 98.11 33.5 175.50 92.4 54.18 16.8 16.01 79.1 83.65 28.4 68.97 114.9 FY13 30.39 23.16 27.07 24.09 14.69 19.27 12.30 16.19 11.93 24.27 20.87 48.79 9.67 18.20 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. P/E-x FY14E 22.97 20.24 19.82 19.42 11.72 16.86 10.30 13.85 11.02 18.22 18.73 21.59 7.35 16.18 FY15E 19.97 17.44 16.03 18.01 10.38 15.70 8.24 10.40 10.36 14.15 16.03 18.29 5.61 14.21 FY13 36.4% 24.8% 30.7% 21.7% 34.8% 24.1% 20.0% 20.1% 27.4% 18.1% 43.8% 16.9% 23.2% 28.4% RoE-% FY14E 37.5% 23.7% 31.5% 22.7% 30.7% 22.8% 19.4% 19.3% 24.9% 20.3% 37.9% 29.7% 24.5% 25.6% FY15E 34.4% 22.9% 29.4% 20.8% 26.0% 20.7% 19.6% 20.7% 22.5% 21.4% 34.4% 27.4% 25.2% 23.6% 12
  • 13. Public Sector Banks Result Review 3QFY14 Moderate NII growth in the system due to muted loan growth Net interest income of our universe grew by 10.4% YoY on the back of margin expansion on YoY basis along with moderate to healthy loan growth. In our coverage universe, Bank of India and UCO Bank were reported healthy NII growth whereas Andhra Bank reported 10.6% YoY declined in NII. SBI reported NII growth of 13 YoY largely due to loan growth of 17% while margin was declined by 12 bps and flat at QoQ basis. Lower operating profit on account of higher wage settlement provisions and cost related to branch expenses Operating profit of our universe was declined by 1.5% YoY on the back of higher cost against employee provisions, operating cost and non supportive other income. Most of PSBs were reported negative growth in their other income led by lower corporate fee income. In our universe ALBK, Bank of India and UCO bank reported healthy operating profit. But we have not seen improvement of operating metrics in these banks. Operating leverage of PSBs bank has been increasing led higher wage provisions and branch expansion. Profitability declined led by higher operating expenses, higher provisions and Nifty Vs Bank Nifty during Year Loan (Rs tn) and YoY Gr(%) creation of DTL special reserve Earnings growth of Public Sector Banks (PSBs) are remained weak largely due to higher operating expenses led by employee provisions and surged in provisions and contingencies and higher tax provision for DTL special reserve as per RBI’s suggestion. In our banking coverage universe, profitability declined by 27% YoY and 11.5% QoQ. UCO Bank reported 208% YoY growth while Andhra Bank de-grew by 82% YoY. Asset quality deterioration sequentially on account of tight liquidity condition and rising interest rate Most of PSBs reported 10 to 20% deterioration in asset quality sequentially while United Bank’s GNPA and net NPA were 11% and 7.5% of gross advance and net advance respectively and fresh slippages were 16% (annualized). On slippage front some banks like PNB, Bank of Baroda, Union Bank and UCO bank showed some strength. But in tight economy condition and rising interest rate scenario, asset quality pressure would continue. Banks with higher coverage ratio would be protected. PNB and Bank of Baroda are in better place and their management commentaries reflect some confidence on asset quality issue. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 13
  • 14. Public Sector Banks Result Review 3QFY14 Worry about the structure damage of balance sheet, declined profit is not matter We are not worried about the declining trend of PSBs profitability but to worry about the structural damage of balance sheet. Most of PSBs were reported moderate to healthy loan growth but their deposits and CASA growth were absent. In rising interest rate scenario, banks with higher low cost deposits would be able to report healthy NII growth on the back of margin expansion and would absorb operating cost. In our sense, PSBs would either have to improve their cost structure or improve deposits franchise to report growth at operating profit level. On cost structure front, we are pessimist as PSBs have higher numbers of unproductive employee than private banks and their salary at lower to middle level management are no means less than private sector banks. So banks with higher deposits growth and strong CASA would be able to report healthy growth going forward. We have buy rating on SBI on the back of its high CASA base and reasonable valuation despite of bank’s profitability was declined by 34% YoY. Outlook Most of PSBs are trading at lower range of valuation multiple owing to absence of core earnings, operating leverage, deteriorating asset quality and higher amount of restructure assets that are in pipeline. Most of banking stocks reported moderate revenue and profit growth owing to multiple headwinds. In near term we are not seeing improvement in economic condition and asset quality pressure are expected to remain in the system due to tight liquidity situation and rising interest rate. Post result we like SBI, Union Bank and UCO Bank due to their structural improvement in balance sheet, operating and financial metrics. Result Snapshot PSU BANKS ALBK ANDHRABANK BANKBARODA BANKINDIA CANBK DENABANK IOB ORIENTBANK PNB SBIN SYNDIBANK UCOBANK UNIONBANK VIJAYABANK Total NII 1336 868 3057 2719 2191 661 1398 1230 4221 12641 1359 1566 1964 495 34369 3QFY14 PPP Net Profit 1008 325 522 46 2197 1048 2144 586 1425 626 371 68 961 75 858 224 2702 755 7618 2235 806 380 1137 315 1262 349 168 11 22170 6717 NII 1309 1045 2895 2527 2191 107 1452 1281 4016 12251 1411 1569 1954 705 33404 2QFY14 PPP Net Profit 1154 276 643 71 2125 1168 2102 622 1425 626 369 625 791 133 825 251 2535 505 6312 2375 811 470 1166 400 1225 208 273 136 20601 7590 NII 1330 971 2841 2308 1988 615 1382 1204 3733 11154 1400 1177 1891 456 31120 3QFY13 PPP Net Profit 860 311 712 257 2256 1012 1856 803 1516 714 443 206 1017 116 926 326 2682 1306 7791 3396 864 508 831 102 1358 302 261 127 22513 9175 YoY Growth NII PPP Net Profit 0.4 17.2 4.7 -10.6 -26.8 -82.3 7.6 -2.6 3.6 17.8 15.5 -27.0 10.2 -6.0 -12.3 7.5 -16.3 -67.1 1.2 -5.5 -35.3 2.2 -7.3 -31.2 13.1 0.8 -42.2 13.3 -2.2 -34.2 -3.0 -6.8 -25.2 33.0 36.8 208.4 3.8 -7.1 15.5 8.5 -35.7 -91.0 10.4 -1.5 -26.8 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. QoQ Growth NII PPP Net Profit 2.0 -12.6 18.0 -16.9 -18.9 -35.5 5.6 3.4 -10.3 7.6 2.0 -5.8 0.0 0.0 0.0 517.7 0.5 -89.2 -3.7 21.5 -43.6 -3.9 4.0 -10.6 5.1 6.6 49.6 3.2 20.7 -5.9 -3.7 -0.7 -19.2 -0.2 -2.5 -21.4 0.5 3.0 67.8 -29.8 -38.6 -91.6 2.9 7.6 -11.5 14
  • 15. SHREE CEMENT. Update Book Profit CMP Target Price Previous Target Price Upside Change from Previous 4772 4791 4791 0% NA Market Data BSE Code NSE Symbol 500387 SHREECEM 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume (Nos.) Nifty 5210/3413 16572 4143 6186 Stock Performance-% 1M 8.2 9.5 Absolute Rel. to Nifty 1yr 9.5 3.8 YTD 8.1 4.0 Share Holding Pattern-% 2QFY14 64.8 8.2 5.9 21.2 Promoters FII DII Others 1QFY14 4QFY13 64.8 64.8 8.2 8.1 5.7 5.9 21.3 21.2 1 yr Forward P/B 6000 PRICE 2x 3x 4x 5000 1.5x 2.5x 3.5x 4.5x 4000 3000 2000 1000 Apr-13 Nov-13 Sep-12 Jul-11 Feb-12 Dec-10 Oct-09 May-10 Mar-09 Jan-08 Aug-08 Jun-07 Apr-06 Nov-06 Sep-05 Jul-04 Feb-05 Dec-03 Oct-02 May-03 Mar-02 0 Source - Comapany/EastWind Research "Book Profit" 25th Feb' 14 Profitability and Earning drag may surprise for the next cosecutive quarters. The stock is trading at 4x in 1 yr forward P/B chart.we believe for the current market scenario the price is fare enough to trade.But looking at future capex plans and sluggish demand we belive the earnings and profitability of Shree cement may fall for the next two consecutive quarters.The profitability may fall due to incrising depriciation.Till now the company's depriciation level is stable but it may surprise further.so we recommend its a better pic to book profit. Volumes grew by18 % but prices came down by 5%. So the EBITDA margin has hit badly:Shree Cement Ltd has reported a 47% fall in its December quarter net profit on lower sales as well as 5% degrowth in realization. PAT impacted due to lower other income (down by 70% YOY), Depriciation burden on EBIDTA (Depriciation increased 41% YOY). Volumes grew by18 % to3.8mn ton from 3.3mn ton QOQ. Net profit decreased by 47% yoy from Rs.217.44 crore (Rs.62.42 per share) in 2Q13 to Rs.115.49 crore (Rs.33.15 per share) in 2Q14.Total net income from operations stood at Rs.1318.13 crore in 2Q14, a 6% fall yoy from Rs.1401.23 crore in 2Q13.Other income decreased from Rs.30.2 crore in 2Q13 to Rs.9.9 crore in 2Q14.In the mean time company declares a Rs.10 as interim dividend/share. Power Segment: Realization Down By 15% : For power generation the net realization has come down from Rs 383 to Rs 334 compared to last year same quarter and in the first quarter it was still better at Rs 397.So the power realization is down by 13 percent and hence sales also have come down by 35 percent to Rs.290 Cr. At the same time 14% increase in its profitability from power segment to Rs112.56 crore while its cement segment reported 79% fall in its profitability to Rs37.65 crore. MAT Credit support the buttom line : During the Quarter Company got MAT (minimum alternative tax) credit entitlement of Rs9.25 crore and deferred tax of Rs1.79 crore. This reduced total tax payable amount to Rs15.27 crore from Rs26.31 crore. On the expansion front : 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.We expect Shree to be a 21.5m-tpa company by Jun’15.It plans to foray into high demanding eastern.Total capex for these expansion is Rs.3,000 crore which is spread over next 2 years. Financials : Q2FY14 Y-o-Y % Q-o-Q % Q2FY13 Q1FY14 Revenue 1318 -7.7 5.6 1428 1248 EBIDTA 271 -24.7 8.8 360 249 Net Profit 115 -46.9 -32.9 217 172 EPS 33 -46.9 -32.9 62 49 EBIDTA% 21 -18.4 3.1 25 20 NPM% 9 -42.5 -36.5 15 14 (In Crs) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 15
  • 16. SHREE CEMENT. Management Corner : From mid-January there is a big change in demand scenario because of the Indian calendar, the prices have improved, the demand has also improved and they think that January to June some impact of elections will be there pre-election demand and other things. So margins should be better than 21 percent. 1500 60 Revenue 1450 50 Growth 1400 40 1350 Outlook : 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. The stock is trading at 4x in 1 yr forward P/B chart.we believe for the current market scenario the price is fare enough to trade.But looking at future capex plans and sluggish demand we belive the earnings and profitability of Shree cement may fall for the next two consecutive quarters.The profitability may fall due to incrising depriciation.Till now the company's depriciation level is stable but it may surprise further.so we recommend its a better pic to book profit. we recommend book profit at a 11% high,and stay out from the stock for medium term,till the triggers hit. 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. 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. P/L PERFORMANCE FY11 FY12 FY13 FY14E Net Revenue from Operation 3454 5898 5590 5409 Other Income 203 163 188 197 Total Income 3656 6061 5779 5550 Power and fuel 905 1500 1513 1409 Freight and forwarding 602 1006 915 1090 Expenditure 2569 4252 4029 4318 EBITDA 885 1646 1561 1091 Depriciation 676 873 436 562 Interest Cost 98 235 193 138 Net tax expense / (benefit) -99 69 115 54 PAT 365 619 1004 478 ROE% 20.8 23.1 26.1 11.0 Narnolia Securities Ltd, 30 1300 20 1250 10 1200 0 1150 -10 1100 -20 Source - Comapany/EastWind Research EBIDTA 450 400 INTEREST SERVICE COVERAGE RATIO 10 350 300 8 250 6 200 150 4 100 2 50 0 0 Source - Comapany/EastWind Research 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - 12 NPM % OPM % EBITDA % 16
  • 17. 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 Trading At : Source - Comapany/EastWind Research Narnolia Securities Ltd, 17
  • 18. "BOOK PART PROFIT " AXIS BANK 25th Feb, 2014 Company Updated CMP Target Price Previous Target Price Upside Change from Previous Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty Stock Performance 1M Absolute -2.2 Rel.to Nifty 0.8 BOOK PART PROFIT 1237 1217 1147 -2 6 532215 AXISBANK 1549/764 55229 3.14 lakh 6186 1yr -17.4 -21.0 YTD -17.4 -21.0 Share Holding Pattern-% Current 4QFY13 3QFY1 3 Promoters 33.9 33.9 33.9 FII 43.2 43.4 40.7 DII 9.7 4.9 8.8 Others 13.2 17.8 16.6 Axis Bank Vs Nifty Axis Bank is now trading at Rs.1237/share which met our target price of Rs.1217. This price implies P/BV multiple of 1.5 times which is quite reasonable as per our view. We advice our investor to book part profit from this stock as we neither see improvement of asset quality nor revival in economy in near term. In 3QFY14’s result, bank’s profitability was up by 19% largely due to reversal of investment depreciation otherwise operating profit was just up by 10.7% YoY. Bank’s exposure to risky sector (Power + Infrastructure) remained high at 12.87% as against 12.64% in previous quarter. However, fresh slippage was marginally softened to Rs.589 cr versus Rs.618 on sequential basis. Impairment of assets (GNPA+ Restructure Assets) remained stable at 3.7% of net advance which was higher among peers. Lower multiple on account of uncomfortable earnings and lower corporate loan demand We have lower valuation multiple of bank in compare to its peers on account of uncomfortable earnings and asset quality stress. Operating performance of bank was remained under pressure as bank’s core operating revenue (NII + Other Income) grew by 12.6 YoY owing to lower fee income led by muted corporate and retail fee income. Corporate loan segment which constituted 46% of total loan grew by 3% YoY while retail segment loan grew by 44% YoY which constituted 33% of total loan. Incremental loan growth came from retail segment implying that bank has to maintain retail growth trajectory for industry average loan growth of 15%. Demand of corporate loan remained weak due to prevailing economy scenario. So loan growth for FY14 is likely to be line with system credit growth due to weakness in corporate loan demand and moderation in retail loan. Asset quality pressure persist; exposure to risky sector remained high Asset quality pressure remained persist during the quarter with GNPA and net NPA increased by 10% and 20% YoY respectively in absolute term. Fresh slippage inch up improved to Rs.589 cr as against Rs.618 cr in previous quarter. In percentage term GNPA and net NPA stood at 1.42% and 0.47% as against 1.36% and 0.42% respectively in previous quarter. Provision coverage ratio without technical write off declined by 270 bps QoQ led by lower provisions made on sequential basis. Impairment of assets (GNPA + Restructure Assets) for the quarter remained stable at 3.7% which was higher among peers. Moreover bank’s exposure to risky sector (Power + Infrastructure) was remained high at 12.87% of net advance where slippage risks are relatively high. Financials NII Total Income PPP Net Profit EPS 2011 6566 11238 6377 3340 81.4 Narnolia Securities Ltd, 2012 8026 13513 7413 4224 102.2 Rs, Cr 2013 2014E 2015E 9666 12224 14775 16217 19146 21697 9303 11206 12367 5179 5826 6934 110.7 124.2 148.2 (Source: Company/Eastwind) 18
  • 19. AXIS BANK Moderate growth in profit & loss Bank’s profitability was up by 19% due to reversal of investment depreciation. Overall provisions and contingencies were lower by 71% QoQ which led PBT growth of 22% YoY. At operating profit level, bank grew by 10.7% YoY which was lower among peers (HDFC Bank 29 YoY, ICICI bank 28.6%). Bank’s NII grew by 19.6% YoY largely due to margin expansion of 14 bps YoY which was supported by low cost deposits franchise. Core operating revenue (NII+ other income) grew 12.6% owing to muted other income growth of 1.8% YoY. Valuation & View We value bank at Rs.1217/share implying 1.5 times of FY14E’s book value which is quite reasonable as per our view. We have given this multiple on account of uncomfortable earning and asset quality stress. Bank’s profitability was up due to reversal of investment depreciation otherwise growth at operating profit level was remained lower as compare to its peers. Asset quality increased at moderate pace with high exposure in risky sector where fresh slippage risks are remaining high. Valuation Band 1 Yr forward P/BV 1 Yr forward P/E Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 19
  • 20. AXIS BANK Fundamenatl throught graph NII growth led by healthy CD ratio and margin expansion on YoY basis Lower other income and higher CI ratio led muted PPP growth Profit growth was higher than expectation on the back of lower provisions Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 20
  • 21. AXIS BANK Quarterly Result Quarterly Result 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 Expended NII Other Income Total Income Employee Other Expenses Operating Expenses PPP( Rs Cr) Provisions PBT Tax Net Profit 3QFY14 5557 2110 49 73 7789 1644 4628 4805 2984 1644 4628 655 1358 2013 2615 202 2413 808 1604 2QFY14 5394 2143 35 37 7609 1766 4703 4672 2937 1766 4703 644 1309 1953 2750 687 2062 700 1362 Balance Sheet Date Net Worth Deposits Loan 37649 36224 27027 262398 255365 244501 211467 201303 179504 Asset qualtiy( Rs Cr) GNPA NPA %GNPA %NPA 3008 1003 1.4 0.5 2734 838 1.4 0.4 3QFY13 % YoY Gr % QoQ Gr 3QFY14E Variation 4907 13.3 3.0 5748 3.4 2014 4.8 -1.5 2235 5.9 25 97.7 39.4 35 -29.2 19 277.1 95.6 38 -47.4 6965 11.8 2.4 8056 3.4 1615 1.8 -6.9 1774 7.9 4110 12.6 -1.6 4780 3.3 4470 7.5 2.8 5049 5.1 2495 19.6 1.6 3006 0.8 1615 1.8 -6.9 1774 7.9 4110 12.6 -1.6 4780 3.3 615 6.5 1.7 0 1134 19.8 3.8 0 1749 15.1 3.1 2008 -0.3 2362 10.7 -4.9 2772 6.0 387 -47.7 -70.5 752 271.4 1975 22.2 17.0 2020 -16.3 628 28.8 15.5 687 -15.0 1347 19.1 17.7 1333 -16.9 2275 679 1.3 0.4 39.3 3.9 7.3 2.8 17.8 5.0 32.2 10.0 47.8 19.7 37558 272935 214892 -0.2 4.0 1.6 - Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 21
  • 22. AXIS BANK FINANCIALS & ASSUPTION Income Statement 2011 2012 2013 2014E 2015E Interest Income Interest Expense NII Change (%) Non Interest Income Total Income Change (%) Operating Expenses Pre Provision Profits Change (%) Provisions PBT PAT Change (%) 15155 8589 6566 31.2 4671 11238 25.3 4860 6377 22.4 3033 3345 3340 34.8 21995 13969 8026 22.2 5487 13513 20.2 6100 7413 16.2 3189 4224 4224 26.5 27183 17516 9666 20.4 6551 16217 20.0 6914 9303 25.5 4124 5179 5179 22.6 31198 18974 12224 26.5 6922 19146 18.1 7940 11206 20.5 2402 8804 5826 12.5 38490 23716 14775 20.9 6922 21697 13.3 9330 12367 10.4 2461 9906 6934 19.0 189166 34 77758 18 26268 71788 142408 36 219988 16 91412 18 34072 92921 169760 19 252614 15 112100 23 43951 113738 196966 16 290506 15 124917 11 51266 129873 228481 16 334081 15 143655 15 58956 149354 265037 16 460 1404 3.1 549 1146 2.1 708 1304 1.8 813 1174 1.4 942 1174 1.2 Balance Sheet Deposits( Rs Cr) Change (%) of which CASA Dep Change (%) Borrowings( Rs Cr) Investments( Rs Cr) Loans( Rs Cr) Change (%) Valuation Book Value CMP P/BV Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 22
  • 23. 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.