Investor's Eye: Update - Bank of India (Margins likely to improve but asset quality worries remain), Power (Restructuring of the SEBs' loans to provide relief)

 

Investor's Eye [September 25, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Bank of India Cluster: Apple Green Recommendation: Hold Price target: Rs310 Current market price: Rs302 Margins likely to improve but asset quality worries remain We recently met the management of Bank of India (BoI) to get an update on the bank's asset quality and capital requirement as well as industry trends. The bank's management believes that the pressure on the bank's asset quality remains due to the weakness in the economy but going ahead the rate of slippages may moderate compared with the previous quarters. The big-ticket accounts of the bank have already been restructured, eg the state electricity boards (SEBs) and Air India. The bank expects its advances to grow by about 15% with its focus on the retail segment. It is also hopeful of marginally improving its net interest margin (NIM) in the coming quarters.  The asset quality concern is relatively higher for BoI because it has a higher proportion of restructured loans (7.8% of its advances) in its books and a relatively high exposure to the troubled sectors (infrastructure, metals, textiles, realty etc). Moreover, it has relatively lower NIM and return ratios (return on equity [RoE] of 14% and return on asset [RoA] of 0.7%) as compared with some of the other comparable banks. Thus, we believe that it would attract 10-15% discounted valuation as compared with its peers like Punjab National Bank (PNB) and Bank of Baroda (BoB). We maintain our Hold rating on the stock with a price target of Rs310 (0.9x FY2014 adjusted book value). We continue to prefer PNB and BoB to BoI.   SECTOR UPDATE Power Restructuring of the SEBs' loans to provide relief Key points Government approves bail-out package for the SEBs: The government approved the bail-out package for the state electricity boards (SEBs) by a scheme to restructure their short-term loans. As per the approved scheme, 50% of the outstanding debt would be converted to bonds guaranteed by the state governments and the remaining 50% will be restructured by the banks. Support for three-year transition period: Currently, the SEBs make losses as the average tariff is still short of the average cost of Rs1.45/unit. The SEBs would have to bridge the gap through tariff hikes and improvement in the operational efficiencies over the next three years. During the transition period, the central government would support the SEBs through a transitional finance mechanism (TFM) fund. View-the package eases the balance sheet stress of the SEBs but sustainability remains questionable: The bail-out package would ease the pressure on the balance sheets of the SEBs, which are an integral part of the power distribution value chain. However, it remains to be seen whether the incentives offered are enough to turn the SEBs profitable in the proposed three-year transition period. Nevertheless, the definitive direction of the SEBs restructuring package would have a rub-off effect on the balance sheets of the power generation companies and the associate companies like Power Grid and PTC India (PTC). In the meanwhile, lenders would be taking the pain to restructure and the states will have to take the responsibility gradually for the restructured loans. Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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