Investor's Eye: Pulse (Inflation begins to moderate, declines to 7.24%); Update - IDBI Bank (Asset quality concerns remain an overhang); Fertilisers (Urea remains the primary growth driver)

 

Investor's Eye [December 14, 2012]  Sharekhan www.sharekhan.com

Summary of Contents     PULSE TRACK Inflation begins to moderate, declines to 7.24% The Wholesale Price Index (WPI)-based inflation came at 7.24% (lower than the market expectations) in November 2012 as against 7.81% in October 2012. The month-on-month (M-o-M) decline in inflation was due to a decline in the fuel group inflation and the manufactured goods inflation. However, the inflation rate for August 2012 has been revised upwards to 8.07% from 7.81% as per the provisional estimate. The manufacturing inflation softened to 5.41% compared with 5.95% in November 2012, while the fuel inflation also declined compared with the previous month (10.02% vs 11.71%). However, the primary articles segment increased by 9.42% year on year (YoY) as compared with 8.21% YoY in October 2012 contributed by the higher food inflation (8.50% vs 6.62% in October 2012) and non-food articles inflation (13.99% vs 10.82% in October 2012).  On an M-o-M basis, the fuel index decreased by 0.58% compared with an increase of 0.85% in October 2012. The manufacturing index increased by 0.07% month on month (MoM) to 148.0 (compared with 147.9 in October 2012). The primary articles index increased to 0.27% MoM as the non-food inflation index increased to 201.3 in November 2012 vs 197.7 in October. The softening of inflation, especially after a hike in the energy prices, is a positive indication. Further, the manufacturing inflation has come below 5.50%. The slower economic growth could exert a downward pressure on the manufacturing inflation. The Reserve Bank of India (RBI) also expects the inflation to moderate significantly by the beginning of the Q4FY2013, which will set the stage for the policy rate cuts. However, going ahead, the trend in crude price and non-food inflation (which still remains high) would be keenly watched.   STOCK UPDATE IDBI Bank Recommendation: Hold Price target: Rs120 Current market price: Rs110 Asset quality concerns remain an overhang Implications of CARE IPO IDBI Bank had a 25.8% stake in CARE, which will be reduced to 17.2% after CARE's initial public offering (IPO). We have valued IDBI Bank's remaining stake in CARE at Rs368 crore, modelling that CARE issues its shares at Rs750 per share. This translates into a value of ~Rs2.9 per share for the bank. Moreover, we have also accounted for the gains arising out of the stake sale and adjusted in the bank's FY2013 numbers.  Prudent loan growth of 12-13% for FY2013 IDBI's loan book has been heavily skewed towards corporate advances. As on Q2FY2013, the share of corporate advances stood at 71.3%, while the retail advances (19.2%), agricultural advances (6.9%) and small and medium enterprise (SME) advances (2.6%) formed the miniscule balance. In order to better manage the asset quality and increase the granularity of its loan book, the bank has indicated a strategy of lower loan growth of ~12-13% year on year (YoY) for FY2013, with a focus on agricultural and SME loans to meet the priority sector lending targets.  Margins to be maintained at ~2.0% Historically, the net interest margin of the bank has floated around ~2.0% and been the lowest in the industry, primarily due to its stance of growing the loan book on the back of lower-yielding corporate advances. Further, having carried a legacy of being a domestic finance institution, the cost of funds for the bank has been high due to a weak liability franchise. Its current and savings account (CASA) ratio as on Q2FY2013 stood at 21.9%, which is lowest amongst its peers. The management expects the CASA ratio to increase to ~26% by FY2013. Though this is will lower the cost of deposits for the bank but the cautious loan growth approach and focus on priority sector lending will compel the margin to restrict to ~2.0%.  Asset quality concerns remain an overhang IDBI Bank has been grappling with asset quality issues as the bank has a high exposure to stressed sectors like power (15.8% of credit portfolio), iron and steel (8.5% of credit portfolio), telecom (5.0% of credit portfolio) and textile (3.7% of credit portfolio). With the gross non-performing asset (NPA) at 3.5% and restructured book at 7.5%, the bank's stressed loans stood at 11.0% as on Q2FY2013. Going forward, the pressure on the bank's asset quality is likely to persist as the bank has an exposure of ~Rs1,700 crore to Suzlon Energy (which has applied for debt restructuring to corporate debt restructuring cell) and ~Rs200 crore to Deccan Chronicle Holdings (which is likely to be classified as a NPA in the coming quarter). Outlook and valuation Of late, IDBI Bank's earnings growth has been affected by a muted business growth and a weak asset quality. Going forward, we expect the bank's earnings to grow at a compound annual growth rate of 6.9% over FY2012-14. On a stand-alone basis, we have valued the bank at 0.8x FY2014 adjusted book value (ABV). Moreover, the bank's partial exit from CARE does not have any material impact on our valuation as its present valuation of ~Rs2,141 crore is largely in line with our previous estimate. Consequently, we retain our price target at Rs120 and maintain Hold rating over the stock.   SECTOR UPDATE Fertilisers Urea remains the primary growth driver Key points Steep decline in non-urea fertiliser sales: During the month of November 2012, the aggregate sales of the fertilisers (by 15 leading manufacturers) saw a steep decline of 24% as compared with the same period of the last year. The lower fertiliser sales were led mainly by the poor sales of the complex fertilisers on back of a lower demand. In November 2012, the production and import of diammonium phosphate (DAP), nitrogen, phosphorous and potash, and muriate of potash (MOP) fertilisers declined drastically due to lower demand and higher prices. The production of DAP and complex fertilisers also declined drastically on back of a lower demand and concerns over the availability of raw materials. Import of urea has seen a steep increase due to a lower domestic production, which was set off by higher imports. YTD sales for non-urea fertiliser remain dull: The total fertiliser sales declined by 13% on a year-till-date (YTD) basis as compared with that in the same period of the last year. A steep decline in the demand of the non-urea fertilisers coupled with lower import of DAP and complex fertilisers led to the drop in fertiliser sales on a YTD basis. The sales of DAP and complex fertilisers decreased by 27% and 40% respectively whereas the sales of urea fertilisers increased by 3% on back of higher imports due to an increase in the use of urea fertilisers as compared with non-urea fertilisers.  Outlook: We maintain our cautious outlook on the non-urea fertiliser manufacturers mainly because of the shift in demand towards urea fertilisers, mainly due to the increasing gap between urea and non-urea fertiliser prices. We expect the demand for fertilisers in the upcoming rabi season to remain largely in line compared with the demand seen in the same period of the previous year due to higher sowing and an increase the in acreage. We prefer pure urea manufacturers like Chambal Fertiliser along with single-super phosphate (SSP) manufacturers like Rama Phosphates and Liberty Phosphate. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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