Investor's Eye: Update - State Bank of India (Annual report review - Price target revised to Rs2,450), Hindustan Unilever (Book some profits, Hold from long-term perspective)

 

Investor's Eye [June 25, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE State Bank of India  Recommendation: Buy Price target: Rs2,450 Current market price: Rs1,915 Annual report review - Price target revised to Rs2,450 The annual report of State Bank of India (SBI) points to stress on margin due to an increase in the term deposits and the bank's focus on derisking the loan book. We expect the asset quality pressures to persist for the next few quarters due a rise in the restructured loans and a recovery in the economy will be the key to a decline in the non-performing assets (NPAs). We have revised our estimate downwards leading to a revision in our sum-of-the-parts (SOTP) based target price to Rs2,450. After the recent correction, the stock is trading at 1.1x its FY2015 stand-alone book value. We maintain Buy rating on the stock. Key points Margin likely to decline: SBI's reported net interest margin (NIM; global) declined to 3.34% in FY2013 from 3.85% in FY2012, largely driven by a decline in the yields on advances. The reported domestic yields declined to 10.54% from 11.05% in FY2012. During FY2013, the deposit accretion was largely towards the longer tenure (~80% of incremental deposits in 6 months-5 years tenure); hence, the cost of funds may remain sticky. In addition, the bank is likely to focus on derisking the book while pressure on lending rates remain (due to weak credit demand), which will impact the NIM in FY2014.  Proportion of secured advances rises to 82.6%, pick-up in direct agri advances: SBI's proportion of secured advances has gradually risen from 78.5% in FY2010 to 82.6% in FY2013, which is at its highest since FY2005. About 87% of the bank's large corporate book was within the investment grade while in the mid-corporate group, 68.3% of advances were in investment grade. However, the advances to the sensitive sectors grew by 28.7% year on year (YoY; vs 20.5% year-on-year [Y-o-Y] growth in advances). The bank's direct agriculture (agri) lending was up by 29.5% YoY (14.24% of ANBC vs 12.99% in FY2012) while the credit to weaker section was 10.14% in line with the Reserve Bank of India (RBI)'s requirement. The exposure to infrastructure, petrochemicals, iron and steel increased during FY2013.  Market share in government business moderates: SBI's market share in the government business slightly moderated to 58.12% from 58.5% in FY2012. This was due to a downwards revision in agency commission by the RBI from July 2012. The fee income growth declined (5% YoY) while treasury income expanded sharply leading to ~12% Y-o-Y growth in the non-interest income. Asset quality pressure remains: The bank's gross and net NPAs increased from FY2012 levels (4.8% and 2.1% respectively) led by a sharp rise in the slippages. The restructured loans expanded sharply (4.1% of advances) led by an economic slowdown and rising stress across the sectors. The proportion of doubtful loans to gross NPA expanded to 28% from 22% in FY2012. Going ahead, given the rising pipeline for restructured loans and corporate debt restructuring cases, the pressure on asset quality may remain. Non-funded loan exposure: The non-funded loan exposure increased by 8.6% in FY2013 largely driven by the exposure to sectors like coal, engineering, food processing, gems and jewellery, infrastructure, power and road. The risk-weighted asset increased by 19.3% YoY as compared with the 20.5% growth in the loan book. The higher lending towards retail and high rated corporates led to optimal utilisation of capital in FY2013.   Hindustan Unilever  Recommendation: Hold Price target: Rs600 Current market price: Rs588 Book some profits, Hold from long-term perspective Key points Unilever's $5.4 billion open offer commences: Unilever PLC (Unilever)'s voluntary open offer to acquire 48.7 crore shares of Hindustan Unilever Ltd (HUL; or 22.5% of the equity capital) at a price of Rs606 per share (Rs600 open offer price + Rs6 per share final dividend) commenced on June 21, 2013 and will end on July 4, 2013. With this, Unilever (the promoter group) is planning to increase its stake in HUL to 75% from 52.48% currently.  Advice investors to partially book some profits: After the announcement of the open offer, the stock price had a strong run-up (18%) and is currently trading at ~32x its FY2015E earnings. Hence, we advice investors to take home some profits at the current level. On tax incidence perspective, it is advisable to sell the share in the open market rather than tendering to the open offer. Hold for a long-term perspective: Though there is a near term concern of moderating volume growth, we believe the long-term growth story of HUL is intact. The company has one of the strongest cash generation ability and is one of the good dividend players. Further, after the open offer there will be some reduction in the free float (though we do not see the entire open offer to get subscribed), thus the supply constraints will keep the long-term investors' interest in the company intact and the company will hold onto its premium valuation. Also, the anecdotal evidence suggests that a front-line company with the lesser free float has always traded at premium valuations. The stock price of GlaxoSmithKline Consumer Healthcare (GSK Consumers) moved up significantly by almost 50% after the closure of open offer. Hence, looking at the long-term potential of the company with superior management bandwidth, we continue to maintain our Hold rating on the stock from a long-term perspective. At the current market price, the stock trades at 35.1x its FY2014E earnings per share (EPS) of Rs16.6 and 31.8x its FY2015E EPS of Rs18.4. 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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