Investor's Eye: Update - Bank of India, Cement

Investor's Eye [December 05, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Bank of India Recommendation: Hold Price target: Rs230 Current market price: Rs217 Asset quality, lower capitalisation remain concerns We recently interacted with the management of Bank of India (BoI) to get an update on the bank's business growth and asset quality trends. According to the management, the advances growth will normalise in Q3FY2014 to about 16% year on year (YoY) vs 30% in Q2FY2014 as borrowers return to the bond market. Though the bank expects its net interest margin (NIM) to improve (especially the NIM of the overseas operations), but we believe high deposits rates could constrain any improvement in the NIM. With respect to asset quality the bank expects slippages to remain at Q2FY2014 levels, ie Rs1,500 crore, and anticipates fresh restructuring of about Rs1,000 crore. It also expects to sell about Rs500 crore of loans to the asset restructuring company (ARC) in Q3FY2014 (vs Rs370 crore in Q2FY2014). We believe the asset quality pressures may persist due to weakness in the economy and a higher growth in the stressed sectors. The bank's tier-I capital adequacy ratio (CAR; 7.75%) remains lower than that of its peers (Bank of Baroda, Punjab National Bank) and the infusion of capital to the tune of Rs1,000 crore by the government could result in a 7% dilution in each of our FY2014 and FY2015 book value estimates. Currently, the stock is trading at a discount of about 19% and 3% to Bank of Baroda and Punjab National Bank (on adjusted book value basis) respectively. Given the sub-par return on assets (RoAs) of 0.6%, we expect the bank to underperform its peers. We maintain our Hold rating on the bank with a price target of Rs230 (0.85x FY2015 adjusted book value).        SECTOR UPDATE Cement Demand environment remains bleak; yet to pick up  We have done a channel check with the cement dealers across most of the major cities in the country to know about the current status on the pricing and demand environment. The key highlights of our interaction are as follows: Cement price remain a mix bag in November 2013: According to our channel check, the price of cement in the past one month has seen a marginal decline on an average of Rs5 per bag (cement bags weighing 50kg) across the country. Among the regions, the correction in the cement price was highest in the eastern region where the price corrected on an average of Rs17 per bag because of a weak demand environment and stiff competition (due to year-end for multinational corporations [MNC]). On the other hand, the correction in the cement price was relatively less in the western, southern and northern regions, where the price corrected on an average of Rs4 per bag. The central region witnessed a marginal price increase of the average of Rs4 per bag on a month-on-month basis. With the recent correction in the cement price, the all-India cement price dropped to Rs308 per bag as against Rs313 per bag at the end of November 2013. The views of cement dealers are mixed with regards to whether the price could go up in the northern and southern regions of India, whereas cement prices are likely to remain flat in western, eastern and central region in December 2013. Demand environment continues to remain weak: The demand environment has remained weak on account of a slower than expected execution of the infrastructure and housing projects across all regions except the central region. The demand for cement in the major cities of the western, southern and eastern regions witnessed a sluggish demand environment owing to an absence of infrastructure projects and a slow recovery in the private housing segment.  Outlook-demand environment weak; cost pressure to escalate: Given the lower than expected demand growth in FY2013 (below 6%) and the continued deterioration in the macro environment, we expect the demand growth to remain flattish to marginally positive in FY2013 and FY2014. However, the utilisation levels will decline due to the stabilisation of supply from new capacities. The firm crude prices and the expected hike in diesel prices would put pressure on the cost side in terms of higher freight cost, and power and fuel cost. The only hope for the cement companies emerge from the possible demand emanating from the pick-up in the execution of stalled infrastructure projects which were cleared recently. On the other hand, the valuation has corrected significantly. However, given the lack of any triggers for re-rating in the near term, it is advisable to remain very selective. We prefer UltraTech due to its strong balance sheet, pan-India presence and the recent correction in its stock price.   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.

Regards, The Sharekhan Research Team

 

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