Investor's Eye: Special - Q3FY2014 Banking earnings review, Q3FY2014 Pharma earnings review, Q3FY2014 Power earnings review; Update - Gayatri Projects

Investor's Eye [February 20, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   SHAREKHAN SPECIAL Q3FY2014 Banking earnings review  Key points The earnings growth remained weak for the public sector banks (PSBs; down 31% YoY) in Q3FY2014 while the private banks fared better in this period by posting an 18.3% growth in the profit. A sharp increase in the provisions, higher opex and deferred tax provisions affected the profit growth of the PSBs. However, the NII growth was relatively better (up 10.4% YoY for the PSBs). Asset quality issues remained with slippages at elevated levels for the PSBs and a bloating pipeline of loan restructuring especially in the mid-sized PSBs (with a shocker coming from United Bank of India, which reported slippage of Rs3,172 crore [16% of advances on an annualised basis]; the bank is not under our coverage). The outlook is also not supportive, given the high interest rate environment and sluggishness in the economy. Within the PSB basket, Bank of Baroda and Punjab National Bank are better placed to weather the storm, given a better operating income, and the confidence is reflected in the commentary of their managements on asset quality issues. But we continue to prefer private banks in a troubled environment as these are likely to maintain their edge in terms of asset quality (superior credit monitoring, lower exposure to the troubled sectors and a higher provision coverage ratio). Among the private banks we prefer ICICI Bank, Axis Bank and Federal Bank. Among the non-banking financial companies, CanFin Homes has consistently delivered strong numbers and is attractively valued.     Q3FY2014 Pharma earnings review   Key points Q3FY2014 was an exceptionally strong quarter for the pharma companies. In this quarter, their adjusted earnings grew by 53.5% year on year (YoY). While Cadila Healthcare, Aurobindo Pharma and Divi's Laboratories surprised us positively, the disappointment came from Cipla and Dishman Pharmaceuticals.  Despite the new pricing policy, the aggregate revenues of the Indian operations grew at a healthy rate of 14% because of continued strong traction from the US geography (up 38%; aided by a weaker rupee), and the generic launch of blockbuster products like Cymbalta under shared exclusivity and other limited competition products Trilipix, Trizivir and Prandin.  The Q3FY2014 performance reaffirms our confidence in the strong growth trajectory of the pharma sector and we have a Buy rating on all the stocks under our coverage. However, our preferred picks are Sun Pharmaceutical Industries (among the large-caps), Cadila Healthcare (our pharma pick for 2014) and Aurobindo Pharma (a multi-bagger since our initiation in late 2012 but it still has a decent upside potential).   Q3FY2014 Power earnings review   Key points Among our coverage companies in the power sector, PTC India and NTPC reported robust results while CESC and PGCIL failed to meet our expectations.  Within the power sector, the issues related to the power generation companies (especially coal linkages and stressed balance sheets) would need lot more policy support to ease the pain. However, the populist move considered by political parties (after the AAP's decision to cut power tariffs in Delhi) to cut power tariffs with keeping with the elections in mind would further dent the sentiments and stall the recovery process in the power sector. Consequently, we continue to recommend a very selective approach.  We have a positive stance on CESC and PTC India (with strong balance sheets and limited impact of issues plaguing the industry) in the power sector. In case of CESC, in addition to its steady performance and free cash generating utility business, the improving performance of its subsidiaries, Spencer's and FSL, are likely to add value to the stock. PTC India is benefiting from the recent steps taken to restructure SEBs which is resulting in higher trading volumes and the resolution of pending receivables issue.    STOCK UPDATE Gayatri Projects Recommendation: Buy Price target: Rs124 Current market price: Rs53 Regional issues hamper execution, Sembcorp entry key positive Key points  The earnings of Gayatri Projects were severely affected by Telangana related issues that hampered execution of irrigation projects (worth about Rs3,000 crore out of Rs7,206 crore of projects in bag). Given the way the bifurcation of Andhra Pradesh is being handled by the central government, the policy logjam in Andhra Pradesh could extend by a couple of more quarters and keep the growth of the stand-alone business of Gayatri Projects under pressure.  The entry of Sembcorp Industries in its joint venture power project with Nagarjuna Construction Company (NCC) is expected to put execution of the power project on track with no further equity requirement from the company. The other power project (51% stake held by Gayatri Projects; 49% stake by Sembcorp Industries) is on track with the first phase slated to get commissioned in H1FY2015. The road projects (six operational) are cash positive and meet the debt requirements. In the immediate term business for the company will remain weak due to regional issues and the next important event would be the commissioning of the first phase of its power plant over the next six to eight months. On account of a downward revision of our estimates for FY2014 and FY2015, and a lower valuation of the EPC business we lower the sum-of-the-parts based price target to Rs124. 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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