Investor's Eye: Update - Corporation Bank, Selan Exploration Technology

 

Investor's Eye [February 10, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Corporation Bank Recommendation: Reduce Price target: Rs235 Current market price: Rs244 Dismal performance Key points Corporation Bank posted a disappointing set of numbers in Q3FY2014 as it recorded a loss before tax of Rs82.8 crore, led by a sharp increase in the provisions (up 104% YoY). However, a tax write-back to the tune of Rs209.5 crore aided the bank to report positive earnings of Rs126.7 crore. Driven by a 14BPS Q-o-Q expansion in the NIM (to 2.18%) and an 18.2% growth in the advances, the NII grew by 13.4% YoY.  The asset quality continues to deteriorate as the formation of stressed loans (slippages + fresh restructuring) continues to remain on the higher end. The loans to the tune of Rs351 crore slipped into the NPAs, while the bank restructured Rs1,163 crore worth of loans in Q3FY2014. The bank has also guided for a restructuring pipeline of Rs1,000 crore for Q4FY2014. In view of the Q3FY2014 results, we have reduced our earnings estimate and downgraded our price target to Rs235 (valuation multiple downgraded to 0.5x FY2015E adjusted book value). Though the bank's valuation has dropped significantly (0.5x FY2015E adjusted book value), we do not foresee any trigger for the earnings growth. We therefore maintain our Reduce rating on the bank.   Selan Exploration Technology Recommendation: Buy Price target: Rs525 Current market price: Rs427 Q3 numbers flat as expected but production ramp-up on the anvil  Key points Production volumes improved sequentially by 18% but largely due to the low base effect of Q2FY2014. On an annual comparison basis, the revenue growth is purely driven by the benefit of the rupee's depreciation (Selan's realisations are based on the average landed cost of imported crude oil). The operating profit was flat largely due to a rise in the provisions for the development of hydrocarbon reserves; after adjusting for the same, the operating profits would have shown a double-digit growth on an annual and a sequential bases.  The company has commenced drilling operations in six wells in three of its fields. The new wells in the Lohar field are being put on regular production; while due to complexities, it would take some more time to put the new wells of Bakrol and Indrora fields on regular production. Hence, we expect the volume could improve significantly in next two to three quarters. After a gap of almost four years, the company is again aiming at a multifold growth in the production level over the next two to three years. We have introduced our FY2016 estimate in this note (an EPS growth 28% YoY).  Selan is one of our high conviction ideas, given a strong growth potential in its financials backed by a jump in the production. Therefore, despite the recent run up in the stock price, we retain our Buy rating on the stock and revise the price target to Rs525 (5x EV to EBITDA FY2016), by rolling over to our FY2016 estimate. 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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