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| Summary of Contents | STOCK UPDATE Yes Bank
Recommendation: Buy
Price target: Rs720
Current market price: Rs537 Earnings growth affected by lower non-interest income Key points - In Q1FY2015 Yes Bank's earnings growth slowed down to 9.6% YoY on account of a 3.7% Y-o-Y dip in the non-interest income (a one-off fixed income gain of Rs100-125 crore had been booked in Q1FY2014) and higher operating expenses (up 25% YoY). The net interest income growth was modest at 13.1% YoY but a dip in provisions (down 75.5% YoY) and a lower effective tax rate (29.2% vs 31.2% in Q1FY2014) aided the earnings growth.
- The asset quality was largely maintained during the quarter as the gross and net NPAs were largely stable at 0.33% and 0.07% respectively. The outstanding restructured book too stood stable at 0.19% (vs 0.18% in Q4FY2014). However, the provision coverage ratio declined to 78.4% from 85.1% in Q4FY2014.
- Though Yes Bank's earnings growth slowed down during the quarter, but it has witnessed a sustained improvement in its liability profile and has a relatively strong asset quality. In addition, the capital mobilised recently will aid it to lever the growth opportunities when the economy revives. We expect the bank's earnings to grow at a CAGR of about 21.7% over FY2014-16 resulting in an RoA of about 1.7%. We maintain our Buy rating on the stock with a price target of Rs720 (2.0x FY2016E book value).
Thermax
Recommendation: Hold
Price target: Rs940
Current market price: Rs910 Q1 disappoints but expect better times ahead; upgraded to Hold Key points - Thermax reported disappointing numbers for Q1FY2015; the PAT declined by 18% YoY on a weak margin. The OPM slipped to a multi-year low of 7% due to losses in the water business and slippage in revenue booking in some projects during the quarter. Further, losses at the subsidiary level widened and affected the overall performance at the consolidated level. The overall results were, thus, lower than our as well as the Street's estimate.
- The management believes that such a low margin in Q1FY2015 was an aberration and expects the margin to be in double digits in FY2015. It shared its optimism with regard a potential recovery of the domestic opportunities. Given the positive political developments in the recent past, it believes the developments at the ground level should reflect in the company's performance by the last quarter of FY2015. In the meanwhile, Thermax has embarked on a long-term strategy of focusing on increasing its global footprint with an aim to eventually having a geographically diversified revenue base (with 40-50% of the total revenues coming from exports to mainly South-East Asia, the Middle-East, Africa and Eastern Europe regions).
- Notwithstanding the quality of the management and its proven track record, the stock is richly valued at 28x the FY2016E earnings and 15x the FY2016E EBITDA. The valuations are relatively high compared with its peers and historical average. Thus, we do not advise fresh investment in it. However, given the expectations of a recovery in H2FY2015 and the management's thrust on building the overseas business, we are increasing the target multiple and upgrading the stock to Hold with a price target of Rs940.
VIEWPOINT V-Mart Retail
Current market price: Rs364 Take home profits of 43%; await correction to re-enter Key points - Our investment thesis played out and stock delivered 43% returns in six months: We had initiated our positive view on V-Mart Retail on January 27, 2014 at a price of Rs255 per share on liking its unique business model of value retailing with a clear focus on small towns of tier-2 and tier-3 cities, lower cost structure and inexpensive valuation (the stock was ruling at 9x FY2015E earnings). On the back of its strong business model, efficient cost structure and good growth the company got re-rated and delivered 43% returns in six months. It is currently ruling at 22.8x FY2015 estimated earnings and 16.4x FY2016 estimated earnings.
- Near-term softness in demand likely to weigh on earnings: V-Mart Retail follows a cluster-based retailing model and has around 75% of its stores located in the northern belt (Punjab, Uttar Pradesh and Bihar). A weak monsoon in these regions is likely to have a dampening impact on the revenue growth of the company as the stores are largely present in small towns where the income of the customer is dependent on agriculture and allied activities. The impact of soft demand on revenues coupled with higher depreciation and other charges is likely to weigh on the earnings of the company for the next one to two quarters.
- Time to take home profits; await correction to re-enter the stock: Taking cognisance of the weak demand and the run-up in the stock, which is currently trading at 23x and 16.4x FY2015 and FY2016 estimated earnings, we believe investors should take home profits at the current juncture (the stock has given 43% returns in six months). Investors should await a correction in the stock price to re-enter the stock, as the long-term business potential of retailing in small towns and cities remains intact and V-Mart Retail is well placed (thanks to store expansion, back-end infrastructure, warehousing) to cash in on the opportunity in the hinterlands.
| | 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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