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| Summary of Contents STOCK UPDATE HDFC Bank
Recommendation: Hold
Price target: Rs950
Current market price: Rs896 Price target revised to Rs950 Key points - For Q2FY2015, HDFC Bank reported a strong growth in the net interest income (up by 23% YoY) driven by an expansion in the net interest margins (up by 10BPS QoQ and 20BPS YoY) and strong growth in advances. However, the profit growth was slightly slower due to rise in the operating expenses (up by 19.2% YoY) and slower growth in the non-interest income.
- Asset quality showed a slight improvement on a sequential basis led by the easing of pressures in certain parts of the retail book. In terms of advances growth, the retail segment grew at ~10% YoY while the corporate loans grew at 30% YoY.
- HDFC Bank continues to deliver a steady performance on the earnings and asset quality fronts. The operating metrics of the bank stands among the best in the system though pending proposal relating to an increase in the foreign holding has led to underperformance of the stock. While we have raised the price target to Rs950 (valuing at 3.7x FY2016 BV), the current valuations (3.5x FY2016 BV) leaves little room for upside. We maintain our Hold rating on the stock.
Punjab National Bank
Recommendation: Hold
Price target: Rs1,015
Current market price: Rs932 Price target revised to Rs1,015, downgrade to Hold Key points - For Q2FY2015, Punjab National Bank (PNB) reported a disappointing performance as it's net profit increased merely by 13.8 YoY (despite a low base), led by a reversal of the interest income, increase in the employee related provisions and higher tax rate. The net interest income growth was also tepid (up by 3.4% YoY) as the margins declined by 24BPS QoQ (3.18%) in Q2FY2015.
- The asset quality deteriorated led by a sharp increase in slippages (Rs3,974 crore vs Rs2,958 crore in Q1FY2015). There was also a sharp increase in the restructured loans (Rs3,290 crore) which increased the total restructured loans to ~10% of the total book. The provision coverage ratio declined to 59.1% from 60% in Q1FY2015.
- PNB's earnings and asset quality trends have been quite volatile in the past several quarters. Going ahead, given its higher stock of stressed loans (~16% of book) and rising slippages from the restructured book raises concerns. We therefore, reduce our estimates for FY2015-16 and value it at 0.85x FY2016 book value, resulting in the revised price target of Rs1,015. We downgrade our rating to Hold.
UPL
Recommendation: Buy
Price target: Rs430
Current market price: Rs327 Strong operational performance, forex impacts earnings negatively Key points - For Q2FY2015 UPL posted revenues of Rs2,662 crore. That is a growth of 14% largely driven by a healthy volume growth of 15% and a 2% higher blended realisation; though the impact of the positives was partially negated by unfavourable currency movement during the quarter. The reported net profit improved by 7% YoY to Rs166 on account of a higher interest expense (forex impact of Rs40 crore) and non-recurring expenses related to the restructuring of the Latin American business and prior-period items. Adjusting for the non-recurring expenses of the Latin American business and the prior-period item, the net profit grew by 2% YoY to Rs183 crore.
- The working capital cycle stood at 102 days as against 109 days in Q2FY2014. The company is focusing on managing the working capital cycle around 95-100 days and the trend is likely to continue in the coming year. On the positive side, it reduced its gross debt by Rs238 crore in H1FY2015 and would further pare down its debt in the coming quarters in spite of capex of Rs500-600 crore during FY2015.
- The management has maintained its guidance of a revenue growth of 12-15% and a margin improvement of 50-60BPS YoY in FY2015. The government's focus on big agricultural reforms coupled with a strong demand environment across geographies will improve the company's prospects and help it to easily achieve the higher end of the guided growth range. In view of the company's focus on improving its balance sheet and sustaining a reasonable level of growth, we retain our Buy rating on the stock with a price target of Rs430.
VIEWPOINT Idea Cellular
Current market price: Rs162
View: Positive Strong all-around performance, maintain Positive stance Key points - Idea Cellular reported a strong performance for Q2FY2015, with a revenue growth of 0.1% QoQ aided by a strong sequential growth in revenues from data services. The operating profit remained flat sequentially but grew at 26.3% YoY with a margin expansion of 172BPS YoY. The strong operating performance led Idea Cellular to report a strong 69% Y-o-Y growth in the bottom line. The reported results included a write-back of Rs25 crore included in the network operating cost. Adjusting for the same, the net earnings grew at 63.1% YoY.
- Despite intense competition in the market place, Idea Cellular has displayed strong execution, resilience, improvement in its market share and strength in its balance sheet. We continue to believe that the Indian voice and data market is likely to improve and Idea Cellular with its strong brand equity and superior execution capabilities would gain disproportionately owing to its strong execution capabilities, solid asset base and stable balance sheet (its net debt/EBITDA ratio has improved from 2.4x in Q4FY2014 to 1.32x in Q2FY2015 via equity raising and robust cash generation). Hence, we hold a positive view on the stock and expect it to deliver a return of 15-18% from the current levels.
- Key risk to our view: Any form of irrational bidding by the players in the upcoming spectrum auctions along with any disruptive or irrational pricing action by Reliance Jio (which is yet to launch its services) would be a key risk to our view.
| | | 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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