Investor's Eye: Stock Update - Axis Bank, LIC Housing Finance; Sector Update - Q2FY2015 Banking earnings review, Q2FY2015 FMCG earnings review

 

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

Summary of Contents   STOCK UPDATE     Axis Bank Recommendation: Buy Price target: Rs556 Current market price: Rs467   Price target revised to Rs556    Key points  Axis Bank's liability profile has improved significantly led by an increase in the average current account and savings account balance (about 40% in Q2FY2014) and acceleration in the retail term deposits (62% of the deposits). On the other hand, the bank has increased its retail loan book and is now focusing on high yielding personal loans. In our view, this should result in healthy net interest margins and operating performance.  Although slippages were relatively higher in Q2FY2015, the overall stressed loans (GNPA + restructured loans) stood at about 4%, which is among the lowest in the sector. In addition, a higher provision coverage ratio (78%) and a higher capital adequacy ratio (CAR; tier-1 CAR of 12.6%) increased the comfort on the asset quality front. We expect Axis Bank's earnings to grow at a compounded annual growth rate of 18% over FY2014-17 resulting in return on asset and return on equity of 1.8% and 18% respectively. We believe the asset quality pressures are within manageable limits and a revival in the economy will ease the concerns. We have rolled over our valuations to the FY2017 estimates leading to a revision in the price target to Rs556 (2.2x FY2017E book value). We maintain our Buy rating on the stock.       LIC Housing Finance Recommendation: Buy Price target: Rs464 Current market price: Rs407   Margins set to expand, price target revised to Rs464    Key points  We expect LIC Housing Finance (LIC Housing)'s net interest margins to expand by 15-20BPS over the next 12 months, led by the softening of interest rates, repricing of loans (fixed-rate loans to floating rates) and an increase in the high yielding portfolio (developer + LAP loans currently at ~6% of the book). We also expect the loan growth to pick-up in the coming quarters which should result in a healthy growth in operating profits (20% CAGR over FY2014-17). With gross and net NPAs of 0.63% and 0.33% respectively, the asset quality remains among the best in the system. The gross NPAs in the individual segment (~95% of the book) are low at 0.38%. We expect the company to sustain a healthy asset quality going ahead. The growth in mortgage finance remains steady and with a revival in the economy, the growth will pick-up which will benefit the bigger HFCs like LIC housing. We have introduced FY2017 numbers and expect an earnings growth of 18.5% over FY2014-17 (implying RoEs of 20%). We have rolled over our valuations to FY2017 estimates leading to a price target of Rs464 (2x FY2017 BV). We maintain our Buy rating on the stock. SECTOR UPDATE     Q2FY2015 Banking earnings review  Earnings growth improves, asset quality stable   Key points  In Q2FY2015 the aggregate earnings of our banking universe grew by 18.7% YoY (up 19.6% for the PSBs) supported by a low base of Q2FY2014 and a strong growth in the non-interest income (up 21% YoY). The net interest income (NII) growth was healthy for the private banks (up 19.5%) whereas moderation in credit offtake was reflected in a relatively slower growth of 9% in the NII of the PSBs.  The reported gross and net NPAs increased during Q2FY2015. Though fresh NPA addition remains high on an absolute basis but the same is stabilising. During the quarter, the overall stressed loans (restructured loans + gross NPAs) were largely stable at 8% of loans for our coverage universe. Private banks maintained their edge in asset quality and had better provision coverage compared with the PSBs. Though challenges of stressed asset formation and slower credit expansion remain in the near term, a likely revival in the macro environment and softening of bond yields would ease both the concerns. In the medium term, the provisioning will remain elevated though treasury profit (mainly in case of PSBs due to a decline in bond yields) should partly compensate for it. We remain selective on PSBs and prefer SBI, BoB and BoI. Among the private banks we like Axis Bank and ICICI Bank. Among the non-banks we prefer Max India, PFS and LIC Housing Finance.     Q2FY2015 FMCG earnings review  Revival in sales volume likely in early FY2016, remain selective in FMCG space   Key points  No festive push in sales: An early festive season failed to boost the sales volume of the FMCG companies in Q2FY2015. Most of the FMCG companies such as HUL, Dabur, Emami and Colgate-Palmolive registered a flat volume growth on a sequential basis. Marico was an exception as its domestic product categories, such as coconut oil, edible oil and value hair oil, witnessed a strong volume growth in Q2FY2015.  GPM remained low; cut in ad spending led to better OPM: Though commodity prices corrected from their highs during the quarter, but the positive impact of the same is yet to reflect in the profitability of the FMCG companies. The GPM of most of the FMCG companies declined by 100-120BPS YoY but remained flat QoQ. However, a tight control on the advertisement spending and other overheads helped most FMCG companies to mitigate the impact of the pressure on the GPM (with a few of them showing an improvement at the OPM level). Revival in sales might take another two quarters; GPM to improve in H2FY2015: The improving consumer sentiment (especially in the urban markets) is yet to convert into a strong demand for consumer goods. As the inflationary trend is receding, we believe the sales volume of the FMCG companies will improve from Q4FY2015 or the start of FY2016. With the rupee stabilising at Rs61-62 against the dollar and commodity prices showing a downward trend, the GPM of the FMCG companies is expected to improve from H2FY2015. We expect the FMCG companies to utilise a large part of the GPM savings for higher sales promotions and discounts to improve the sales volume in the near future. Remain selective: The valuations of the FMCG companies remain at a premium. Hence, we maintain our selective stance and continue to recommend ITC as our top pick in the large-cap space (due to its discounted valuations to some of the large-cap FMCG stocks) and Marico in the mid-cap space (due to its strong earnings visibility). Britannia Industries is not under our active coverage but we maintain a positive view on the stock due to its better revenue growth and margin expansion. 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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