Investor's Eye: Update - State Bank of India, Automobiles

 

Investor's Eye [December 02, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     State Bank of India Recommendation: Buy Price target: Rs378 Current market price: Rs319   Price target revised to Rs378, Buy maintained   Key points  Given its market share of ~19% in advances (about 25% including the share of its associate banks), State Bank of India (SBI) is our preferred play on the revival in economic growth within the public sector bank (PSB) space. As several macro indicators (core sector growth, Purchasing Managers' Index, trade data, etc) suggest a gradual pick-up in the economy, SBI stands to benefit due to its strong liability franchisee (current account and saving account ratio of about 43%) and healthy capital adequacy ratio (Tier-I capital adequacy ratio of 10.1 %; which leaves scope for growth in the advances).  In addition to its core business, the softness in bond yields is also relatively more favourable for SBI due to the size of its investment book. The Reserve Bank of India (RBI) has clearly guided to a roadmap of an accommodative policy going ahead and the easing of the interest rate trajectory would result in a healthy appreciation in its bond portfolio which would partially compensate for the provisioning requirements on its advances book (ie non-performing assets [NPAs]). While asset quality remains a concern in the current scenario, SBI has shown moderation in slippages and stable NPAs in the past two quarters. The stressed loans of the bank are at 6.1 %, which is better compared with the other PSBs. Going ahead, as the RBI is likely to extend the 5/25 scheme (as per the recent monetary policy announcement) to the existing projects (in the infrastructure sector), it will help in containing fresh NPA additions. Though the stock has appreciated considerably in the past few weeks due to the bank's healthy performance in Q2FY2015 and an improving outlook on the interest rate front, we retain our positive stance on SBI due to the expected improvement in its return ratios (especially return on assets) and a healthy compounded annual growth of 27% in its earnings over FY2014-17. The stock currently trades at close to its mean valuation (1.5x FY2017E stand-alone book value). We revise our sum-of-the-parts price target to Rs378 (on rolling forward the valuation to the FY2017 estimates) and maintain our Buy rating. SECTOR UPDATE     Automobiles    Automobile sales in November 2014: Heavy trucks shine; tractor volumes disappoint   The domestic automobile industry maintained the growth momentum post the festive season with growth across segments. The medium and heavy commercial vehicle (MHCV) segment was the standout performer with a growth rate in excess of 30% for incumbents. The effect of a low base inflated the growth rate for the segment, especially for Ashok Leyland (ALL) which reported a growth of 92%. The light commercial segment (LCV) volumes continue to remain weak but there has been a fall in the rate of decline which augurs well and we expect the segment to bottom out in Q4FY2015. The passenger vehicle segment witnessed a healthy growth during the month of November; however, the trend was not uniform across the players. Manufacturers with an updated product folio and new launches like Maruti Suzuki India (Maruti), Hyundai India, Honda India and Tata Motors (TAMO) reported a double-digit volume growth, while other players with an outdated product lineup such as Mahindra & Mahindra (M&M), Ford India and General Motors witnessed a double-digit volume decline. In the two-wheeler segment, TVS Motor Company (TVS) continued to remain the outperformer with an impressive 36% growth in two-wheeler volumes. The tractor segment had an alarming fall in volumes during the month as both market leaders M&M and Escorts reported a nearly 30% fall in volumes.   Key takeaways from the month's performance are given below: The two-wheeler industry reported a moderate growth in dispatches for the month of November 2014. The scooter segment continued to outperform the motorcycle segment with leading manufacturers like Honda Motorcycle and Scooter India (HMSI), and TVS reporting a strong 25% plus growth in volumes. TVS was the outperformer with a double-digit growth across segments. The high base affected the growth rate for Hero MotoCorp which fell to 3%. Bajaj Auto was the laggard as domestic volume remained under pressure and strong uptick in export supporting overall volumes. In the passenger vehicle (PV) category, the market leader Maruti reported an impressive 17% growth in domestic volumes. The dispatches of the newly launched Swift refresh and the new Alto K10 with automatic manual transmission (AMT) boosted growth during the month. TAMO too turned a corner on the back of incremental volumes from the new Zest and dispatches of the Nano Twist, and reported a double-digit growth after 27 months. M&M had another dismal month with double-digit decline across all segments. The MHCV segment on a low base, reported an impressive performance with a 30% plus growth across the players. ALL, on a highly depleted base of last year, reported a remarkable growth of 92% while TAMO witnessed a 39% increase in volumes. The light commercial vehicle (LCV) segment (especially below 2mt) continues to decline; however there has been a consistent fall in the rate of decline. We expect the LCV segment to bottom out in Q4FY2015.  The tractor segment was the biggest underperformer for the month with volumes significantly below our estimates. Both M&M and Escorts reported a nearly 30% fall in volumes. The consumer sentiment in the tractor segment continues to remain weak given the deficient monsoon in the country. Picks: We continue to prefer Hero MotoCorp, Maruti and ALL among the auto stocks under our coverage.   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