Investor's Eye
[November 08, 2013] | | |
| Summary of Contents
STOCK UPDATE Punjab National Bank
Recommendation: Buy
Price target: Rs620
Current market price: Rs522 Earnings miss estimates, slippages remain elevated Result highlights -
Punjab National Bank (PNB)'s Q2FY2014 earnings declined by 52.6% year on year (YoY) to Rs505.5 crore, which was lower than our and the Streets' estimate. A steep rise in provisions (up 76.8% YoY) resulting from an increase in non-performing assets (NPAs) and investment depreciation affected the profit adversely. -
The net interest income (NII) grew by 10.1% YoY (up 2.8% quarter on quarter [QoQ]) to Rs4,015.5 crore, which was bang in line with our estimate. However, the net interest margin (NIM) declined by 5 basis points sequentially to 3.47%. -
The bank's strategy of consolidating its balance sheet led to the slower business growth. Consequently, the advances grew by 6.5% YoY while the deposits recorded a muted growth of 1.2% YoY. However, the current account and savings account (CASA) ratio rose to 40.7% from 39.6% in Q1FY2014. -
The non-interest growth was flat on a year-on-year (Y-o-Y) basis though the fee income and the foreign exchange (forex) income grew by 11.5% YoY and 25.8% YoY respectively. The bank incurred a marked-to-market (MTM) loss of Rs1,045.7 crore but amortised Rs348.6 crore of the same in Q2FY2014. During the quarter the bank transferred statutory liquidity ratio (SLR) securities worth Rs10,297.2 crore from the "available for sale" (AFS) and "held for trading" (HFT) categories to the "held to maturity" (HTM) category and booked a shifting loss of Rs47.9 crore. -
The asset quality continued to weaken as advances to the tune of Rs3,050 crore (gross) slipped into NPAs. Moreover, it restructured loans worth Rs2,768 crore, thereby pushing the outstanding restructured advances to 11.8% of the loan book. Price target revised, Buy maintained on inexpensive valuation
PNB's Q2FY2014 earnings were dented by a sharp increase in the provisions. The operating environment remains challenging but the management expects moderation in slippages and lower addition to restructured book going ahead. We have revised our estimates to factor in the decline in the NIM and the higher advances growth. We have also maintained our conservative assumptions for the bank's credit cost. We expect the bank's return on asset (RoA) and return on equity (RoE) to be around 0.8% and 12% respectively. We value the bank at 0.8x FY2015 adjusted book value which leads to a price target of Rs620. Currently, the stock is trading at 0.5x FY2015 book value and 0.7x FY2015 adjusted book value. This is at a discount to peers like Bank of Baroda and Bank of India and partly factors in the concerns. Hence, we maintain our Buy rating on the stock.
VIEWPOINT Tech Mahindra Strong show continues, positive bias retained Result highlights -
A strong quarter: Tech Mahindra reported yet another strong quarter with the revenue growth comfortably ahead of the Street's estimate. It also outperformed the larger information technology (IT) companies like Infosys, Wipro and HCL Technologies (HCL Tech). That the company signed thirteen large deals worth $500 million during the quarter (versus four large deals in the previous quarter) is a pertinent indication that the company is making significant progress towards leveraging its synergies with Satyam Computer Services (Satyam). Not only the robust deal signings provide comfort with regard revenue visibility, but also indicate that the company has achieved the much needed scale to be invited to bidding for large deals. With Tech Mahindra too reporting a strong set of numbers, the thesis that the operating environment in the USA and Europe is improving stands vindicated. Additionally, the company's outlook across verticals, geographies and service lines remains positive leading us to maintain our positive stance on the company. -
Revenues ahead of estimate; beats peers: Tech Mahindra reported a 4.7% quarter-on-quarter (Q-o-Q; 5% in constant-currency terms) revenue growth in dollar terms to $758 million versus the Street's estimate of $746 million. The organic revenue growth was 4.2% while 0.5% growth was inorganic or contributed by the full quarter's reconciliation of the revenues of Complex IT (a recent acquisition). The revenue growth for the September 2013 quarter is much better than that of the larger IT companies like Infosys (revenues up 3.7% quarter on quarter [QoQ]), Wipro (revenues up 2.7% QoQ), HCL Tech (revenues up 3.5% QoQ). More importantly, with an 18% growth reported for H1FY2014 the company is well on its way to beating the upper end of NASSCOM's guidance for the industry at 12-14%. The company needs a 1% sequential growth to beat the upper end of the NASSCOM guidance which should be easily achievable in the current scenario. In rupee terms, the company reported a 16.3% Q-o-Q growth in the revenues to Rs4,771 crore. It is commendable that the company has been able to report a healthy broad-based growth across geographies and verticals including telecommunications (telecom; despite declining revenues from its top client, British Telecom [BT]). -
Margin in line with expectation: The company reported a 220-basis-point improvement in the EBITDA margin to 23.3%, which was in line with the Street's estimate. The margin was largely supported by currency gains (of 350 basis points) while a 100-basis-point fall in the utilisation ratio restricted the growth in the margin for the quarter. Going ahead, the company has announced a wage hike of 7% on an average with effect from January 1, 2013 for its employees (a 200-basis-point impact) and the absence of deferred revenues post-Q3FY2014 will have a negative impact on the margin. The management expects the margin to remain stable despite the head winds led by an improvement in the utilisation levels (currently at 75%, targeted to increase by 200 basis points) and efficiency in certain large projects by driving more and more offshoring and automation. -
Forex loss and higher tax rates restrict PAT: The company incurred a foreign exchange (forex) loss of Rs26 crore versus a forex gain of Rs133 crore in the preceding quarter. The tax rate for the quarter came in at 28.3% versus 25% reported in the previous quarter. The higher tax rate can be attributed to the merger tax paid in Australia and New Zealand (excluding this, the normalised tax rate remains at 25-26%). A higher forex loss and an increase in the effective tax rate restricted the net income growth for the quarter to 4.6% QoQ to Rs718 crore. In the current hedge book it has a marked-to-market (MTM) loss worth Rs20.7 crore out of which Rs2.7 crore is expected to come through to the Profit and Loss Account in Q3FY2014 while Rs18 crore will be recognised in the balance sheet which is expected to flow through to the Profit and Loss Account in the next five quarters should the rupee stay at the current levels of 61-62 against the dollar. -
Management commentary confident across the board: On account of the signing of 13 deals worth $500 million during the quarter, the company's management remains confident of its prospects going ahead in all the verticals and geographies. The company signed large deals across the major verticals like telecom (which accounts for 46% of the total revenues) and manufacturing (which accounts for 19% of the total revenues) and both the key geographies of the USA (which accounts for 44% of the total revenues) and Europe (which accounts for 33% of the total revenues). More importantly, the company is confident of timely ramp-ups of all these deals. The management sees demand returning in the USA and Europe (driven primarily by the UK) due to the region's improved economic prospects. Overall, the management observes an uptick in IT spending going into the future. The company posted a 2.5% growth (in dollar terms) in its largest vertical, telecom. This is commendable, given the persistently declining trend in BT and the fragile nature of spending of the telecom companies worldwide. In the last four quarters the telecom vertical has grown at 5.3% compounded quarterly growth rate (CQGR). On the enterprise services vertical (which accounts for 52% of the total revenues), the company sees a good order pipeline with increasing win rates especially in deal sizes of about $5 million. Additionally, the enterprise business currently has a large deal pipeline of about five to six large deals (size upwards of $50 million). -
Valuation: retain our positive bias: In line with our earlier prognosis of step-up in the consensus earnings upgrades and re-rating of Tech Mahindra, the same happened after the company delivered a stellar performance for Q2FY2014. The upgrades and re-rating were driven by an improvement in the company's execution of orders and were aptly supported by an improved demand environment and rupee tail winds. The stock has already run up by more than 35% in the last three months and is trading at 13x FY2014 and 11.5x FY2015 consensus earnings estimates. We maintain our positive bias for Tech Mahindra and expect the stock to see further upside in the next 12 months .
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Regards,
The Sharekhan Research Team | |
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