| Summary of Contents STOCK UPDATE Mcleod Russel India
Recommendation: Hold
Price target: Rs305
Current market price: Rs271 Realisation gains may lead to better performance in FY2015, maintained Hold Key points - McLeod Russel India Ltd (MRIL)'s FY2014 operating performance was affected by a correction in the raw tea prices in the domestic and international markets (which resulted in a lower sales realisation) despite a double-digit growth in the production and sales volume.
- With Indian tea prices likely to firm up to Rs187-190 per kg and Kenyan tea prices to witness a gradual increase too, the MRIL management has guided for a growth in mid high teens in revenues and an increase of over 20% in the operating profit (on the back of a single-digit growth in the operating cost).
- We have cautiously assumed a 5% increase in the domestic sales quantity and a sales realisation of around Rs180 per kg (up by 7.5% YoY) in our estimates for FY2015. The domestic tea production and price scene will become clearer by the second and third quarters of FY2015 (a period of quality tea production in India). We maintain our Hold recommendation on the stock with an unchanged price target of Rs305. The stock is currently trading at 8x FY2016E (consolidated) EPS of Rs33.9.
- Key risk: Any drop in the domestic tea prices or substantial increase in any of the key cost elements would act as a key risk to our earnings estimates.
CanFin Homes
Recommendation: Book profit
Current market price: Rs327 Upside limited after recent run-up, book profit Key points - Canfin Homes has appreciated by 157% since our initiation report on the stock (Stock Idea, "Turning over a new leaf" dated December 4, 2012) led by a strong earnings performance. Given the strong outperformance the stock now trades at 1.0x FY2016E book value which is premium to its peers (GIC Housing Finance, Dewan Housing Finance) while earlier it used to trade at a ~40-50% discount to its peers. We therefore recommend investors to book profit in CanFin Home as the upside to the stock price seems limited from the current levels.
- The company's top management team has been instrumental in aggressively expanding the company's branch network which has contributed to a strong growth in the company's loan book. Going ahead, any change in the management team could affect the company's expansion plans and growth outlook. Also, rising competition in the mortgage segment (especially in the salaried segment) could add pressure on its spreads.
SECTOR UPDATE Q4FY2014 Banking earnings review Key points - In Q4FY2014, the performance of the banks under our coverage was in line with our expectations at the operating level. Though high provisions affected the net earnings of the PSBs, one-offs like tax reversals and utilisation of floating provisions helped grow their earnings. On the other hand, private banks continued to report a strong performance on all fronts especially margin and asset quality.
- Led by the growing expectations of a cyclical recovery in the economy and a possibility of a strong reforms push by the new government, the PSBs have rallied sharply in the past few weeks. However, despite this the PSBs trade about a discount of 30% to their respective long-term means. However, as growth picks up and reforms lead to an improvement in some of the stressed sectors (especially power and infrastructure), the asset quality challenges will ease which could take the valuations back to the long period average.
- Accordingly, we have reviewed the ratings and price targets for the PSBs under our coverage (our preferred picks are SBI and BoB). In case of the private banks, we maintain a positive view on them due to their healthy asset quality, strong capital position and steady operating performance (our top picks: ICICI Bank, Federal Bank). We also maintain a positive stance on the NBFCs and going ahead any moderation in the wholesale rates will be a key positive for them (our top picks: LIC Housing Finance, Bajaj Finance).
- Key risk: Any rate hike by the RBI (due to high inflation) could weaken market sentiment towards banks.
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
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