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| Summary of Contents STOCK UPDATE Yes Bank
Recommendation: Buy
Price target: Rs720
Current market price: Rs569 Well capitalised to grow ahead, price target revised to Rs720 Key points - The recent equity capital raising has taken Yes Bank's CAR to 18% (tier-I CAR to ~14% levels from 9.8%) which gives significant opportunity to the bank to expand the balance sheet (advances book) amid signs of a recovery in the economy. Thus, we expect the earnings growth trajectory to return to 25%-plus range after the cautious growth seen in the past couple of years.
- In our view there are multiple structural drivers for the margin (a rising CASA ratio, improved priority sector lending, stabilisation in interest rates) apart from leveraging of the equity capital. This should result in an expansion of 20-30BPS in the net interest margin over the next couple of years. The asset quality of the bank remains among the best in the system.
- Despite equity dilution we expect the return ratios to remain strong (RoE of about 20% and RoA of about 1.7%) led by a strong earnings growth. We have revised our price target upwards (to factor in the improvement in the margin, lesser than expected dilution in the equity and increase in the book value by 11% for FY2015 and by 22% for FY2016). This has resulted in a new price target of Rs720 (2x FY2016E book value, which is close to its five-year mean valuation multiple). We maintain our Buy rating on the stock.
Bharti Airtel
Recommendation: Hold
Price target: Rs370
Current market price: Rs356 Limited upside; downgraded from Buy to Hold Key points - Reliance Communications tinkers rate; acts as sentiment spoiler: After maintaining pricing discipline for a period of 10-12 months Reliance Communications triggered a price competition by introducing "One India, One rate", which offers unlimited free incoming national roaming. This move is likely to result in lower blended rates across regions. It is sentimentally negative for the industry and can lead to pricing action by the other players as well, resulting in likely dilution of the earnings and margins for the other telecommunications (telecom) players.
- Monetisation of African tower assets to deleverage balance sheet: As per media reports, Airtel Africa is in an advanced stage of selling its tower assets for a combined value of $1.8-2.0 billion. The development is on expected lines (as the investors had been informed of the same by the company) and seeks to monetise assets and delever the balance sheet. Bharti Africa collectively holds around 15,000 towers and at the stated valuation the enterprise value per tower comes to Rs75-77 lakh. That is a premium to the Indian tower valuations and would also aid in deleveraging the balance sheet. Hence, it would be positive for the company.
- Book partial profit; downgraded to Hold from Buy: Despite the concerns related to a higher than expected pay-out by the telecom operators in the spectrum auction held in February 2014, Bharti Airtel has fared fairly well due to pricing discipline and an improving operating environment (in line with our positive stance and expectations). In the last three months the stock has given a return of over 25% and is currently trading close to our price target (Rs370), offering meagre 4% returns. Hence, we advise investors to book partial profits in the stock. In view of the limited upside from the current levels we downgrade our rating on the stock from Buy to Hold.
- Strong fundamentals-competitive environment a key monitorable: We remain positive on the long-term prospects of Bharti Airtel (and the telecom sector) and would keep a keen watch on the emerging competitive environment to review our rating and price target on the stock.
SECTOR UPDATE Q4FY2014 Capital Goods & Engineering earnings review Key points - During Q4FY2014, most of the capital goods and engineering companies under our coverage recorded a double-digit sales growth YoY (around 11-14%). However, Finolex Cables and Thermax reported a flat growth to a decline in their sales. The sales of BHEL continued to decline as expected which affected the margin adversely. The margins of Thermax and Bajaj Electricals remained weak. However, Larsen and Toubro, Crompton Greaves, Finolex Cables and V-Guard Industries managed to expand their margin. On a net level, Bajaj Electricals surprised us negatively while Larsen and Toubro, and Finolex Cables delivered results that were above expectations.
- The order book position has remained not so encouraging till date (a decline of 10% YoY) mainly due to continued depressed order inflow for BHEL. However, we see optimism in the management commentaries across the board with a pro-reform government at the centre. We believe the clearance of several projects worth Rs200,000 crore that were stuck is itself going to brighten the prospects for the capital goods and engineering sector. However, fresh order inflows should reflect from Q3FY2015 only.
- We advise investors to remain positive as the sector is likely to be a major beneficiary of the expected revival in investment cycle. We remain positive on Larsen and Toubro in the large-cap space and retain our positive stance on quality mid-caps like Crompton Greaves, Finolex Cables, Kalpataru Power and V-Guard Industries.
| | | 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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