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| Summary of Contents STOCK UPDATE Federal Bank
Recommendation: Buy
Price target: Rs142
Current market price: Rs122 Poised to scale up Key points - Federal Bank plans to grow its advances by 18-20% in FY2015 compared with a growth of ~10% CAGR over FY2011-14. A healthy credit demand in the SME and retail segments coupled with a likely pick-up in the economy will drive the growth in advances book. We have built in a growth of 20% CAGR in the advances over FY2014-16 in our estimates.
- Liability franchisee has undergone significant improvement over the past few years led by reduction in bulk deposits and increase in the CASA ratio. Also, the bank has reduced the low yielding corporate advances book which should have positive impact on the net interest margin (NIM). We therefore expect the bank to maintain its NIM at a healthy level (~3.5% in FY2015).
- The bank has witnessed improvement in its asset quality over the past four quarters mainly due to lower slippages from the corporate segment. The slippages from retail and SME have remained low for the past several quarters. The management is quite confident of containing the asset quality pressures compared to FY2014. The bank's provision coverage ratio stands at ~85% and enhances comfort on asset quality.
- Federal Bank is among the better capitalised banks (Tier 1 CAR of 14.56%) in its peer group and is set to ride the recovery cycle. We expect its earnings to grow at a CAGR of 19% over (FY2014-16) leading to improvement in return ratios. We maintain a Buy rating on the Federal Bank with a price target of Rs142 (1.4x FY2016 book value).
SECTOR UPDATE Automobiles Automobile sales in September 2014: Two-wheelers and heavy trucks impress; cars and tractors lackluster The domestic automobile industry entered the festive season on an optimistic note considering the turnaround in fortunes over the past three-four months. September was a crucial month for the industry as the dealer inventories were stocked up for the festive season which began in the last week of the month. With the festive season falling about a month earlier this year as compared with the last year, the reported volumes have to be adjusted for seasonality. Sales during the month turned out to be a mixed bag. While the two-wheeler industry reported a strong volume growth of 20% plus, the passenger vehicle dispatches fell short of expectations. The medium and heavy commercial vehicle (MHCV) segment too reported an impressive volume growth while the light commercial vehicle (LCV) sales continued to decline. In the tractor segment, although both Mahindra & Mahindra (M&M) and Escorts reported a mid-single digit growth, adjusted for the seasonality factor the growth was underwhelming. TVS Motor Company (TVS) and Ashok Leyland (ALL) were the standout performers for the month. The key takeaways from the month's performance are given below. - The two-wheeler companies continued to report an impressive performance in the month of September 2014. The industry reported a 20% plus growth which even adjusted for seasonality is healthy. Aided by incremental volumes from new launches, TVS reported all time high monthly dispatches. Hero MotoCorp too reported dispatches in excess of 6 lakh units, translating in a growth of over 25%. Bajaj Auto (BAL) dispatches too touched the 4 lakh mark helped by the launch of the new Discover 150 and strong momentum in exports.
- In the passenger vehicle (PV) category, market leader Maruti Suzuki (MSIL) reported a 9.8% growth in domestic volumes, while both M&M and Tata Motors (TAMO) reported a mid-single digit growth. However, adjusted for the seasonality, the growth rates were below expectations. The disappointment was most evident wherein MSIL's entry segment (Alto, WagonR) reported a 13% decline in volume as against our expectation of a positive growth.
- The MHCV segment, albeit on low base, reported an impressive performance with TAMO and ALL reporting a growth of 18% and 40% respectively. The LCV segment volumes continue to decline especially in the small commercial vehicle (less than 2mt) category. We expect the declining trend in the LCV segment to persist till Q4FY2015.
- While tractor manufacturers M&M and Escorts reported mid-single digit growth in domestic dispatches, the volumes were below our expectation. Adjusted for the seasonality factor, the tractor volume growth rates are well in the negative and we expect manufacturers to report double digit volume decline in the month of October 2014 due to the high base.
Picks: We continue to prefer TVS, MSIL and ALL among the auto stocks under our active coverage.
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| Regards,
The Sharekhan Research Team |
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