Investor's Eye: Update - ICICI Bank, Bank of Baroda, Selan Exploration Technology

 

Investor's Eye [December 04, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     ICICI Bank Recommendation: Buy Price target: Rs424 Current market price: Rs362   Price target revised to Rs424   Key points  ICICI Bank continues to deliver a strong operating performance (with PPP growth of ~25% over the past eight quarters) led by a healthy loan growth and an expansion in the margins, and a check on the opex growth. We believe the given sharp improvement in its liability profile and the net interest margins will sustain at high levels. In addition, the likely pick-up in fee income (especially the corporate fees due to the recovery in economy) could improve the operating profits. Even as the asset quality has shown a marginal stress in recent times, it remains significantly better than the PSU banks. The management expects the stressed loan formation to be lesser in FY2015 vs FY2014, and the credit cost to be contained to 90BPS in FY2015. Any recovery in the economy or policy initiatives by the government will result in an improvement in the asset quality by FY2016. ICICI Bank is a structural growth story and it is likely to benefit from the recovery in economy due to its improved liability base, increase in branch network and healthy capital position. We have revised our estimates and valuation multiple upwards (2.1x FY2017E BV for ICICI Bank [stand-alone]) on increasing visibility on the interest rates and a likely pick-up in the economy. This results in the revision of our SoTP-based price target to Rs424. We maintain our Buy rating.     Bank of Baroda Recommendation: Buy Price target: Rs1,236 Current market price: Rs1,085   Price target revised to Rs1,236   Key points  Despite a tough macro environment, Bank of Baroda (BoB) reported a stable performance at the operating level. The bank's focus on reduction in bulk deposits (preferential rate deposits and CDs) and calibrated growth in advances have contributed to an increase in margins (domestic NIMS at 3.02% as on Q2FY2015). We expect its net interest income to grow by 19.3% CAGR over FY2014-2017. While the asset quality is a concern for the public sector banks, BoB is relatively better placed than its peers. As on Q2FY2015, the stressed loans (gross NPAs + restructured loans) were at a 9.1% compared with the sector average of 11.9%. The NPAs provision coverage is also reasonable at 65.4% and better provided on wage revisions' front.  BoB's capital position (tier-1 CAR of 9.3%) is relatively better compared with the other PSBs and hence suitably placed in the recovery cycle. We expect BoB's earnings to grow at a CAGR of an 18.1% over FY2014-2017 resulting in a RoA of 0.8% by FY2017. We have rolled over our valuations to FY2017 estimates resulting in revision in the price target to Rs1,236 (1.04x FY2017E BV). We maintain our Buy rating on the stock.     Selan Exploration Technology Recommendation: Buy Price target: Rs550 Current market price: Rs380   Crude meltdown to dent earnings but growth story intact; price target revised down to Rs550   Key points  Q2 performance remained subdued, in expected line: In Q2FY2015, the net revenues (which adjusted for the petroleum profit) of Selan Exploration Technology (Selan) remained negative as the realisation of crude oil prices turned weaker while the production volume was flat to negative during this period. Weaker realisation reflected on its profitability during this quarter as earnings declined by 19% YoY and 8% QoQ to Rs9.6 crore. Globally, the average crude oil prices turned weaker and slipped from ~$110 to below $90 per barrel during Q2.  Material ramp-up in production volumes from FY2016: The flat volume growth was largely expected by the Street in this quarter but all eyes are watching for the production uptick from the ongoing drilling work. We believe that the company is taking steps to commercialise some of the 11 wells drilled earlier in 2014 and would result in volume pick-up from Q4 of this year. However, the material change in production volumes is only expected to materialise from the next fiscal. The management has retained its broader guidance of production volumes of 5-6 lakh barrels annually in the next 24-36 months (up from close to 1.65 lakh barrel bases in FY2014; about 3-4x jump in the production volumes) and has an oil field development (drilling) program to support the same.  Revising estimates; delay in ramp-up and correction in crude prices: We have fine-tuned our FY2015 and FY2016 estimates to factor in the revised production ramp-up schedule and the sharp decline in crude oil prices. We are factoring in the average realisation of $80-85 per barrel range over FY2016-2017 which accounts for certain amount of pullback from the recent plunge below $70 per barrel which is not likely to be sustainable. In this note, we have also done a sensitivity analysis to show the changes in our price target with a change in the average crude oil prices globally. Valuation; negatives discounted the risk-reward favourable: Selan's exploration share price now discounts most of the negatives with a sharp decline in the crude oil prices as one of the key external changes affecting its earnings and valuations. We retain our bullish stance based on two reasons: First, purely on our confidence of the management's ability to execute the set target of exponential jump in the production volumes over the next two to three years; and second, our view that the recent plunge in crude oil prices is not sustainable and the crude oil prices would eventually stabilise around $80-85 per barrel sooner than later. Consequently, we retain our Buy recommendation with a price target of Rs550. 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

 

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