| Summary of Contents STOCK UPDATE Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs47
Current market price: Rs33 Price target revised to Rs47 Result highlights - For Q2FY2008, Tourism Finance Corporation of India's (TFCI) profit after tax (PAT) grew by only 2.2% year on year (yoy) to Rs1.4 crore. The overall profit growth was restricted by the absence of cash recoveries and by higher operating expenses.
- Operating expenses that were higher than envisaged earlier have made us reduce our FY2008E earnings by 3% to Rs19.5 crore. We have also changed the earnings per share (EPS) estimates for FY2008 from Rs3 to Rs2, while EPS estimates for FY2009 has been changed from Rs4.1 to Rs3.4. The change in EPS estimates were mainly due to the capital raising plans, which have been factored into our current update.
- Net interest income (NII) was down by 14.4% yoy to Rs4.4 crore. Absence of pre-payment premium and cash recoveries resulted in a lower NII component in Q2FY2008 as compared with that in Q2FY2007.
- Operating expenses jumped to Rs2.6 crore from Rs1 crore mainly due to a significant increase in lease rentals for its office space and increase in employee salary levels. The operating profit was down by 40.7% to Rs2.5 crore.
- Due to sustained improvement in TFCI's asset quality in past couple of years the company didn't require to make any provisions and contingencies during the quarter. There was no requirement for further provisioning as net non-performing assets (NPAs) were almost nil and as incremental defaults were contained.
- TFCI's current capital base restricts it to bid for bigger projects requiring more capital (in the range of Rs40-50 crore). Hence, it is currently considering to expand its capital base by raising capital from primary market. This could be in the nature of qualified institutional placement, preferential allotment, rights issue or even roping in a strategic investor. A board meeting in this regard is scheduled on December 19, 2007.
- We have factored in a capital raising of Rs125 crore by the company in FY2008 at an expected issue price of Rs42, which would be at a 15-20% premium to the current prevailing price. We feel the pricing should be decided keeping in mind the future growth prospects and the current prices do not factor in the improved earnings growth potential of the company.
- The business fundamentals of the company have improved significantly on the back of capacity expansion in hotel and tourism sectors planned for the next three to four years. We expect TFCI's earnings to grow at a compounded annual growth rate (CAGR) of 50% over the period FY2007-10E, as it will undertake much higher volume of business after its capital raising in FY2008. At the current market price of Rs34 the stock is quoting at 9.8x its FY2009E earnings and 0.9x FY2009E book value. We believe the strong earnings growth coupled with a higher leverage will result in significant improvement in RoE (from 6.5% in FY2007 to 12.8% in FY2010E). This should help the company gradually trade at higher book value multiples in the range of 1-1.2x from the current 0.9x. Thus we maintain Buy recommendation on the stock with the revised 12-month price target of Rs47 at which it would trade at 1.2x average of FY2009E and FY2010E book values.
SECTOR UPDATE Telecommunications Large players continue to dominate
GSM mobile service providers reported a net addition of 5.82 million subscribers during November, taking the total subscriber base to 165.8 million. The month-on-month (m-o-m) growth works out to 3.6%, which is bit lower than 3.7% reported in the previous month. |
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