| STOCK UPDATE Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs163
Current market price: Rs136
Upgraded to Buy Key points In addition, the bank has now turned its focus on (1) expanding in the more lucrative western and southern regions of India; and (2) attaining 100% core banking solution (CBS) coverage. The expansion in the western and southern regions of India should offer much better credit deployment opportunities, which should trickle down to wider spreads. Meanwhile, a 100% CBS coverage should lead to an improvement in the fee income stream (as has been the case with the other public sector banks [PSBs]). Importantly, the bank is well capitalised to fund its balance sheet growth as its capital adequacy ratio (CAR) is comfortable at 15%. In addition, the potential capital infusion by the Government of India would provide additional capital to fund the expansion of the branch network in the western and southern regions of India. Eventually, a pan-India presence would help the bank shed its ?regional bank? tag. With most of the operating parameters in line with those of the other major PSBs and the stock?s valuations cheap currently, the bank appears to be a strong re-rating candidate. Driven by a distinct improvement in the key parameters and increased confidence in the new management of the bank, we are bullish on the stock. We are raising our FY2011 and FY2012 earnings estimates by 4.8% and by 9.4% respectively. At the current market price of Rs135, the stock trades at par with the FY2011 book value, which we believe is cheap considering the respectable return ratio (about 20% return on equity [RoE]). We upgrade the stock to Buy with a revised price target of Rs163. Reliance Industries
Cluster: Evergreen
Recommendation: Hold
Price target: Rs1,130
Current market price: Rs984
Price target revised to Rs1,130 Key points -
The Union Budget 2010-11 has increased the minimum alternate tax (MAT) including the surcharges to 20% from 17% earlier. To account for the higher incidence of MAT, we have lowered Reliance Industries Ltd (RIL)?s FY2011E earnings per share (EPS) by 2.9% to Rs71.4 and its FY2012E EPS by 3.8% to Rs83.5. Further, we have also cut our current net present value (NPV) estimate for Krishna-Godavari (KG) D-6 by 2% to USD16.3 billion due to the higher MAT. This means a negative impact of Rs18 per share on RIL?s value. -
The street was expecting clarification on the income tax exemption under section 80 IB of the Income Tax Act on profits from natural gas production for a period of seven years from the blocks offered under the New Exploration Licensing Policy (NELP) V-VII in the Union Budget 2010-11. However, ambiguity remains on this front in case of RIL and we expect clarification from the oil ministry on the same. -
In the worst-case scenario, if gas produced from NELP I-VII does not get tax holiday under section 80 IB, RIL?s earnings from the KG D-6 block would be taxed at 34% instead of the MAT rate of 20%. In this case, we expect a negative impact of 11-13% on our EPS estimate for FY2011-12. Moreover, our current NPV estimate for KG D-6 would also come down by 13% to USD14.5 billion. Consequently, we expect a negative impact of Rs50 per share on RIL?s value. However, given the ambiguity we are not factoring the same in our price target. -
We maintain our Hold rating on the stock with a revised price target of Rs1,130. The change in the price target reflects a higher MAT rate of 20% versus 17% earlier. However, an adverse clarification on seven-year tax holiday on natural gas production under section 80 IB and the negative outcome of the Supreme Court in the RIL-Reliance Natural Resources Ltd (RNRL) gas dispute are the key risks to our price target. At the current market price, the stock trades at a price/earnings of 11.8x FY2012E earnings and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x FY2012E. ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs275
Current market price: Rs242
Price target revised to Rs275 Key points -
After sparing the cigarette industry from any excise duty hike in the FY2009-10 Union Budget, the government has increased the excise duty on cigarettes by a steep 11-18% in the FY2010-11 Union Budget. While a hike was expected in the range of 5-8%, the overall weighted average increase in the excise duty for ITC stood at approximately 16%. -
Apart from the sharp increase in the excise duty, we believe more states are likely to increase the valued added tax (VAT) on cigarette to 20% from 12.5% in their respective state budgets. Thus, we believe that to combat the hefty increase in its tax burden and to protect its profitability ITC is more likely to increase the price of cigarettes in its current portfolio by about 10% in FY2011. -
This will affect the volumes of the cigarette business in FY2011, especially for the regular category cigarettes (which contribute a large chunk to ITC?s cigarette sales volume) on which excise duty has been increased by 18%. However, the introduction of the new slab of upto 60mm cigarettes in the budget and the likely introduction of the same by ITC at Rs1.50-1.75 per stick would help the company in bringing back the incremental volumes from the lower price points. Thus, we expect the overall cigarette sales volume growth to be at about 3% in FY2011 (as against our earlier estimate of 5% year on year [yoy]). -
With the lower volume growth assumptions and taking into account the higher blended VAT burden, we reduce our earnings estimate for FY2011 by 3.9%. -
The Union Budget 2011 has posed significant challenges for ITC?s cigarette business in FY2011. However, the business has shown sound resilience in the past in the face of similar harsh taxation moves. Also, the strong demand environment currently provides comfort that the cigarette business will respond strongly to the adverse tax scenario. ITC?s other businesses of hotels, paper/paperboards/packaging, non-cigarette fast moving consumer goods (FMCG) and Agri are all likely to look up in FY2011, thereby providing a cushion to the overall profitability. -
Based on the revised earnings estimates the company is likely to deliver only a 13.5% year-on-year (y-o-y) increase in its net profit in FY2011 compared with the earlier estimate of a strong 17.4% growth. Thus, to reflect a lower earnings growth (largely in line with the earnings growth of Hindustan Unilever Ltd [HUL]) we reduce the exit multiple from 22x to 21x and revise our price target on the stock to Rs275. We maintain our Buy recommendation on the stock and maintain our positive bias on ITC compared to HUL among the large-cap stocks. At the current market price the stock trades at 19.9x its FY2011E earnings per share (EPS) of Rs12.1 and 17.2x its FY2012E EPS of Rs14.1.
SECTOR UPDATE Automobiles Auto sales continue to zoom on buoyant demand
The sales volumes in the automobile industry continue to drive on top gear on account of the buoyant demand environment, which has aided the automobile (auto) manufacturers to post volumes at historical peak levels, and a low base of the last year. Though the demand environment is likely to remain relatively upbeat going ahead, we expect the incremental growth trajectory to taper down substantially. Starting from Q1FY2011 auto companies (mainly passenger car makers) will have to deliver a volume growth on a high base of FY2010. Thus, FY2011 will be a tester for the auto companies especially considering the likelihood of an uptick in the interest rate cycle, the price increases recently implemented for the excise roll-back and those likely to be effected during the course of the year due to raw material cost escalation. Further, aided by the incremental cost pressure on account of the implementation of the Bharat State (BS) IV emission norms FY2011 will seriously test the auto companies on the profit margin and bottom line growth fronts.
VIEWPOINT Tata Motors JLR drives growth in Q3FY2010 Consolidated results snapshot -
For Q3FY2010 Tata Motors reported a total income of Rs26,044 crore, indicating an excellent 47.1% increase on a year-on-year (y-o-y) basis. The revenues also grew by a strong 23.4% on a sequential basis on the back of a substantial growth of 28% in the Jaguar and Land Rover (JLR) volumes. -
The operating profit margin (OPM) for the quarter stood at 11.8%, indicating a massive jump of 415 basis points on a quarter-on-quarter (q-o-q) basis, which was mainly on account of higher volumes and a tighter control on costs undertaken by the company. This led to a four-fold jump in the operating profit of JLR compared to that in Q2FY2010. Consequently, the company reported a 92% sequential growth in the operating profit to Rs3,057.5 crore. -
The company?s outstanding performance at the operating level subdued the impact of the lower other income and a higher depreciation. Consequently, the adjusted net profit stood at Rs884.5 crore as against a profit of Rs174.6 crore in Q2FY2010. After the extraordinaries to the tune of Rs234.2 crore, the reported net profit stood at Rs650.3 crore, which was above the street?s expectations. -
The strong demand environment in the commercial vehicle segment has led to a substantial pick-up in the volumes of Tata Motors. This coupled with a higher government spending, lower interest rates, improving industrial production and a low base of the previous year has been a significant driver of the volumes in the segment. Furthermore, the implementation of the EURO IV emission norms in 11 major cities across the country by April 2010 will also lead to significant pre-buying volume gains in the commercial vehicle segment, thereby benefiting Tata Motors. -
Furthermore, the strong improvement in JLR?s performance has been better than expected (with JLR reporting a net profit of 54 million pounds for the quarter). Consequently, a further improvement in the JLR volumes on the back of a global recovery and improvement in the profitability on higher scale of operations and reduced cost is likely to improve the consolidated performance of the company. At the current market price, the stock is trading at 19x its FY2011E Bloomberg consolidated earnings per share (EPS) of Rs42.
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