Punjab National Bank - 'Primed for a re-rating' - BUY
CMP Rs1,062, Target Price Rs1,246, Upside 17.3%
Loan growth momentum witnessed in H2 FY10 to continue
Aided by a revival in credit demand since November 2009, PNB witnessed robust loan book expansion of 14% in H2 FY10. The advance growth was driven by Large Corp, MSME and Agriculture segments. In our recent interaction, PNB's management has expressed confidence about continuation of brisk growth in FY11. Bank has witnessed strong credit demand from Telecom and Infrastructure segments in Q1 FY11. Management has set a credit growth target of 22% for FY11.
NIM management has been exemplary; margin to stabilize at 3.5%
PNB's NIM management has been far better than peers over the past 8 quarters, the period which tested every bank's margin management ability. Bank's aversion from raising substantial high-cost deposits during Q2-Q3 FY09 and lower sub-BPLR lending (~35% presently) stood in good stead. PNB has set its base rate at 8%, in-line with most PSBs but 50bps higher than SBI despite having the lowest CoD. Thus we expect base rate implications on NIM to be negligible for the bank. However, we expect PNB's NIM to correct by 30-40bps in H1 FY10 on savings interest calculation on daily basis, 100bps CRR increase over past 5 months and recent 25bps policy rate hike by RBI amid tight liquidity conditions. In the medium-term margin would stabilize near 3.5%.
GNPL to be contained below 2%; NPL risk marginal
At most, bank expects slippages from restructured portfolio at 6-7% (Rs7-8.5bn) in FY11. Though absolute GNPL would increase in coming quarters, GNPL% is likely to remain stable supported by a strong loan book growth. In FY12, we expect an improvement in GNPL levels. Provisioning is likely to remain firm near 0.8% of average advances in FY11 and FY12 with coverage remaining above the 70% requirement. Adequate provisioning would contain Net NPLs below 0.5%. PNB has one of the lowest NPL risk with Net NPLs just comprising 5.5% of networth.
RoA and RoE to remain the best; prefer PNB over SBI
In FY10, PNB was the most efficient and profitable public bank with RoA and RoE of 1.4% and 25.5% respectively (both excluding profit from stake sales). With continuance of superior margin, credit growth and gradual improvement in NPL levels, bank's profitability would continue to be the highest amongst peers in FY11 and FY12. Despite superior fundamentals, PNB trades at 15-20% discount to SBI. We expect bank's valuation to re-rate near SBI or even higher in the next one year as PNB offers a much attractive FY12E RoE-P/adj.BV mix. Using our proprietary valuation model, Bank 20, we assign a FY12 P/adj.BV multiple of 1.7x to PNB and arrive at 6-9 month price target of Rs1,246.
Please on the link to view the attachment.
http://content.indiainfoline.com/wc/research/researchreports/PNB_080710.pdf
Amtek Auto – 'Components in place' - BUY
CMP Rs178, Target Price Rs212, Upside 19.1%
Indian auto component industry is witnessing resurgent times following a strong domestic auto industry growth. Amtek Auto is one large company in this space where, we believe, the worst is over in terms of its international business contraction. The company's international operations, which suffered a beating (following a slew of acquisitions during 2002-07) post the outburst of Subprime crisis, have now bottomed out. International business may take time to recover but can only improve from hereon. Capacity utilization at ~30%, possibly its lowest point; any rise makes a case for margin expansion (flexible raw material pricing supports) with operating leverage kicking in.
The big story will be supply to the domestic auto industry that has been growing at a fast pace supported by rising incomes, easy availability of finance and low penetration levels. With a plethora of OEMs setting up shop in India , especially to supply small cars at competitive prices, local sourcing of components from players like Amtek is the need of the hour. Lower manufacturing costs coupled with high quality of products are making India a sourcing hub for automobile components.
To break-away from the vagaries of cyclicality of autos over time, Amtek is diversifying into non-automotive areas like the defence segment and wagon manufacturing and components in railways. The management expects non-automotive revenue contribution to rise to 40% in 2014 from 9% currently.
Amtek Auto has a diversified business profile, catering to a vast customer base (top five customers contributing less than 15% of revenues). Consolidated revenues have witnessed a CAGR of 34% over the last five years and we expect it to grow by 11% and 10% in F6/11 and F6/12 respectively (PAT CAGR of 45.6% over F6/09 to F6/12).
Concerns on international business are largely in the price, in our opinion. Over the past one year, Amtek Auto has under performed its peers (Bharat Forge, Bosch, Motherson Sumi) by a huge margin. Even based on our bear case scenario, the stock trades at a P/E of 12x (P/E of 8x based on bull case). We initiate coverage with BUY rating; upside of 19.1% in 6-9 months.
Please on the link to view the attachment.
http://content.indiainfoline.com/wc/research/researchreports/Amtek_Auto_080710.pdf
Warm Regards,
India Infoline Research Team
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