| Summary of Content STOCK UPDATE Housing Development Finance Corporation
Cluster: Evergreen
Recommendation: Hold
Price target: Under review
Current market price: Rs712 Q1FY2012 results: First-cut analysis Result highlights -
Housing Development Finance Corporation (HDFC) reported a net profit growth of 21.6% to Rs844.5 crore which was marginally below our expectations due to a lower than expected net interest income (NII) growth for the company. The asset quality of the company was also stable with gross non performing assets (NPA) at 0.83% as against 0.77% in Q4FY2011. -
NII growth weak: The NII of the company grew by 17.1% year on year (YoY) to Rs1,094.8 crore. The calculated net interest margin (NIM) declined by 8 basis points to 3.38% as against 3.46% in Q1FY2011. The reported spreads were largely stable at 2.3% as against 2.33% in Q4FY2011 and 2.34% in Q1FY2011. -
Advances growth strong: The advances of the company grew by 22.2% YoY and 6% quarter on quarter (QoQ) to Rs124,167 crore during the quarter. Loans sold during the preceding 12 months amounted to Rs3,123 crore. The growth in the loan book inclusive of these loans is of 25%. -
Asset quality remains stable: The gross NPAs of the company based on 90 days overdue increased marginally from 0.77% to 0.83% QoQ. The gross NPAs of the company based on 180 days overdue also increased sequentially by 9 basis points to 0.55% as against 0.46% in the previous quarter. In terms of the prudential norms as stipulated by the National Housing Bank, the corporation is required to carry a provision of Rs839.66 crore, which includes the provisioning of Rs450.76 crore on standard assets in respect of housing loans granted under the Dual Rate Home Loan Scheme. -
Capital adequacy ratio at 14.1%: The capital adequacy ratio of the company stood at 14.1% as against the statutory requirement of 12%. The tier I capital of the company stood at 12.2% as against the statutory requirement of 6%. -
Outlook: HDFC has continued with its strong performance on all fronts. A robust advances growth and stable interest spreads along with a stable asset quality reflect the strong operating performance of the company. The company is also adequately capitalised for future expansion plans. The stock is currently trading at 5.3x FY2012E book value (BV)and 4.6x FY2013E BV. We shall come out with a detailed note shortly.
SHAREKHAN SPECIAL Q1FY2012 Construction earnings preview Key points -
Moderate execution due to onset of monsoon: In Q1FY2012, the construction companies are likely to register a slowdown in execution of the ongoing projects on account of onset of monsoon in the month of June 2011, which is a normal phenomenon. Hence we expect the revenue of the engineering, procurement and construction (EPC) companies during Q1FY2012 to likely decline on a sequential basis. On a year-on-year (Y-o-Y) basis the cumulative revenue of the Sharekhan construction universe (ex-Punj Lloyd) is estimated to grow by 13.4%. Among them , we estimate Ramky Infra to deliver the highest revenue growth of 31.7% YoY on account of robust order inflow witnessed in FY2011 along with the lower revenue base in Q1FY2011. Whereas C&C Constructions is expected to post a muted revenue growth of 1.1% YoY. In case of asset developers, we expect a 47.8% Y-o-Y growth for IL&FS Transportation Networks (ITNL) on the back of toll hike in three of its operational projects during the quarter and commencement of construction activity in few new projects. We further expect a 33.8% revenue growth in IRB Infrastructure Developers (IRB Infra) on the back of its robust EPC revenues led by start of construction work in its Tumkur-Chitradurg project and toll hike in its Mumbai-Pune project. -
Surge in interest burden to dent earnings: A poor execution during the last one year resulted in a surge in the working capital requirement across the construction industry. This, in turn, resulted in higher borrowings which along with the rising interest rate will lead to a surge in the interest burden of the companies for the quarter. Thus, despite a flat operating profit margin (OPM) Y-o-Y, a higher interest cost will dent the earnings of the construction companies. The cumulative average bottom line of the EPC companies (ex-Punj) is expected to decline by 11.8% YoY (as compared to an average growth of 13.8% at the operating level). In case of Pratibha Industries, we expect a 33.8% YoY profit after tax (PAT) growth which would be largely driven by saving in the interest cost as the company has made a part repayment of its outstanding debt. On the developer front, we expect a marginal earnings growth of 1.7% and 0.6% in IRB Infra and ITNL respectively, mainly dented by lower OPM and higher interest burden. OPM will decline for asset developers on the back of higher contribution from the EPC business which has lower margins compared to build-operate-transport (BOT) segment. -
Order inflow muted in Q1FY2012: The order inflow which had gained momentum in Q4FY2011 lost its pace during Q1FY2012. The order inflow in the quarter ended June was muted at around Rs39,500 crore which represents a fall of 32% YoY and 40% quarter on quarter (QoQ). The key factor that affected the order inflow during the quarter was the state elections in April and May 2011. Further, scams and political rifts and high inflation also restricted the order inflow during the quarter. Among the various infrastructure verticals, the water & irrigation segment has been a major disappointment over the last four to five quarters since new orders from the most active state in this space, Andhra Pradesh, have completely dried up. Even the orders in the building segment have slowed down recently given the dip in the real estate demand and poor financial health of the realty companies. Further, industrial capital expenditure (capex) continues to be low in a rising interest rate scenario. -
Outlook: Though the National Highways Authority of India (NHAI) failed to meet its monthly target during the first quarter of FY2012, we expect traction going ahead. We however don't expect the NHAI to meet its aggressive target fully. Further, we expect some revival in government spending in H2FY2012. Further, we expect the execution of projects to improve in H2FY2012 which might reduce the working capital pressure going ahead. This, in turn, will moderate the interest burden a little since the interest rates will continue to be high in FY2012. Given the steep correction in the sector and its underperformance, the valuations of the major companies in this space have turned very attractive. Many stocks are trading below 1x their price/book value (P/BV) and we believe all the negatives have been factored in. Thus, one can take a selective approach at this point of time and start accumulating infrastructure stocks with a long-term perspective. We like IL&FS Transportation Networks (India) and IRB Infra among the larger players given their strong financials and track record in the road BOT space. We like Pratibha Industries and Unity Infraprojects among the smaller players. Q1FY2012 Capital Goods & Engineering earnings preview Key points -
We expect most of the capital goods companies under our coverage to report a robust revenue growth for Q1FY2012 led by sound execution of their order book and a favourable base effect. Conventionally, the first quarter of a fiscal accounts for 16-22% of the yearly sales and hence is the lowest revenue contributing quarter for the capital goods companies. As a result, the operating profit margins (OPMs) are also the lowest in this quarter. -
Further, on account of the lagging effect of two to three months in passing on the hike in the prices of inputs like copper to customers (in Q4FY2011), the margins would be subdued for Q1FY2012. However, the effect of the cooling off of prices of metals like copper in the last three months should provide some respite to the margins from Q2FY2012 onwards. -
The order inflow announcements in the capital goods space picked up momentum in Q1FY2012 driven by the big-ticket orders bagged by Larsen and Toubro (L&T) in the engineering and construction (E&C) and transmission and distribution (T&D) segments. However, we feel that the order inflow needs to improve in the coming quarters if the growth has to be robust from FY2013 onwards. -
Margin sustenance (actually margin pressure) along with the order inflow would be the key monitorables in the Q1FY2012 report card. In terms of anticipated Q1 results, we expect Bharat Heavy Electricals Ltd (BHEL) to be the top performer in the large-cap space and PTC India and V-Guard Industries to lead the show in the mid-cap space. Q1FY2012 Power earnings preview Key points -
According to our estimates, India generated 217.6 billion units (BU) of power during Q1FY2012. This reflects a very healthy growth of 8.6% year on year (YoY) backed by an 8% incremental capacity over the last year. At the end of Q1FY2012, the total generation capacity of the country is likely to have stood at around 175,000MW. Sequentially, India's power output is expected to have grown by 2% in Q1FY2012. -
As the monsoon had set in by the end of Q1FY2012, the growth in power requirement is estimated to have moderated to 2% sequentially during the quarter and to 3% on a year-on-year (Y-o-Y) basis. In the meanwhile, the availability of power is estimated to have grown by 9% YoY and 5% quarter on quarter (QoQ) in the same period. Hence, the power deficit for the quarter is expected to fall to 7% from 12% in Q1FY2011 and 8% in Q4FY2011. -
The power deficit is likely to come down both sequentially and annually. The effect of the same should get reflected in the merchant power prices. However, the prices were broadly in the range of Rs2.5-4.0 per unit during Q1FY2012. -
View: We expect healthy volume growth in power generation in the industry during Q1FY2012 and believe that merchant power price realization should also be around Rs3.5-4/unit for companies during this quarter. Price hike taken by Coal India selectively would start reflecting from Q1FY2012 numbers in raw material of power generation companies. Though, most of them would pass on the same in their tariff revision, in short run it would pinch margin to some extent. We like CESC among generation companies as the company is available at a low valuation despite having an integrated business (refer our stock idea report dated June 29, 2011).
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