| | STOCK UPDATE HDFC Bank
Cluster: Evergreen
Recommendation: Hold
Price target: Rs518
Current market price: Rs491 Robust growth in earnings, margins take a dip Result highlights -
HDFC Bank's earnings for Q2FY2012 grew by 31.5% year on year (YoY) and 10.5% quarter on quarter (QoQ) to Rs1,199 crore. The earnings were slightly ahead of our estimates majorly led by a strong growth in the net interest income (NII; 16.6% YoY and 3.4% QoQ) and non interest income coupled with lower than expected provision expenses. The business growth remained strong with advances growing by 25.6% YoY (after adjusting for one off short term loans in Q1FY2012) leading to a strong growth in core income. However, the net interest margin (NIM) declined by 10 basis points (bps) sequentially to 4.1% due to increased intake of term deposits. The asset quality of the bank also remained stable with the gross and net non performing assets (NPAs) at 1% and 0.2% respectively, in line with that of the previous quarter. The provision coverage ratio (PCR) of the bank however declined to 81.3% from 83% in Q1FY2012. HDFC Bank remains among the safer bets within the banking space due to its consistent growth and impeccable asset quality. However the stock trades at 3.5x FY2013E book value (BV), which is at a significant premium to peer banks, leaving little room for an upside. We maintain our Hold rating with a price target of Rs518 for the stock. -
Strong growth in advances fuels NII growth: The NII of the bank grew by 16.6% YoY and 3.4% sequentially to Rs2,944 crore. This was majorly led by a strong growth in advances which grew by 25.6% YoY (after adjusting for one off short term loans in Q2FY2011). The growth in advances was driven by the retail segment which grew 34% YoY and constituted approximately 50% of the advances. The deposits of the bank grew by 18.1% YoY and 9.2% sequentially. -
Sharp increase in term deposits impacts margins: The NIM of the bank declined by 10bps QoQ to 4.1% as a sharp increase in term deposits raised the funding cost. During Q2FY2012 the term deposits increased by 26% YoY and 13% QoQ compared to an 18% YoY growth in overall deposits (9.2% growth Q-o-Q). Consequently, the current account-savings account (CASA) ratio declined by 173bps QoQ to 47.3% as compared to 49.1% in Q1FY2012. -
Non-interest income up 26% QoQ: The non-interest income of the bank grew by 26.1% YoY and 8.2% QoQ to Rs1,212 crore. The foreign exchange (forex) and trading income grew by a robust 43.1% YoY while fee income registered a moderate growth of 15.2% YoY due to sluggishness in distribution income. The loss on sale of investments was also lower at Rs1.3 crore in Q2FY2012 as compared to a loss of Rs52 crore in Q1FY2012. -
Asset quality remains stable, provisions decline: The asset quality of the bank remained stable with gross and net NPAs at 1% and 0.2% respectively. The proportion of restructured advances stood at 0.4% of the total advances (in line with that of the previous quarter) of which the standard restructured advances stood at 0.1%. The provision expenses declined by 19.5% YoY as the bank adjusted for a surplus provision (Rs135 crore) during the quarter. The bank continues to make floating provisions and has an outstanding balance of around Rs1,000 crore. The provision coverage ratio declined to 81.3% in Q2FY2012 as compared to 83% in Q1FY2012. -
Cost- Income ratio remains stable: The cost to income ratio of the bank was maintained at 48.9% as compared to 48.8% in Q1FY2012 and 48.2% in Q2FY2011. During the quarter the bank opened 39 branches, taking the total branch network to 2,150. -
Outlook: HDFC Bank continues to report strong profits; this time the profits were led by a strong growth in advances. The margins witnessed some pressure due to an increase in term deposits while the asset quality remained stable. We expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 24% over FY2011-13, led by a 25% CAGR growth in advances. HDFC Bank remains among the safer bets within the banking space due to its consistent growth and impeccable asset quality. However the stock trades at 3.5x FY2013E BV, which is at a significant premium to peer banks, leaving little room for an upside. We maintain our Hold rating with a price target of Rs518 for the stock. Bajaj FinServ
Cluster: Apple Green
Recommendation: Buy
Price target: Rs600
Current market price: Rs543 Growth in lending and insurance businesses propels earnings Result highlights -
During Q2FY2012, Bajaj Finserv reported a strong 128% year-on-year (Y-o-Y) growth in its consolidated net profits to Rs158 crore. The income from operations showed a 52% Y-o-Y growth to Rs714 crore while expenses remained flat on a Y-o-Y basis which contributed to an around 96% Y-o-Y growth in the operating profits. -
Life insurance-top line contracts: The life insurance business reported a policyholder's surplus of Rs238 crore in Q2FY2012, a growth of 24.6% YoY. However, the gross written premium declined by 27.2% year on year (YoY) with renewal premiums declining by 20.2% YoY. The assets under management also declined by 5.8% quarter on quarter (QoQ) to Rs36,946 crore. -
General insurance-steady growth: The general insurance business registered a growth of 82.9% YoY in its net profit to Rs64 crore as against Rs35 crore in Q2FY2011. This was despite making higher provisions (Rs42 crore vs Rs11 crore) for the motor pool. A strong growth in underwriting profits and a higher investment income were the key drivers for profitability. The gross premiums also increased by 15.5% YoY during the quarter while the combined ratio improved to 99.45% (including motor pool losses). -
Bajaj Finance-robust growth in core income drives profits: The earnings of Bajaj Finance Ltd (BFL) for Q2FY2012 grew by 64.2% YoY to Rs87 crore as against Rs53 crore during Q2FY2011. The core income grew by 34% YoY while provisions declined by 28% YoY which contributed to a strong growth in profits. The deployments of the company grew by 58% YoY to Rs3,352 crore during the quarter while the assets under management (AUM) grew by 11.6% QoQ to Rs10,071 crore. -
Valuation: Bajaj FinServ has reported a strong set of numbers for Q2FY2012 aided by a strong growth in the financing and insurance businesses. However the life insurance business showed moderation in line with the industry as the management works on rationalising the cost structure as per the new regulatory environment. The management expects the life insurance business to start witnessing revenue growth from Q3FY2012 onwards as by then the company wouldn't face a higher base of the previous year.
Due to continued ambiguity relating to the Reserve Bank of India (RBI)'s circular on transfer of shares from Indian residents to non residents, we continue to value Bajaj FinServ on the average of the two target prices ie the one arising out of factoring in the potential upside from the RBI circular and the other arrived at by excluding the impact of the circular on the company's valuation. We maintain our sum of the parts (SOTP) based target price of Rs600. We maintain our Buy recommendation on the stock. Torrent Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs680
Current market price: Rs578 Upgraded to Buy Result highlights -
Q2FY2012 results exceed expectations: The consolidated net sales of Torrent Pharmaceuticals (Torrent) for Q2FY2012 grew by 19.2% year on year (YoY) and 7.2% quarter on quarter (QoQ) to Rs657.8 crore as against our estimates of Rs619 crore. While the international business (up 32% YoY to Rs386 crore) reported 10% higher sales than our estimate, the Indian business (up 8% YoY to Rs295 crore) fell short of our expectation by 6%, largely due to weaker revenue from contract research and manufacturing services (CRAMS; down 2% YoY) and a stiff competition in the acute therapy segment (contributes approximately 29% of Indian branded formulations). However, due to a 156 basis point (bps) expansion in operating margins to 17.5% and foreign exchange (forex) gains of Rs18.9 crore, the reported profit after tax (PAT) grew by 31.2% to Rs100 crore. The adjusted PAT (adjusted for forex gains and extra-ordinary items) rose by 22.5% to Rs81.1 crore which is slightly lower than our estimates. -
H2FY2012 revenue from India to grow by approximately 15%: The revenue from India business grew just 6% to Rs295 crore mainly due to (1) a 2% Y-o-Y de-growth in the CRAMs business and (2) just an 8% Y-o-Y rise in branded formulations due to weaker sales in gastro-intestinal segments. In H1FY2012, the revenue from India grew 10% YoY to Rs603.6 crore. The gastro-intestinal segment is facing a stiff competition in the market. However, the management has indicated a 15% Y-o-Y rise in revenue from India during H2FY2012 on better contribution from the newly added field force. -
International business jumps 32% YoY; momentum to continue in H2FY2012: During the quarter, the revenue from international business grew by 32% YoY to Rs376 crore. The growth is primarily attributed to (1) 2 new product launches in the US leading to a 57% Y-o-Y rise in revenue to Rs51.5 crore (2) rationalisation of inventory channels (stock clearance by distributors in Q1FY2012) in Brazil helping to record a 31% Y-o-Y rise to Rs120 crore, (3) depreciation of rupee against major international currencies (at constant currency international business grew at 24% YoY). Going forward, we expect the growth momentum to continue in H2FY2012 with 4 new launches in the US, 3-4 launches in Brazil and an approximately 20% growth in the rest of world (RoW) business. -
Margin to remain stable in H2FY2012: During Q2FY2012 the operating margin (excluding other operating income) jumped by 156bps to 17.5%. The improvement in margin is mainly attributable to lower employee expenses (down 30bps to 16.6% of net sales), lower other expenses (down 70bps to 26.3%) and lower research and development (R&D) expenses (down 114bps to 31.7%) during the quarter. We expect the margin to remain stable at this level during H2FY2012.
Other operating income, which mainly constitutes exports incentives and forex gains, grew by 30.5% YoY to Rs25.6 crore. The net forex gain for the quarter stood at Rs18.93 crore. -
We revise revenue and profit estimates: A better than expected performance in international business and firm operating margins during H1FY2012 prompt us to revise revenue and profit estimates for FY2012 and FY2013. We have increased our revenue estimates for international business by 2% and 4% for FY2012 and FY2013 respectively. However, we have revised our estimate for revenue from Indian business downward by 4% and 3% for FY2012 and FY2013 respectively. -
Upgrade to Buy, revise price target to Rs680: With the new capacity at Sikkim contributing higher revenues and as the newly added field force starts contributing incremental revenues, the revenue growth momentum is likely to continue in H2FY2012. We expect a compounded annual growth rate (CAGR) of 17% and 23% for revenue and PAT respectively over FY2011-13. At the current market price of Rs574, the scrip trades at 14.5x and 12x FY2012E and FY2013E earning per share (EPS) respectively. We upgrade our rating on the stock to Buy with a price target of Rs680 (14x FY2013 estimated earnings).
SECTOR UPDATE Telecommunications Led by strong performance from Uninor; Net adds up 22.5% MoM -
For September 2011, the all-India GSM operators (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added 6.54 million SIM cards, taking the overall base to approximately 618.3 million. That is approximately an increase of 1.1% over the August figure. -
Incumbents' net additions continue to drift southwards: The aggregate subscriber net additions by the incumbents declined by 18.3% month on month (MoM) to 4.62 million subscribers in September from 5.66 million subscribers in August this year. This was the ninth consecutive month of lower net additions for the incumbent players (we consider Bharti Airtel; Idea Cellular, Vodafone Essar, Aircel, Loop and Bharat Sanchar Nigam Ltd [BSNL] as incumbents). -
Amongst new players Uninor shines bright: The aggregate subscriber base of the new players increased to 40.9 million in September from 39 million in August, primarily driven by the robust net additions of Uninor. For the month Uninor added around 1.92 million SIMs to its kitty taking its overall subscriber base to 29.7 million as against 27.7 million in August this year. The other players like Etisalat as well as STel posted decent net additions during the month.
VIEWPOINT Hero MotoCorp An impulsive ride turns compulsive -
Q2FY2012 was the first quarter when the rejuvenated "Hero" proved its mettle by initiating the most successful corporate rebranding exercise in recent times. The new Hero MotoCorp not only emerged stronger and vibrant, but also appeared more prepared to meet the global challenges. The management tone was confident and firm which was also reflected in the company's Q2FY2012 operating profit margin (OPM) that was the best in last five quarters. Hero MotoCorp is one of the few companies that skipped slowdown last time (2008) and in all probability may do the same this time too. -
Based on better guidance on volumes as well as costs we are raising our earnings per share (EPS) estimate for FY2012 by 6.8% to Rs120.7. The stock is trading at over 17x current year's earnings. The current valuation are closer to the higher end of the historical one-year forward price/earnings (P/E) band, and largely capture the long term sustainable growth of the business. | |
