| STOCK UPDATE Aditya Birla Nuvo
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs954 Strong performance; insurance business drives earnings Result highlights -
Strong Q2FY2012 performance: Aditya Birla Nuvo Ltd (ABNL) reported strong Q2FY2012 results with the consolidated net revenue, operating profit and adjusted profit growing at 17.8%, 25% and 11.6% respectively on a year-on-year (Y-o-Y) basis. A strong growth in the fertilisers and agri business (+34.7% year on year [YoY]) followed by telecom (+26.6%) and the fashion & lifestyle business (+24.1% YoY) led the revenue growth, Efficiency and cost management efforts in the life insurance and the telecom businesses resulted in a strong operating performance. The life insurance business posted an over 4.6x increase in profitability from a mere Rs22.5 crore in Q2FY2011 to Rs105 crore in the quarter under consideration while the telecom business' profitability was up 37.2%. -
Efficiency in life Insurance business led by growing in-force book and lower new business strain - strong outlook ahead: In line with the industry trend, the new business premium for Birla Insurance also showed a deceleration of 14% on a Y-o-Y basis. However for September, the business reported a strong 58% Y-o-Y growth in the new business premium, which is a result of the waning base effect. Last year, effective September 1, 2010, the new ULIP guidelines came into force, that resulted in a deceleration in the new business premium. Now that base is waning. High persistency (13 month persistency at 82%), a growing in-force book and a lower new business strain led to a significant uproar in the profitability. The net profit showed an around 5x fold rise from a mere Rs20 crore in Q2FY2011 to Rs97 crore in Q1FY2012.
Going forward, we believe that H2FY2012 is likely to witness a good growth in the new business premium. Thus we have built in in our estimates a 7% growth for FY2012. The management remains confident of the medium to long term growth trajectory of the business and has guided for a steady and stable new business achieved premium (NBAP) margin of 20-21%. For the full year FY2011 the insurance arm's NBAP margin was amongst the highest in the industry at 27.5% with the exit margin at 22%. -
Maintain Buy: Given the diverse businesses of ABNL, the company is best valued using the sum-of-the-parts (SOTP) method. Looking at the robust and resilient performance of the key segments we continue with our bullish stance on the company and maintain our Buy rating with a target price of Rs1,050. Divi's Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,047
Current market price: Rs762 Growth momentum continues Result highlights -
Q2FY2012 results in line with expectation: Divi's Laboratories (Divi's) reported a 39.8% year-on-year (Y-o-Y) rise in net sales to Rs354 crore in Q2FY2012, which is 4% higher than our estimate of Rs341 crore. The operating profit margin (OPM) improved 220 basis points (bps) YoY to 35.6% (although it stood at the same level as in Q1FY2012), which is exactly in line with our expectation. However, a 139% year on year (YoY) rise in other income led the profit before tax (PBT) to jump by 65% YoY to Rs133 crore during the quarter. The effective tax rate increased to 20.4% (vs 9.4% in Q2FY2011), presumably due to minimum alternate tax (MAT) provisions on special economic zone (SEZ) units. As a result, the net profit after tax (PAT) jumped by 45% YoY to Rs106 crore during the quarter. -
High base effect to impact H2FY2012 growth: We expect a slower revenue growth (15% YoY) in H2FY2012 mainly due to the high base (due to bunching of certain orders in Q4FY2011). The H2FY2012 PAT would be impacted by higher tax provisioning (~10% in H2FY2012 vs 9% in H2FY2011). We expect a PAT growth of 8% to Rs298 crore in H2FY2012. -
Growth momentum continues in H1FY2012, expect slower H2FY2012: During H1FY2012, the net sales grew by 38% YoY to Rs712.6 crore. The Q2FY2012 revenue growth is indicative of the continues pick up in the contract research and manufacturing services (CRAMS) business. However, due to the higher base effect, H2FY2012 growth is likely to be slower at 15%.
In fact, Divi's reported a 63% and 53% YoY surge in revenue in Q3FY2011 and Q4FY2011 respectively, presumably due to bunching of certain orders in the quarter. -
Maintain Buy: The stock is trading at 20x and 16x FY2012E and FY2013E earning per share (EPS) respectively. We maintain our Buy rating on the stock and target price of Rs1,047 (which implies 22x FY2013E EPS). Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs230
Current market price: Rs161 Strong growth in core income Result highlights -
Allahabad Bank's Q2FY2012 results were ahead of our expectations as the net earnings of the bank grew by 21.1% year on year (YoY; 16.7% quarter on quarter [QoQ]) to Rs488 crore led by a strong growth in the net interest income (NII) and a lower tax rate. The NII of the bank grew by 35.9% YoY and 12.1% QoQ led by a sharp sequential jump in margins (28bps QoQ to 3.68%). The advances growth was relatively lower (16.6% YoY) while deposits expanded by 25% YoY. The asset quality of the bank fared better compared to peer banks as gross and net non performing assets (NPAs) grew to 1.77% and 0.69% respectively as against 1.62% and 0.6% in Q1FY2012. Allahabad Bank has delivered a strong growth in its core operation and performed reasonably well on the asset quality front. We expect the earnings of the bank to grow at a compounded annual growth rate (CAGR) of 25% over FY2011-13 led by a 21% CAGR growth in advances. We maintain our Buy rating on the stock with a target price of Rs230. -
NII growth above our estimate: During Q2FY2012 the NII of the bank was above our expectations as it grew by 35.9% YoY and 12.1% QoQ to Rs1,318 crore. This was majorly led by a strong growth in the net interest margin (NIM) which expanded by 28 basis points (bps) QoQ to 3.68%. The advances growth during the quarter was below the industry average as the bank focused on reducing the short term low yielding advances. The small and medium enterprise (SME) advances grew by 43.4% YoY, retail advances grew by 20.4% YoY whereas the agriculture advances grew by 4.4% YoY. The management has guided at the bank's advances growing at a 4-5% higher rate than the industry rate. -
NIMs up 28bps on sharp increase in yields: The NIM of the bank grew by 28bps sequentially to 3.68% primarily driven by a sharp jump in the yield on advances. During the quarter the yield on advances expanded by 98bps sequentially to 12.56% as against 11.58% in Q1FY2012. This was due to re-pricing of advances and also on account of the bank reducing its exposure to short term advances. However, the cost of deposits of the bank grew only by 11bps sequentially to 7.12%. The current account savings account (CASA) ratio however was relatively lower at 30.6% compared to 34.4% in Q1FY2012. -
Muted non-interest income growth: The non interest income of the bank declined by 10.3% YoY but grew by 8.1% QoQ due to a decline in treasury profits and lower growth in miscellaneous income. While the fee income grew at a healthy rate (20.4% YoY and 23.9% QoQ), the treasury income declined by 81% YoY to Rs7 crore as against Rs38 crore in Q2FY2011. The miscellaneous income of the bank also declined by 51% to Rs46 crore thereby contributing to a slower growth in the non interest income. -
Recoveries ease asset quality pressures: The asset quality of the bank deteriorated sequentially although it was better than the other peer banks. The gross and net NPAs of the bank grew to 1.77% and 0.69% respectively as against 1.62% and 0.6% in Q1FY2012. The provision coverage of the bank remained stable at 79.6%. The slippages during the quarter were Rs520 crore (2.2% of opening assets) majorly due to shifting over to system based NPA recognition; however the strong recoveries supported in easing the likely pressure on the asset quality. The bank restructured Rs477 crore worth of loans during the quarter, taking the total restructured book to Rs2,941 crore (3.1% of advances). -
Provision expenses rise: The provision expenses of the bank jumped by 51.6% YoY and 28.8% sequentially led by a steep jump in the provisions for NPAs (Rs302 crore vs Rs166 crore in Q1FY2012) whereas the depreciation on investment grew from Rs4 crore in Q2FY2011 to Rs82 crore in Q2FY2012. The tax rates were lower during the quarter as the bank availed to exemptions under various categories of lending. The bank also expects to receive Rs300 crore of tax refund for previous years and hence we have assumed a lower tax rate for FY2012. -
Capital Adequacy Ratio: The capital adequacy ratio of the bank stood at 12.99% as against 12.75% in Q1FY2012 and the tier I capital stood at 8.93% as against 8.55% in Q1FY0212. The bank has also approached the Government of India for fresh capital infusion of Rs1,000 crore. -
Outlook: Allahabad Bank's Q2FY2012 performance was characterised by a strong growth in NII and a relatively better performance on the asset quality front. While Allahabad Bank's advances could grow higher than the industry rate, the margins will decline from the current levels due to a lower CASA ratio and limited pass through of rate hikes. The management is confident of maintaining the asset quality despite a higher exposure to the power sector (14.2% of advances). We believe Allahabad Bank will deliver a stronger growth compared to its peer banks, though the asset quality could see some pressure if the macro environment weakens. Currently, the stock trades at an attractive valuation of 0.7x FY2013 book value (BV). We expect the earnings of the bank to grow at a CAGR of 25% over FY2011-13. We maintain our Buy rating on the stock with a price target of Rs230 (1.0x FY2013 BV estimate).
SECTOR UPDATE Cement Seasonal weakness In the quarter ended September 2011, the earnings growth of large cement players like ACC, Ambuja Cements and UltraTech Cement (UltraTech) was marginally below the Street's estimates. The revenue growth of the companies was supported by a growth in the volume, and equally by an increase in the average realisation. However, the cost push primarily in terms of increase in the power & fuel cost and freight cost has largely offset the positive impact of an increase in the realisation. Further due to the monsoon season all the three companies witnessed a sharp fall in their average realisations on a sequential basis. Going ahead we expect the cement players to post a sequential growth in their earnings. |
