Fw: Investor's Eye: Update - SBI (PT revised to Rs3,115); Special - Q1FY2011 Pharma earnings review

 

 

Investor's Eye [August 13, 2010]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE  State Bank of India Cluster: Apple Green Recommendation: Buy Price target: Rs3,115 Current market price: Rs2,850 Price target revised to Rs3,115 Result highlights Bottom line beats expectations: For Q1FY2011 State Bank of India (SBI) reported a net profit of Rs2,914.2 crore, up 25.1% year on year (yoy). The outperformance can be traced to a higher than expected top line and contained opex (due to write-back of excess wage hike provision. Meanwhile gross slippages were high leading to a 6.6% sequential increase in the gross non-performing assets (GNPAs).  NIM expands sequentially: The reported net interest margin (NIM) stood at 3.18% up 22 basis points sequentially. The improvement in the NIM was led by an improvement in the cost of deposits due to a superior current account and savings account (CASA) ratio coupled with a higher deployment rate.  Higher slippages: The gross slippages during the quarter stood high at Rs4,081 crore of which around Rs574 crore was realised as non-performing assets (NPAs) after the expiry of the agri debt waiver scheme. The management expects incremental slippages to come off going forward. PCR improves: The provision coverage ratio (PCR) improved by 247 basis points sequentially to 60.7% (including the technical write-offs). Considering the extension of the deadline to September 2011, the bank should be able to reach the stipulation of 70%.  Strong advances growth: In Q1FY2011, SBI?s advances grew by a strong 20.7% yoy to Rs663,828 crore. The growth in the advances was led by a growth in the large corporate and retail segments. During the quarter the bank disbursed around Rs7,000 crore to telecommunications (telecom) companies. Meanwhile, the deposits grew at a much slower pace of 6.8% yoy, implying a 165-basis-point sequential expansion in the deployment rate. The slow growth in deposits was due to the bank?s efforts to reduce the bulk deposits. The CASA deposits grew by a strong 32% yoy, leading to an 84-basis-point sequential increase in the CASA ratio to 47.5%.  Maintain Buy with revised price target of Rs3,115: SBI has reported a robust Q1FY2011 performance led by a strong growth in advances, expansion in margins and lower operating expenses. Although the asset quality concerns persisted during the quarter with gross slippages higher than that in the previous quarters, yet it is likely that the same shall improve going forward as the bank booked all NPAs arising out of the agri debt waiver scheme during Q1FY2011. We maintain our positive stance on the bank in view of its increasing CASA base, improved cost-to-income ratio and expanding NIM. At the current market price of Rs2,850 the stock trades at 11.9x its FY2012E earnings per share (EPS), 5.9x its FY2012E pre-provisioning profit (PPP) and 2.1x its FY2012E book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs3,115.  SHAREKHAN SPECIAL Q1FY2011 Pharma earnings review  Most pharmaceutical companies under Sharekhan?s coverage reported a strong Q1FY2011 led by a robust performance in the export business (one-time exclusive revenue in Sun Pharmaceuticals [Sun Pharma] and Glenmark Pharmaceuticals [Glenmark]) and no major extraordinary items (limited foreign exchange [forex] losses). Select geographies like Russia, Germany and France grappled under the adverse currency movements. We expect a revival in the export formulation business on the back of an increased focus on branded and niche products, and huge abbreviated new drug application (ANDA) pipeline, particularly for companies like Sun Pharma, Lupin and Glenmark in FY2011. The domestic formulation business resumed normalcy in this quarter and the buoyant growth witnessed in the quarter was partially on a low base of the corresponding quarter of the last year (Q1FY2010). We expect a similar robust growth trend in Q2FY2011 as well as across FY2011 due to a low base throughout the previous fiscal. The operating profit margin (OPM) of all the pharmaceutical companies under Sharekhan?s coverage has been pretty strong led by a better product mix (improved gross margins).  Improving balance sheet and working capital cycle has been the mantra of the quarter. Most companies under our coverage showed a positive bias towards de-risking their balance sheets as the interest costs declined by 32.6% year on year (yoy) during the quarter. The mid-caps continue to outperform with another strong quarter. Our result picks, Glenmark, Lupin and Sun Pharma, delivered a strong growth as compared to their peers. We expect Glenmark and Ipca Laboratories (Ipca) to perform well considering their inexpensive valuations and the steady nature of their core business. However, a slow ramp-up in the key products and a delay in product approvals could act as dampeners for Lupin in the near term.   Click here to read report: Investor's Eye Attention:  As per SEBI guidelines, clients who want to transact in the Futures & Options segment are required to submit proof of Financial Details. Kindly contact the nearest Sharekhan branch for more information or check the pop-up banner on our website, www.sharekhan.com.

Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions