| Summary of Contents
SHAREKHAN SPECIAL Q2FY2013 Banking earnings review
Asset quality concerns persist, operating performance also tapers for PSBs Key points -
Earnings below estimates due to weak performance of PSBs: During Q2FY2013, Sharekhan's banking universe reported an earnings growth of 14.4% YoY (9.4% quarter on quarter [QoQ]; ex State Bank of India [SBI]), which was lower than our estimate. The lower growth was due to a disappointing performance by the public sector banks (PSBs), which reported a decline of 5.3% YoY in earnings (ex SBI). However, the private sector banks continued to report a strong performance as the earnings grew by 27.5% YoY (6.1% QoQ). -
Operating performance comes under pressure: The operating performance of the banks weakened as the net interest income (NII) grew by 11.3% YoY, slightly lower than our estimate. The NII growth for the PSBs was merely 7.6% YoY while the private banks showed a growth of 25.7% YoY. The net interest margins (NIMs) declined on a quarter-on-quarter (Q-o-Q) basis for most PSBs due to rate cuts and interest income reversals on the non-performing assets (NPAs). -
Asset quality stable for private banks but it continues to deteriorate for PSBs: During Q2FY2013, the slippages continued to rise for the PSBs (especially Bank of India [BoI], Punjab National Bank [PNB] and Allahabad Bank), leading to a rise in the NPAs on a Q-o-Q basis. The restructured assets also expanded across the PSBs, though at a slower pace. The private banks were able to maintain their asset quality. -
Outlook-challenges in plenty, remain selective: Going ahead, we believe the pressures remain on the asset quality and business growth fronts due to the sharper than expected slowdown in the economy. We believe that the private banks are likely to outperform the PSBs and maintain a decent earnings growth and asset quality. We prefer ICICI Bank (strong operating performance and asset quality) and Federal Bank (attractive valuation and structural improvement in balance sheet) among the private banks and SBI (reasonable valuation and relatively better growth in core income) among the PSBs. Q2FY2013 earnings review
Earnings growth largely in line with growing number of positive surprises Key points -
Earnings slightly ahead of estimates: On an aggregate basis the earnings of the Sensex companies grew by 4.3% year on year (YoY; 12.9% ex oil companies) in Q2FY2013 which was slightly ahead of our estimate. This was mainly driven by a better than expected performance from the private banks as well as the fast moving consumer goods (FMCG) and pharmaceutical (pharma) companies. However, sectors like metal, power and telecommunications (telecom) largely disappointed on the earnings front. -
Top performers and losers: Thirteen companies out of the 30 companies in the index showed a year-on-year (Y-o-Y) decline in their profit but the extent of the surprise was lower compared with the previous quarters. Companies like HCL Technologies (HCL Tech), Sun Pharmaceutical Industries (Sun Pharma), Cipla, Maruti and NTPC delivered a positive surprise on the earnings front. However, the major disappointments came from companies such as Tata Steel, SAIL, Tata Power and Bharti Airtel. -
Revenue growth turns sluggish: The aggregate revenues of the Sensex companies grew by 11.7% YoY, in line with our expectations. The growth was the lowest in several quarters. Despite the positive impact of the rupee's depreciation in some sectors (information technology [IT], pharma etc), the revenue growth turned sluggish contributed by a general slowdown in the economy. The growth in the revenues was led by the pharma, IT services and telecom sectors. The private banks continued to post a healthy performance though State Bank of India (SBI)'s top line growth was affected by a sharp decline in its net interest margin (NIM). -
Margin pressure continues: During Q2FY2013, the EBITDA margin of the Sensex companies (ex banks) declined to 17.2% (vs our estimate of 17.8%) from 19.9% in Q2FY2013. Maximum stress was seen in the oil & gas and telecom stocks as well as Reliance Industries Ltd (RIL). The decline in the output of the high-margin gas production business significantly dented RIL's profitability during the quarter. However, the EBITDA margin in the pharma and IT sectors showed a marginal expansion as compared with Q2FY2012. -
Outlook-earnings growth holding up for large companies: Despite a tough macro-economic environment, the earnings growth of the Sensex companies is holding up with more positive than negative surprises. However, the same is not true for the broader market with many mid-sized companies struggling with difficult business conditions. The good news is that the incremental downgrades in the consensus earnings estimates have slowed down (~1% in Q2FY2013) and are largely confined to a few troubled sectors. The consensus expectation is of an earnings growth of 8-10% in FY2013 and that of close to 14% in FY2014 which seem achievable. However, the expectation of a pick-up in the earnings is built on the consensus expectation that the Reserve Bank of India (RBI) would cut the interest rates by 100-125 basis points over the next four quarters. Moreover, the global uncertainties and volatility in commodity prices also pose a risk to the consensus earnings estimate.
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