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STOCK UPDATE Yes Bank
Recommendation: Buy
Price target: Rs510
Current market price: Rs383 Price target revised to Rs510 Result highlights -
Yes Bank's Q1FY2014 performance was above our estimate as the net profit grew by 38.2% year on year (YoY) to Rs400.8 crore. A strong growth in the net interest income (NII) and a treasury gain to the tune of Rs97 crore drove the overall growth in earnings. -
The NII of the bank grew by 39.6% YoY (3.3% quarter on quarter [QoQ]) led by a strong growth in the customer assets. The net interest margin (NIM) was stable at 3.0% on a sequential basis. -
The growth in advances including credit substitutes was at 24.2% YoY (excluding credit substitutes, the growth was at 24.3% YoY). The corporate advances grew by 23.1% YoY while the retail advances grew at a faster rate of 41.6% YoY. The deposits grew by 29.9% YoY on account of a robust growth in the current and savings account (CASA) deposits. The CASA ratio of the bank rose to 20.2% from 18.9% in Q4FY2013. -
A strong non-interest income growth compensated for the sharp rise in provisions (up 223.2% YoY). In Q1FY2014, the bank booked a treasury gain of Rs97 crore. Other streams like financial advisory and retail banking also posted a strong growth. The cost-to-income ratio inched up marginally to 38.3% from 37.7% in Q4FY2013. -
The asset quality deteriorated marginally in Q1FY2014 as the absolute gross non-performing asset (NPA) rose by 11.2% sequentially due to a couple of accounts to the tune of Rs25 crore that slipped into NPA. Consequently, the gross NPA rose by 2 basis points sequentially to 0.22%. However, the outstanding restructured book declined to Rs139.5 crore (0.29%) from Rs144.2 crore in Q4FY2013 (0.31%) on account of the upgrades. Valuation
Yes Bank's net earnings came in ahead of our estimate due to a higher NII growth and treasury gain. We believe the recent measures taken by the Reserve Bank of India (RBI) will not only raise the cost of funds for the banks but may also impact the advances growth. Though the bank's NIM has largely been stable, we expect the pressure on NIM to rise due to higher dependence on wholesale funds. Therefore, we have fine-tuned our estimate and revised our valuation multiple to 1.9x leading to a price target of Rs510. After the recent correction in the share price, the valuation seems reasonable; hence, we maintain Buy rating on the stock. United Phosphorus
Recommendation: Buy
Price target: Rs180
Current market price: Rs142 Results in line; margin improves Result highlights -
Revenues in line with expectation; driven by 7% increase in volume offtake: During Q1FY2014, the consolidated revenues of United Phosphorus Ltd (UPL) grew by a robust 10.5% to Rs2,456 crore as compared with Rs2,222 crore in Q1FY2013, while the reported profit after tax (PAT) for the quarter stood at Rs213 crore, which is a growth of 4.8% year on year (YoY) and includes a net foreign exchange (forex) loss of Rs41 crore. Adjusting to the net forex loss, the PAT stood at Rs254 crore, which was ahead of our as well as the Street's estimates. The revenue growth was aided by a higher blended realisation (2%) and currency benefit (2%) in addition to a 7% growth in the volume offtake, which was largely driven by a robust performance across the geographies except North America (due to a delay in sowing of corn and cotton because of the tough environmental condition). The hike in prices during the quarter was higher in the domestic market compared with other geographies. -
Margin aided by currency gain and better product mix: During Q1FY2014, the operating profit margin (OPM) improved marginally by 85 basis points YoY to 18.6%, thereby reversing the declining trend experienced in the margin in the past four quarters. This was largely on account of a better product mix and currency benefit. The gross debt in its balance sheet at the end of the quarter was around Rs4,200 whereas the net debt stood at Rs2,680 crore, which includes revaluation due to currency deprecation to the tune of Rs161 crore. During the quarter, the total cash generation was to the tune of Rs350 crore. -
Demand outlook positive across geographies; management maintains guidance: The demand environment for agrochemicals remains positive across the world on account of a favourable weather condition projected by different metrological departments. North American and the domestic markets are expected to play a key role in the revival of demand for agrochemicals as both the markets were witnessing an uneven weather pattern. The management has maintained its guidance of 12-15% growth in FY2014, which is largely in line with our estimate. The effective tax rate for FY2014 will be in range of 22-25%. The total capital expenditure (capex) plan for FY2014 is in the range of Rs400 crore. -
Valuation-retain Buy recommendation: UPL's decent Q1 results, a positive commentary by the management on the demand outlook this fiscal and an attractive valuation leave scope for rerating in the stock. Consequently, we maintain our positive stance on the company and retain Buy recommendation with a price target of Rs180.
SECTOR UPDATE Banking RBI tightens the noose; banks with low CASA (retail deposits) worst hit In the past couple of weeks, the Reserve Bank of India (RBI) announced several measures to curb the exchange rate volatility. The measures ranged from tightening of the liquidity (by capping the liquidity adjustment facility [LAF] borrowing to 1% of net demand and time liabilities [NDTL] and then revising it to 0.5% of NDTL on July 23) and raising rates (marginal standing facility [MSF] and bank rate hiked by 200 basis points on July 15). The RBI took further measures to tighten liquidity by virtually tightening the reserve ratios since it has asked the banks to maintain 99% of cash reserve ratio (CRR) requirement on daily average basis compared with 70% allowed earlier. These measures are likely to suck the liquidity to the tune of Rs90,000 crore and probably help the RBI's objective of reducing the speculation on currency. We believe these steps are quite stringent and will create serious liquidity deficit in the system. Bonds yields to rise; cost of borrowings to inch up for banks
While the RBI and the government have suggested that the measures are temporary, but we believe it could sustain longer, thereby exerting an upward pressure on rates. The short-term yields have gone up by about 140 basis points in the past fortnight while the 10-year benchmark has increased by 60-70 basis points to 8.2%. We believe this will lead to an increase in the funding costs for banks and non-bank financial companies (NBFCs), which will be difficult to pass on to borrowers given the sluggishness in the economy and corporate earnings. Further, the rise in the bond yields devoid the banks of treasury profits and they might even have to provide for depreciation on their investment book. Banks with weaker funding profile are likely to be impacted most
We believe the banks with weaker deposit profile and higher dependence on wholesale funds may even have to borrow from the MSF window at 10.25%. The deposit growth already remains weak and we expect some hardening in the deposit rates (mainly in shorter maturities), which should impact the net interest margins of banks. The advances growth will also suffer as higher interest rates and weak economic growth will deter borrowers. Within our coverage universe, banks like Corporation Bank, IDBI Bank and Yes Bank will face relatively higher pressure due to a lower current and savings account (CASA) ratio and a higher bulk funding. Asset quality concerns persist
Due to an adverse economic scenario, policy uncertainties and higher interest rates, the asset quality concerns are likely to persist, thereby raising the credit costs for banks. The measures taken by the RBI will also hit the economic growth and therefore will impact several sectors of the economy. We expect the loan impairment (slippages +restructured loans) to remain high in FY2014, especially, in case of public sector banks (PSBs). View-sector gets derated; avoid banks with weak deposit profile
The RBI in its forthcoming monetary policy review (July 30) is likely to maintain a hawkish stance. Though it is difficult to predict the timing of withdrawal of RBI's curbs, we believe it is likely to be there for some time (two to three months), which will have a collateral damage to the economy and the banking sector. Consequently, -
We have turned bearish on banks like Corporation Bank, IDBI Bank and Andhra Bank (despite low valuations), which have relatively weak deposit profile. -
We see scope for considerable downward revision in earnings and the price target of Yes Bank, Bank of India, Punjab National Bank, Allahabad Bank and Union Bank. Avoid bottom fishing in the new private sector banks space. -
HDFC Bank is the safe heaven among private banks; State Bank of India is better placed among the public sector banks.
VIEWPOINT Hero MotoCorp Demand pressure to sustain in near term Results highlights -
Hero MotoCorp Ltd (HMCL) Q1FY2014 results were broadly in line with our estimate. -
The realisation/vehicle at Rs39.502 per vehicle was 3.8% below our estimate on account of higher proportion of the entry-level bikes. The contribution/vehicle at Rs10,928 per vehicle was 5.5% lower than our estimate due to a poor mix. -
However, the higher material costs were offset by a lower other expenditure. The other expenditure/sales at 9.2% was 90 basis points lower than our estimate. HMCL reported an operating profit margin (OPM) of 14.9%, which is 40 basis points higher than our estimate. -
However, a higher taxation impacted the profit. HMCL reported a profit of Rs548.6 crore as against our estimate of Rs567.7 crore. Conference call highlights
Maintains two-wheeler industry growth forecast of 7-8% in FY2014
HMCL has maintained the two-wheeler industry growth forecast of 7-8% in FY2014. It expects H1FY2014 to remain lacklustre (the industry declined by 0.8% in Q1FY2014). HMCL is banking on the festive season to boost the demand in H2FY2014. Also, the low volumes in the corresponding period of the last year (October 2012 to March 2013) have created a favourable base for the industry in H2FY2014. Competition to intensify; HMCL likely to loose market share
With the launch of products at lower price points, Honda Motorcycles and Scooters India (HMSI) is planning to gain market share in the domestic market. It recently launched Activa-I in the scooter segment and Dream Neo (HMSI's cheapest bike in India) in the 100cc segment to enhance its presence. Further, with HMSI expanding its capacity, we expect HMSI to gain market share. Also, Bajaj Auto Ltd (BAL) has planned aggressive product launches (six motorcycles in the executive segment and two bikes in the premium segment) to gain market share in the motorcycle space. HMCL being the market leader is likely to loose market share given the strong product pipeline planned by the competition. Exports to gain traction with entry into new markets
HMCL expects the export volumes to pick-up as the company enters new markets for exports. Recently, HMCL commenced operations in Guatemala and Honduras in the Latin American market and Kenya and Ivory Coast in the African market. It plans to commence exports in newer markets such as Peru and Ecuador from August 2013, which would further boost the export volumes. HMCL plans to achieve volumes of 3.5 lakh units from export operations in FY2014. It has maintained a target of 1 million two-wheeler sales from exports by FY2017.
Valuation
For HMCL, we have assumed a 6% volume growth for FY2014 given the expectation of a mid-single digit growth for the industry. The margin is expected to decline marginally on account of the rupee's depreciation against the dollar. We have assumed a margin of 14.5% and 14.7% for FY2014 and FY2015 respectively. For FY2014, HMCL is likely to witness an increased tax rate on account of a reduction in tax benefit from its Uttarakhand plant and an increase in the surcharge in the Union Budget. We expect earnings per share (EPS) estimates of Rs108/share and Rs138.3/share for FY2014 and FY2015 respectively. We have a Neutral view on the stock.
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