| STOCK UPDATE Hindustan Unilever
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs388 A quarter of impressive performance Result highlights -
Strong operating performance: Hindustan Unilever Ltd (HUL)'s Q2FY2012 results were above our as well as the Street's estimates with the top line and bottom line growing by 18% and 22.0% year on year (YoY) respectively during the quarter. All segments posted a double-digit revenue growth, but the performance of the soap and detergent segment (which contributes around 47% to the total revenues) was the highlight of the quarter with around 22% revenue growth and improved profitability both YoY and sequentially. The only negative pointer could be the cut in the advertisement spend to show a better margin picture at the operating level. -
Volume-led top line growth: The top line grew by a strong 18.0% YoY to Rs5,522.0 crore with a volume-led growth of 9.8% and a price-led growth of around 8% during the quarter. The volume growth of 9.8% in Q2FY2012 showed a slight improvement over the volume growth of 8.3% in Q1FY2012. With strong rural demand on the back of a better monsoon and the management's focus on innovations and enhancing the distribution reach, we could see the volume growth inching up to a double-digit level in the coming quarters. Having said that, the high food inflation remains a key risk to the volume growth expectation. -
Gross margin remains under pressure: Though the prices of the key raw materials (palm oil, LAB and raw tea) have corrected from their highs the same remained higher on a year-on-year (Y-o-Y) basis in Q2FY2012. The price hikes implemented by the company were not enough to entirely mitigate the input cost pressure. Hence the gross profit margin (GPM) declined by 344 basis points on a Y-o-Y basis during the quarter. We expect the sequential improvement in the GPM to sustain in the coming quarters unless there is any significant upward movement in the prices of the key raw materials. Also, any further depreciation in the rupee would result in higher raw material (palm oil) prices in the coming quarters. -
Revision in estimates: We have revised our earnings estimates for FY2012 and FY2013 by 2.5% and 4.0% respectively to factor in the higher than expected revenue growth in the soap and detergent segment and the better than expected OPM. -
Outlook and valuation: We expect HUL's top line to grow at a compounded annual growth rate (CAGR) of 15% over FY2011-13 driven by a mix of sales volume and realisation-led growth. We expect the strong volume growth momentum to sustain (ranging between 9% and 12%) in the coming quarter. However, the high food inflation remains a key risk to the volume growth expectation. With the OPM standing in the range of 12.5%-13.0%, we expect the bottom line to grow at a CAGR of 17% over FY2011-13. Any significant surge in the raw material prices or increase in competition in the key segments would be a risk to our margin estimates.
At the current market price the stock trades at 33.6x its FY2012E earnings per share (EPS) of Rs11.6 and 28.8x its FY2013E EPS of Rs13.5. With the stock trading above its average one-year price/earnings (PE) multiple of 26.7x, we don't see any substantial upside from the current levels. Hence we maintain our Hold recommendation on the stock with the price target under review. Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs550
Current market price: Rs429 Asset quality disappoints Result highlights -
Corporation Bank's Q2FY2012 results came in ahead of our estimates as the earnings grew by 4.9% year on year (YoY; 14.2% quarter on quarter [QoQ]) to Rs401 crore majorly led by a robust growth in the non interest income during the quarter. The net interest income (NII) showed a subdued growth of 4% YoY and 5.1% QoQ in line with our estimates. The net interest margin (NIM) remained unchanged on a sequential basis at 2.43%. However, the asset quality of the bank deteriorated significantly as the gross and net non performing assets (NPAs) increased to 1.32% and 0.91% respectively as against 1.07% and 0.52% in Q1FY2012. Due to the low current account-savings account (CASA) ratio and subdued NIM the operating performance of the bank continued to remain weak. Further, the rising slippages continue to be a cause of concern and are reflected in the stock's valuation (0.7x FY2013E book value [BV]). We expect Corporation Bank's earnings to grow at a compounded annual growth rate (CAGR) of 8% over FY2011-13. We maintain our Buy rating on the stock with a price target of Rs550. -
NII growth in line with estimates: The NII of the bank was in line with our estimates as it grew by 4% YoY and 5.1% QoQ. Corporation Bank's advances growth was below the industry levels as they grew by 17% YoY and 3.5% QoQ. The small and medium enterprise (SME) advances witnessed a strong growth of 57.4% YoY (7.3% QoQ) whereas the retail advances showed a robust growth of 28.4% YoY (5.8% QoQ). However, agriculture advances witnessed a decline of 16% YoY (3.1% QoQ). Led by an increase in term deposit rates, the deposits of the bank grew by a robust 24.4% YoY and 2.4% QoQ. -
NIM remains stable at 2.43%: The NIM of the bank remained stable at 2.43%, in line with that of Q1FY2012. The yield on advances grew by 60 basis points (bps) sequentially to 11.75% whereas the yield on investments for the bank expanded by 10bps sequentially to 7.78%. However, the increase in the cost of deposits by 29bps sequentially to 7.56% offset the benefit of the increase in the yield on advances and investments for the bank. The CASA ratio of the bank also increased by 80bps to 21.8%, but remains the lowest amongst the peer banks. -
Uptick in treasury profits boost non interest income growth : The non interest income of the bank grew by a robust 76.3% YoY and 37.6% QoQ to Rs399 crore led by a robust growth in the treasury income. The treasury income of the bank was reported at Rs123.3 crore in Q2FY2011 as against Rs4.5 crore in Q2FY2011 and Rs34.3 crore in Q1FY2012. The income from foreign exchange transactions also grew by a robust 70.8% YoY and 38% QoQ while the fee income grew by 22.1% YoY and 6.7 % QoQ. -
Asset quality disappoints: The asset quality of the bank deteriorated during the quarter as the gross and net NPAs of the bank grew to 1.32% and 0.91% respectively as against 1.07% and 0.52% in Q1FY2012. The bank has recorded incremental slippages of Rs510 crore (2.3% of opening advances) as against Rs155 crore in Q1FY2012 primarily due to migration to system based NPA recognition. Also, the reductions of the bank were majorly led by write offs (Rs292 crore in H1FY2012). Due to a rise in the NPAs the provision coverage ratio (PCR) of the bank declined to 64.7% from 74.9% in Q1FY2012. -
Capital Adequacy Ratio: The capital adequacy ratio of the bank stood at 13.58%. The tier I capital stood at 8.36% and the tier II capital stood at 5.22%. -
Outlook: Due to a low CASA ratio and subdued NIM the operating performance of the bank continues to remain weak. In addition, a rise in the NPAs will impact the business growth and volatility in earnings. We expect Corporation Bank's earnings to grow at a CAGR of 8% over FY2011-13. Currently the stock trades at 0.7x FY2013E BV and reflects a weak earnings growth and asset quality pressures. We retain our Buy rating with a target price of Rs550 (0.85x FY2013E BV). Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,150
Current market price: Rs1,013 Steady performance but asset quality concerns remain Result highlights -
During Q2FY2012, Punjab National Bank (PNB) reported a higher than estimated growth in net profits to Rs1,205 crore, an increase of 12.2% year on year (YoY). This was driven by a healthy growth in the net interest income (NII; 16% YoY and 10.8% quarter on quarter [QoQ]) and relatively lower provision expenses. The bank provided Rs161 crore on investment depreciation against the requirement of Rs51 crore. The advances growth was slightly subdued as it grew by 15% YoY while the deposit growth was quite strong at 25% YoY aided by inflow of term deposits (up 7% QoQ). The net interest margin (NIM) swelled 11 basis points (bps) QoQ to 3.95% due to a sharp increase in the yields. The asset quality broadly remained stable as gross non performing assets (NPAs) inched up 5bps QoQ to 2.05%; however the slippages got offset by a strong growth in recoveries. The restructured advances increased to 8.3% of advances as the bank restructured Rs2,150 crore worth of loans (including a Rs1,750 crore loan of the Tamil Nadu Electricity Board [TNEB]). Though PNB continues to post a healthy operating performance, higher restructured advances and exposure to sensitive sectors (power, commercial real estate) could levy a pressure on the asset quality. We expect PNB's earnings to grow at a compounded annual growth rate (CAGR) of 14% over FY2011-13, leading to a return on equity (RoE) of around 21%. We maintain our Buy rating with a price target of Rs1,150. (1.3x FY2013 BV). -
NII up 16% YoY; growth in advances flattish: The NII increased by 16% YoY and 10.8% QoQ driven by an expansion in the margins. The advances growth was slightly subdued, showing a growth of 15% YoY, due to repayment of short terms advances. Based on segment wise growth the overseas advances grew 66% YoY while corporate advances grew 24% YoY. The small and medium enterprise (SME) and agri segments showed a growth of 17.8% and 9% respectively. The management has guided for a loan growth of around 20% for FY2012. -
Strong growth in deposits, CASA ratio slips: The deposits grew by 25.5% YoY and 5.5% sequentially mainly driven by terms deposits. During Q2FY2012 the term deposits expanded by 7.4% QoQ compared to a 5.5% QoQ growth in the overall deposits. However CASA deposits declined to 36.3% compared to 37.4% in Q1FY2012. -
Margins up 11bps QoQ to 3.95% on higher yields: Led by a sharp increase in the loan yields (54bps QoQ) the NIM expanded by 11bps QoQ to 3.95%. The bank hiked its lending rates during the quarter which led to a rise in the yield on advances to 11.92% from 11.38% in Q1FY2012. However the cost of funds increased by only 10bps to 5.44% in the similar period. Since the CASA ratio of the bank declined, the interest outgo on savings deposits could increase (deregulation of savings rate); these could lead the margins to decline from the current levels. -
Slippages trend down...: The asset quality broadly remained stable as gross NPAs increased by 5bps QoQ to 2.05% while net NPAs were at 0.84% (compared to 0.88% in Q1FY2012). This was mainly due to a strong growth in recoveries and upgradations (Rs719 crore). The slippages also were lower compared to the past several quarters at Rs993 crore (1.6% of opening advances). The bank set aside investment provision over and above the actual requirement and hence is protected upto an 8.6% rise in the benchmark yields. -
...but restructured advances inch up: During the quarter, the bank restructured Rs2,150 crore of advances (Rs1,750 crore belong to TNEB) leading to an increase in the restructured advances to Rs19,966 crore (8.3% of the advances). The bank's exposure to state electricity boards is around Rs78,000 crore. The bank expects slippages from the restructured advances to be in the range of 10-15%. -
Steady growth in core fee income: The core fee income of the bank increased by 26% YoY contributed by a strong growth in the exchange and remittance incomes. The treasury profits increased by 39% YoY to Rs53 crore leading to an overall non interest income growth of 24% YoY. -
Outlook: PNB delivered a superior performance in Q2FY2012 led by a healthy core performance. The margins expanded despite cost pressures while the fee income showed a strong growth. The management has guided at a slippages run rate of around Rs1,000 crore per quarter which would be offset by a strong growth in recoveries. However, a rise in the restructured advances and exposure to sensitive sectors (power, commercial real estate) could bring the asset quality under pressure. We expect PNB's earnings to grow at a CAGR of 14% over FY2011-13E, leading to a RoE of around 21%. We maintain our Buy rating with a price target of Rs1,150. (1.3x FY2013 BV). Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs364
Current market price: Rs274 Super operating performance Result highlights -
Q2FY2012 results outpace our estimates: For Q2FY2012 Ipca Laboratories (Ipca) reported a 19.2% year-on-year (Y-o-Y) and 16.6% quarter-on-quarter (Q-o-Q) rise in net sales to Rs618 crore, which was ahead of our estimate of Rs584 crore. The growth was mainly powered by a 40% Y-o-Y rise in exports on account of an impressive uptake in the institutional business. The operating profit margin (OPM) jumped by 190 basis points year on year (YoY) to 24.7%, mainly due to a lower employee cost (on account of the reversal of certain provisions made earlier) and a better product mix. However, due to a foreign exchange (forex) loss of Rs27.2 crore (vs a forex gain of Rs28.38 crore in Q2FY2011) the reported profit after tax (PAT) declined by 17% YoY but rose by 26.3% quarter on quarter (QoQ) to Rs77.9 crore. -
Institutional sales power export growth, guidance revised: The institutional sales jumped by 243% YoY to Rs91 crore in Q2FY2012 and by 366% YoY to Rs144 crore in H1FY2012. The management has indicated better traction in the institutional business which will lead to sales of Rs250 crore (earlier estimate Rs220 crore) in FY2012 and that of Rs300 crore in FY2013. The company is expected to get the approval of one more combination anti-malarial product by the end of CY2011 which should give further upside to the revenue in this segment. -
We fine-tune earnings estimates: We marginally decreased our earnings per share (EPS) estimates for FY2012 and FY2013 to factor in the higher interest cost (due to the high cost of rupee denominated debts) and the higher effective tax rate (due to the higher component of deferred tax) expected in H2FY2012. Our new EPS estimates are lower by 2% and 5% for FY2012 and FY2013 respectively. -
Maintain Buy with price target of Rs364: The current market price of the stock discounts 11.9x and 9.8x FY2012E and FY2013E earnings. We maintain our Buy recommendation on Ipca with a price target of Rs364 (implies 13x FY2013E EPS).
SECTOR UPDATE Automobiles Pit stop ahead! Auto volumes missed the festive buzz and reported only a modest growth in the peak festive month of October 2011. Even as the auspicious days bunched in October this year, the growth across segments was just modest against the corresponding month of the previous year.
VIEWPOINT Nava Bharat Ventures With merchant power out of steam, focus on global operations Nava Bharat Ventures (NBV) reported mixed sales numbers with a 10% decline year on year (YoY) but a 9% growth quarter on quarter (QoQ). The net sales reported at Rs258 crore were 3% better than estimated as higher than expected ferro alloy volume (up 38%) more than compensated for the lower sales in the power business. The company's sales declined by 10% YoY as both power and ferro alloy sales declined by 16% and 18% respectively. This drop in sales would be attributed to a decline in the volume in the two segments (down 13% in power and 14% lower in ferro alloy). On a sequential basis, a 14% volume growth in the ferro alloy business pushed the revenue growth to 9%. A flattish realisation was witnessed sequentially in the ferro alloy segment while the blended power realisation remained 1% lower sequentially. Sugar sales grew by 80% YoY and 1% QoQ to Rs28 crore in the same quarter. Valuation: At the current market price, the stock is trading at 7x its FY2012 and 6x FY2013 estimated earnings. It is available below its book value. This reflects that the current stock price factors the multiple head winds faced by the company, namely depressed margin in the merchant power business (a combination of lower merchant rates and higher coal cost) and uncertainty regarding projects. Now, the coal mining-cum-power project in Zambia remains the key development to watch out for as it alone could add more than Rs100-150 crore of value to NBV's bottom line going forward if the company manages to sell the targeted coal of 1 million tonne annually. However, we opine that only on-time targeted execution proof of coal mining in Zambia can bring these possible developments in the stock price. |
