Stock Views on Hero Honda, Canara Bank, Ahok Layland

EMKAY on Hero Honda

EMKAY maintains a ‘buy’ rating on Hero Honda. The company’s Q2 FY09 results were in line with expectations. While net sales, at Rs 3,200 crore (yo-y growth of 36%), were in line with estimates, EBIDTA at Rs 440 crore (yo-y growth of 49%) was ahead of expectations by around 4%. However, significantly higher tax provision (Q2 FY09 tax rate was 32%, against expectation of 24%) resulted in net profit of Rs 310 crore (y-o-y growth of 51%), which was below expectation by 2%. The higher tax rate is due to reduction in target production at the company’s Haridwar plant from 750,000 to 600,000 units. The required residual growth in FY09 and declining raw material prices warrant volumes/earnings upgrade in FY09, as well as FY10. However, considering the cautious stand adopted by the management, Emkay is leaving its estimates unchanged as of now.

CLAS on Canara Bank

CLSA maintains ‘underperform’ rating on Canara Bank as the RoE is likely to be capped at ~12% for FY09-10 due to the sharp increase in loan loss provisioning costs. Canara Bank reported a 46% y-o-y growth in topline, led by 26% y-o-y loan growth and margin expansion of 24 basis points to 2.7%. Margin expansion was a reflection of: a) improving pricing power and increase in lending rates; and b) repayment of high cost deposits by Canara Bank in the previous year, which reduced cost of deposits from 6.8% in Q2 FY08 to 6.6% in Q2 FY09. Despite loan growth being sustained at +20% and margins likely to expand further, earnings growth in coming quarters and in FY10 will remain muted as Canara Bank will need to provide for: a) higher wage costs under the new wage settlement; and b) loan loss provisions as delinquencies pick up, since the bank has no cushion due to its dismal coverage levels. As a result, RoE is likely to remain at ~12%, justifying Canara Bank’s low price-to-book multiple of 0.7x FY10 book.

Citigroup on Ahok Layland

CITIGROUP maintains ‘sell’ rating on Ashok Leyland and revises the risk rating to ‘medium’ because growth prospects for the company appear limited, and a rising capital outlay poses risks. Fundamentally, the key reasons for a healthy growth outlook in commercial vehicles include a sustained pick-up in economic activity, focus on infrastructure spending and a strong replacement cycle. Moreover, growth in agriculture, infrastructure and manufacturing sectors — all of which have positive linkages to the freight business — should remain positive over the long term. However, the near term looks challenging for Ashok Leyland due to sharp increase in interest rates, which will affect demand. A slowdown in the economy will also lead to a slowdown in the investment cycle, which will impact Ashok Leyland’s profitability. The 12-month target price of Rs 19 for the company is based on 4x March 10E consolidated EPS, based on trough valuation multiples to reflect slower-than-expected earnings growth.