Stock Views on Federal Bank, NTPC, Nalco

GOLDMAN SACHS on NTPC

Goldman Sachs maintains its earning estimates of NTPC and `Buy’ rating on the stock. The 12-month target price of Rs 208 is the value of its FY2010E financial assets (Rs 37/share) plus the value of its operating assets using a residual income (RI) model (Rs 171/share). India’s central electricity regulator (CERC) has announced the final tariff norms for generation and transmission projects for FY2010-14. Takeaways for NTPC -
[1] Minimum regulated post-tax ROE (return on equity) raised from 14% to 15.5% (16% in case of new projects completed within prescribed time).
[2] Benefit of tax holidays to be retained, but tax on incentives will not be a pass-through.
[3] Fixed-cost recovery linked to ‘plant availability’ and not utilisation rate (PLF or plant load factor).
[4] Option to avail R&M (repairs and maintenance) allowance for more than 25-year-old units. [5] Normative levels for operational and working capital parameters have been tightened.
[6] Depreciation rate for tariff setting largely aligned with accounting norms.

Prima facie, CERC’s final tariff norms for FY10-14 are neutral-to-positive for NTPC’s earnings outlook; consensus expected them to be neutral-to-negative. We maintain that
[1] effective tax rate and,
[2] economic life of projects, are critical parameters to assess NTPC’s profitability during FY10-14.

CITIGROUP on FEDERAL BANK

Citigroup maintains `Buy’ rating on Federal Bank. However, it revises the price target down to Rs 215 from Rs 270. Federal Bank reported a strong P&L quarter in 3Q09, with high NIMs (net interest margins) of over 450 bps, core fee income growth over 90%, trading and bond portfolio gains, and relative cost moderation (excluding one-offs). However, the balance sheet was under pressure, with high asset deterioration and loan-loss provisions. Overall, a mixed quarter - a resilient P&L but marked by increasing asset risks. Federal Bank’s loan book comprises 36% SMEs (small and medium enterprises) and 32% retail, both of which have seen significant pressures over the last couple of quarters, and contribute to the bulk of the deterioration in asset quality. Incremental slippages increased to about 1.4% of loans in 3Q09, meaningfully above its larger peers. Citigroup increases FY09E earnings by 28%, to incorporate gains on the bond portfolio, but reduces FY10E and FY11E earnings by 21% and 31% respectively, reflecting significantly higher loan-loss provisioning costs.

DEUTSCHE BANK on NALCO

Deutsche maintains `Sell’ rating on Nalco with a price target of Rs 126. Nalco’s latest alumina sale tender, which is used as a benchmark for the spot market globally, has been closed at US$194/MT. The new contracted price is down 58% from a high of US$458/MT which Nalco got for a 30,000-tonne shipment in July ‘08. Outlook for alumina remains negative as brought out by the bidding range. Apart from the winning bid of US$194/MT, the majority of bids from traders ranged between US$153-US$176/MT, which provides an indication of market expectations of future alumina price movement. Nalco is averse to any production cuts despite the global demand weakness. Consequently, its aluminum inventory situation is expected to get worse. According to the news flow, inventory is hovering around 15 Kt which is already double of the normal levels of 8 Kt. The inventory situation is expected to get even worse with average inventory increasing to 30 Kt by the year-end. Deutsche remains negative on alumina/aluminium demand and pricing outlook in 2009