Stock Views on oriental bank of commerce, Colgate-Palmolive, ABB

Morgan Stanley on oriental bank of commerce

OBC is now trading at a huge discount to other state-owned enterprise (SOE) banks. OBC has corrected sharply in the last few days. The stock is now trading at 0.4x book. The stock is mispriced compared with other SOE banks, which are trading close to 0.9x book, on an average. Morgan Stanley remains negative on OBC’s fundamentals, but that’s for all the SOE banks. The valuation gap is huge and some of this is likely to get bridged. OBC is now a most preferred stock among SOE banks. Earnings will be under pressure. Morgan Stanley is expecting the revenues to fall by 31% in F2010. This will be driven by a continued weakness in NIMs (net interest margins) and a sharp pick-up in credit costs. But, even on those earnings, the stock is trading at 4x. Morgan Stanley agrees things can be much worse in terms of asset quality, but OBC will not be the only one to be affected. Other banks (which are trading at significant premiums) will also be affected in equal measure. Hence, this is the stock to buy in the SOE universe. There is no change in the negative view on Indian banks. Morgan Stanley expects core earnings for Indian banks to remain weak in F2010 driven by increased credit costs and weak revenues. Plus, Indian banks still remain among the most expensive banks in the region.

HSBC on Colgate-Palmolive

HSBC maintains `Overweight’ rating on Colgate-Palmolive with a price target of Rs 470. The company’s sales growth volume for the first three quarters of this year has averaged 12%, with Q3 spiking up to 14%. However, the average over the last three years has been 9%. There are three factors responsible for this high growth rate:

(1) market share gains - Colgate has moved up from 47.8% in FY06 to nearly 50% currently (crossed 50% for the first time in several years for the month of January 2009)

(2) Price stability - Colgate has not taken any price increases in the year till date

(3) price point rationalisation - price of Cibaca 20g pack was reduced from Rs 6 to Rs 5, which has greatly boosted volumes.

Although Colgate is in staples category and is relatively immune to recession, it is possible that there may be a slight impact on the sales and volume growth may return to the three-year average in high single digits, from the current 12%+ which is probably above trend. The probability of a price increase, however, seems low given the softening commodity cost scenario.

Motilal Oswal on ABB

Motilal Oswal has reiterated `Neutral’ rating on ABB with a target price of Rs 382, which implies a downside of 4% from current levels. ABB India reported in-line performance for 4QCY08, with revenues up 18% y-o-y to Rs 2,170 crore, EBITDA up 3% y-o-y to Rs 270 crore, and net profit up 6.8% y-o-y to Rs 190 crore. While 4QCY08/CY08 results are largely in line with the estimates, order intake witnessed sharper than anticipated decline (- 37% y-o-y, -33% q-o-q), as projects got deferred. Order backlog as of December 2008 stands at Rs 6,160 crore (up 22.6% y-o-y), and book to bill ratio is at 0.9x CY08 revenues. EBITDA margin declined 100 bps to 11.2% in CY08, in line with our estimates. EBIT margins for power systems declined 190 bps to 8.6% in CY08 from 10.5% in CY07, largely due to business restructuring (reduced focus on APDRP and RGGVY) and possibly higher costs in certain projects. Business headwinds on the industrial side (47% of CY08 EBIT) are getting stronger, particularly in the project segment, given delays in terms of financial closure. Metals and cement (~30% of industrial order book) are witnessing demand slowdown. Also, segments like hydrocarbons, paper/pulp and real estate constitute a sizeable part of the order book, where order intake would be impacted. Motilal Oswal is downgrading its earnings estimates by 9.8% for CY09 and by 11.6% for CY10 to factor in the business headwinds. The stock trades at 15.7x CY09E and 16x CY10E earnings.