City Union Bank (CUB)

City Union Bank may be small in size, but it has scaled the heights in terms of performance. Investors can consider buying it for long term

CITY Union Bank is one of the most efficient banks in the country. With a network of 202 branches, it is present in many parts of the country but its operations are primarily concentrated in southern India. City Union Bank (CUB) ranked among the top 10 banks in three of the four main parameters. Of the 39 listed Indian banks, CUB stood 7th on efficiency, 10th on growth and 10th in terms of return to shareholders. It is well known that CUB is one of the strongest banks in the country. Our study showed that it is equally good in terms of rewarding its shareholders. The bank has consistently reported net interest margin (NIM) in excess of 3% in the last nine financial years. Only a handful of Indian banks have managed to achieve this feat.

In FY 2009, the bank posted the second highest return on assets (RoA) across listed banks. Only Indian Bank did better. While CUB clocked a RoA of 1.5% in FY 2009, the average RoA of Indian banks was only 1%. This is a key ratio in the banking industry because it explains how efficiently a bank is utilising its assets.

The current fiscal year has been the most challenging for the banking industry since the start of the boom in 2003. For starters, the pick-up in credit slowed down. As per latest Reserve Bank of India data, the growth in aggregate bank credit has slowed to 10.6% year-onyear. Moreover, bankers are still grappling with shrinking spreads, which is an offshoot of tight monetary conditions in the last months of calendar year 2008. Despite such headwinds, CUB managed to grow its loan book at 19% y-o-y at the end of Sept ’09 quarter. Though, its net interest income fell down by 4% y-o-y, it still managed to grow its net profit by 21% in the six months ending Sept ’09. Net interest income is calculated by deducting interest expense from interest earned and is a measure of spread between cost of deposits and yield on advances. In the absence of growth in net interest income, non-interest income, which grew by 59%, came to the bank’s rescue. Meanwhile, the bank has come out with a rights issue in the ratio of one share for every four shares held. The price of one rights share will be Rs 6. The current market price is Rs 25 per share. This shows that there is significant discount embedded in the rights issue. So, it makes lot of sense for investors to subscribe to rights issue. The issue closes on December 16, 2009

VALUATION:

The stock is trading at 1.4 times its book value. Compared historically, the stock is just inches short of its all-time high valuations, as it was trading at 1.6 times its book value in March 2008. However, the banking sector, and CUB in particular, have shown resilience in tough times. Going forward, investors are likely to give more premium to the banking sector in general and efficient banks like CUB in particular. Its peers like Federal Bank, South Indian Bank, Karur Vysya Bank and Indian Bank are trading at an average price to book value multiple of 1.3 times. This shows that City Union Bank’s stock, at 1.4 times price to book value, is reasonably priced. Moreover, the bank consistently pays dividend to its shareholders. At the current price, the dividend yield stands at 2.4%, which shows that the stock offers value to conservative investors as well.

Stock views on South Indian Bank, Cipla, Hero Honda

IIFL on Hero Honda - Target Rs 1730

IIFL has maintained its add rating on Hero Honda Motors with a target price of Rs 1730 in its research report.

"Hero Honda’s 1QFY10 results were in line with our expectation. EBITDA margin expanded 500bps YoY and 100bps QoQ to 17%, thanks largely to lower raw-material costs (down 400bps YoY), better realisations (price hike and model mix) and increased production at Haridwar. Going forward, we expect margins to decline 100bps as the company purchases raw materials on spot basis (prices of key raw materials, steel and aluminium, have risen in the last few months). We raise our FY10 and FY11 earnings estimates by 15% and 18% respectively, as we revise our FY10 volume growth estimate to 20% from 12% earlier. We maintain ADD with a revised target price of Rs 1,730," says IIFL's research report.


KRChoksey on Cipla - Target Rs 286

KRChoksey has recommended a hold rating on Cipla with a target price of Rs 286 in its research report.

"The topline of the company is inline with our expectation and posted a turnover growth of 14% Y-o-Y backed by better performance from both its domestic as well as exports business. The domestic sale of the company has shown an increase of about 11.3% whereas Export sales grew by 14.3%. We believe the sales of the company were mainly driven by good performance from its domestic as well as exports business. The net profit of the company was impacted by an increase in interest cost (an increase of 186%). 'Hold', target of Rs 286," says KRChoksey's research report.


Angel on South Indian Bank - Target Rs 135


Angel Broking has recommended a buy rating on South Indian Bank with a target price of Rs 135 in its research report.

"South Indian Bank (SIB) is one of the better-performing old private sector banks. Largely concentrated in the semi-urban areas of the Southern states of India, SIB's profitable, cost-efficient and technologically up-to-date network constitutes a reasonably attractive standalone franchise. The Bank's Deposit franchise includes a niche NRI customer base that contributes a meaningful 17% of deposits and gives it a distinguishing cost advantage over several of its peers. At the same time, the Bank is trading at the cheapest valuations among peers. We value the stock at 0.9x FY2011E ABV to arrive at a target price of Rs 135, implying an upside of 26% from current levels. We Initiate Coverage on the stock with a 'Buy' recommendation," says Angel's research report.

Stock views on Divis Labs, South Indian Bank, Tata Tea

Hem Securities on Divis Labs - Target Rs 1370

Hem Securities has initiated a buy rating on Divi's Laboratories with a target price of Rs 1370 in its research report.


"Being a pioneer in the API and CRAMS segment, Divi’s Laboratories has posted tremendous growth over the past few years. With the leadership in dextromethorphan, phenyleffrine, nabumetone and lopamidol, the com-pany is expected to witness surge in its business. Further, with almost completion of massive capex, the company is expected to continue to post excellent financial performance on the back of its successful entry into the high margin nutraceuticals segment. In wake of the growth of the phar-maceutical sector, Divi’s Laboratories Ltd seems to be extremely attrac-tive investment opportunity."


"Presently, the stock is trading at Rs 1088.60 which is at 16.92 times to its earnings and 5.68 times to its book value of Rs 191.72. Since the stock offers good opportunity, we initiate a ‘BUY’ signal on the stock with a target price of Rs 1370 in medium to long term investment horizon ex-pecting an appreciation of about 26% from the current level of Rs 1088.60", says Hem Securities' report

FinQuest Securities on South Indian Bank - Target Rs 120

FinQuest Securities has recommended a buy rating on South Indian Bank, with price target of Rs 120, in its report.

"South Indian Bank is trading at an attractive valuation of 0.7x FY10E ABV. Peer banks like KTK Bank, KVB etc continue to trade at 1x FY10 ABV, although operational parameters are comparable with SIB. We therefore believe that SIB’s valuations will catch up with peer banks. Our target price of Rs 120 for the stock (based on DDM model) discounts 1x FY10E ABV. We recommend Buy on the stock," says FinQuest Securities' report.

KRChoksey on Tata Tea - Target Rs 859

KRChoksey has maintained its buy rating on Tata Tea, with price target of Rs 859, in its report.

"More than 70% revenues and 80% of EBIT come from tea business, which is likely to face margin pressure in FY10 as tea prices are likely to remain firm on account of decline in production by 5%. However, with company planning to leverage its tea & coffee brands in other beverage products would help it to diversify and become a complete beverage company. The company plans to focus on six key geographies - Great Britain and Africa, Europe and Middle East, the U.S., Canada and South America, South Asia and Asia Pacific, innovation and distribution going ahead to integrate the business, take advantage of economies of scale. Its recent launch T!ON - an active drink made from fruit juice, tea extracts and ginseng in Chennai has been performing well. At CMP of Rs 728, we maintain our ‘BUY’ recommendation on Tata Tea with a target price of Rs 859, which gives it an upside potential of 18%. At the CMP, the stock is trading at 5.1x FY10E earnings of Rs 143.8," says KRChoksey's report.

Stock views on South Indian Bank, Dabur India, Bank Of Baroda

ULJK Securities on Bank Of Baroda - Target of Rs 384


ULJK Securities has recommended a buy rating on Bank Of Baroda with a target price of Rs 384 in its research report.

"Bank of Baroda has posted a positive improvement in its return ratios driven by robust growth in the top line particularly non interest income. Asset quality of the bank also improved and the Gross NPA level now stands at 1.5%. Improvement in ROA will lead to an improvement in ROE, which we believe result in re rating for the stock. Looking at its sustainable growth prospect and attractive valuation, We recommend “BUY” on the stock with a target price of Rs 384 for a medium to long term horizon," says ULJK Securities' research report.


Bonanza on South Indian Bank - Target of Rs 55


Bonanza has recommended a buy rating on South Indian Bank with a price target of Rs 55 in its research report.

"South Indian bank is mid-sized private sector bank. It serves niche market of NRIs and their families in India. SIB is growing at brisk pace. The bank has shown decent performance. Its profits have grown very well, from Rs 8.7 crore in FY 2005 to Rs 153.39 crore in FY 2008, a growth of 260% compounded. It has also shown very good improvement in Assets quality. Its Net NPA stand at 0.4% presently, down from 3.81% in FY 2005.It is likely to report an EPS of Rs 16.8 in FY 09. Investors can buy at CMP Rs 46 for a target of Rs 55 i.e. PE of 3.3," says Bonanza's research report.


IIFL on Dabur India - Target of Rs 111


IIFL has maintained its buy rating on Dabur India with target price of Rs 111 in its research report.

"Dabur has put its beauty and wellness retail venture ‘new-u’ on the block. The company has mandated Grant Thornton to find a buyer for the retail chain. We had anticipated this move by the management, given the poor response to the chain, weak positioning and the overall operating environment, which has turned extremely tough for retailers. This is a move in the right direction, though finding a buyer may not be easy in the current environment. Retail losses will no longer be a drag on overall profitability. Accumulated losses on the venture add up to Rs 220 million over an investment of Rs 416 million over the past two years. We reiterate 'BUY' with target price of Rs 111," says IIFL's research report.

Views on banking stocks Corporation Bank, Karnataka Bank, South Indian Bank, Dena Bank,

Angel Broking on CORPORATION BANK

We are positive on Corporation Bank due to its efficient operations reflected in low operating expenses, as a percent to average assets, superior asset quality and proactive investments in modern distribution and payment systems. But the bank’s relatively small size and scope of operations as well as urban focus that subjects it to greater competition from private banks, temper the growth outlook on the key competitive parameters of CASA and fee income.

Karvy Stock Broking on DENA BANK

At current valuations, Dena Bank is the most attractively valued bank in our government banking universe, it is also the smallest. As a result of the wage hike provisions and lower other income we revise our FY2009 EPS to Rs 12.8 and FY2010 EPS to Rs 16.8. In FY2009 earnings would only increase by 2% y-o-y.

SMC Global on SOUTH INDIAN BANK

Kerala-based South Indian Bank has drawn up a five-year plan to drive total business to Rs 75,000 crore by March 2013. Under the five-year plan, banks deposit are likely to grow to Rs 44,000 crore and advances to Rs 31,000 crore by March 2013. We believe that stock is undervalued to the future potential price.

SMC Global on KARNATAKA BANK

Karnataka Bank has a dominant presence in the southern and western parts of India. With 12.17% capital adequacy as on March 2008, we believe the bank has sufficient capital to grow its loan book and comply with Basel II norms. With the implementation of Basel- II norms, the management expects a 100bps impact on its capital adequacy. We believe that stock is undervalued to the future potential price.

Ambit Capital Views on Midcap Banking Sector

ANDHRA BANK

The bank is expected to exhibit a steady business CAGR in the range 23-25% over FY08-FY10E. A low capital adequacy has been constraining the bank’s growth over the last three years. This proved to be a blessing in disguise as the bank boasts of an asset quality among the most superior within the banking system. The bank’s provisioning coverage remains exceptional.

South Indian Bank

The bank remains a fundamentally sound investment idea from the old private sector banking space. We expect business growth in the range 15-18% during FY09E - the bank has already shed Rs 5bn worth of bulk deposits during H1FY09 and is focusing on improving the CASA levels. This, taken alongside the PLR hike to the extent of 100bps during H1FY09, has helped shore up NIMs.