Andhra Bank

Andhra Bank managed to grow its profit by 30% in the December quarter, when its peers recorded flat numbers due to absence of trading gains and a slowdown in lending

Andhra Bank is a mid-sized public sector bank (PSB) operating mostly in Andhra-Pradesh with two-thirds of its total 1,546 branches in the state. The bank is known for maintaining extremely low non-performing assets (NPA). On an average, net NPA formed just 0.2% of net advances over the past five fiscal years.

At such low NPA levels, the bank has one of the best asset quality in the industry. It has the history of growing its loan book at higher than industry rates. For instance, its loan book grew at an average rate of 28% during FY05-FY09. It has maintained the same trend in the current fiscal as well.

The bank’s advances grew 22% in the quarter ended December 2009, which was double the industry growth rate and its credit deposit ratio stood at 77.5% — one of the highest in the industry, showing the bank’s effectiveness in terms of lending, when the industry was struggling with falling growth in credit.

In fact, the bank has maintained the trend of outgrowing the industry throughout the current fiscal year, when other banks found it difficult to grow due to falling economic growth. This shows that the bank has clearly bucked the trend and it is just a matter of time, when it will be re-rated.

FINANCIALS :

In the first six months of the current fiscal, interest rates were falling, which helped banks earn treasury gains, as bond prices went up. But thanks to rising inflation and rising concerns over the government’s deficit, interest rates started moving up in the quarter ended December 2009 making it almost impossible for banks to earn money on their investment books. On the top of it, banks found it extremely difficult to lend to corporate sector, as the growth in the aggregate credit slipped to the lowest in the decade.

Despite such an environment, the bank managed to post 30% rise in profits in the quarter ended December 2009, when most of the other banks recorded flat numbers. The profit growth was fuelled by a 29% growth in net interest income (NII) and some moderation in expenses. NII is the difference between interest earned and interest expense. The bank has maintained an average net interest margin (NIM) of 3.5% over the past five years. NIM is a measure of spread between cost of borrowings and lending rate.

Even in the December 2009 quarter, NIM stood at 3.35%. It must be noted that a 3% NIM is considered to be a benchmark in banking industry and not many banks have maintained such a high level of NIM over a long period.

Moreover, mid sized banks find it difficult to maintain high NIM, since the share of low cost current account and savings account deposit in total deposits is less compared to large banks. Despite which, the bank has a maintained high margins. Even on other parameters, the bank’s performance has been exemplary.

For instance, its provision coverage ratio stood at more than 90% in the December’09 quarter. This shows that the bank has more than sufficient coverage against bad assets. In fact, the coverage is more than minimum 70% advised by the Reserve Bank of India (RBI) last year.

VALUATIONS:

Since the beginning of the current rally on March 9, 2009, Andhra Bank’s stock price has gone up by more than 150%. The benchmark, Bank Nifty index, too has gone up by similar percentage points. However, banks, which have performed better than industry, have gone up by much higher margin. Therefore, at current levels, it doesn’t seem that the performance of Andhra Bank is entirely discounted by the stock price. In terms of valuations, it is trading at a price to book value (P/BV) ratio of 1.3. Its valuations are far away from its own peak valuations of 2.4 P/BV in FY05. At the same time, the stock is trading at a price-to-earning multiple (P/E) of 4.8, which is low since almost all PSB are trading at a P/E of more than 5.

It seems that the price has a scope to catch up. Moreover, at current price, its stock offers a dividend yield of 4.6%, which is one of the highest yields across PSBs. So, the stock has some value even for the conservative investors who are interested in a regular income stream like dividend.

Stock views on Shree Cement, Dishman Pharma,

Sharekhan on Shree Cement - Target of Rs 825


Sharekhan has maintained its buy rating on Shree Cement with a price target of Rs 825 in its research report.

"Shree Cement has commissioned clinker manufacturing Unit VII of 1MMT capacity at Bangur City, Ras in Pali district of Rajasthan at a capital investment of Rs 200 crore. In order to account for higher realisation and better than expected volumes, we are upgrading our earnings estimates for FY2009 and FY2010. The net profit for FY2009 and FY2010 is revised upwards by 4.3% and 11.6% to Rs 479.9 crore and Rs 291 crore respectively. We have been bullish on cement sector since the past four months with Shree Cement as one of our top picks. The stock has appreciated by over 45% since our last update on January 30, 2009. We maintain our Buy call on the stock with a revised 12-month price target of Rs 825 (EV/tonne of USD 70 on expanded capacity)," says Sharekhan's research report.


Reliance Money on Dishman Pharma - Target of Rs 185


Reliance Money has maintained its buy rating on Dishman Pharmaceuticals & Chemicals with a target price of Rs 185 in its research report.

"Dishman Pharmaceuticals & Chemicals Ltd (Dishman), is setting up a Rs 350 million US FDA and MHRA approvable drug formulation unit at the Bavla plant in Gujarat. On the similar lines, the company has assigned one of its other plants to meet the requirements of AstraZeneca’s 14 API supply agreement. Another, two plants have been visited by large MNC pharma companies like GSK, Pfizer, Novartis and have expressed their interest in entering into manufacturing contracts going forward."

"With the increasing number of contracts and various capacity additions, augers well for Dishman to derive stronger revenue growth going ahead. Hence, looking at the robust future outlook for CRAMS operations, we retain our top pick rating on Dishman Pharma in CRAMS space and accordingly maintain our BUY recommendation on Dishman Pharma with target price of Rs 185," says Reliance Money's research report.


Karvy on Andhra Bank - Target of Rs 74


Karvy Stock Broking has maintained its buy rating on Andhra Bank with a price target of Rs 74 in its research report.

"We revise Andhra Bank's FY10 estimates mainly to factor in higher NPAs and restructured loans and much higher credit costs. Also incrementally, for FY10 we marginally reduce our estimates for fee income and increase operating overheads. For FY10, we reduce our earning estimates by 11.3% to Rs 5.24 billion from our earlier estimates of Rs 5.9 billion and reduce price target by 14.9% to Rs 74. We maintain our BUY rating on the stock; based on our target price the stock would trade at 1.05x adjusted book value FY10," says Karvy Stock Broking's research report.

Karvy views on Ambuja Cements, Andhra Bank, Bank of India, Shree Cements, PVR

Buy PVR, target of Rs 260

Karvy Stock Broking has maintained its buy rating on PVR with a revised target price of Rs 260 in its August 8, 2008 research report. "PVR declared its 1Q FY09 results which were above our expectations. Net sales grew by 10.4% YoY as against our estimates of a 0.4% in 1Q FY09. This was majorly on account of higher than expected income from advertising and royalty. The net profit for 1Q FY09 declined by 35.3% YoY and grew by 43.7% QoQ as against our expectations of a decline of 61.7% YoY and decline of 14.8% QoQ."

"Considering the foray of PVR into new and promising businesses of production & distribution and lifestyle entertainment and subsequent de-risking of the exhibition business we believe that PVR will emerge as one of the better and stronger players in the multiplex industry. We have valued PVR at 13x FY10E earnings and 1.1x FY2010 sales. Subsequently, we have increased our price estimate on the company from Rs 230 to Rs 260 maintaining our BUY rating on the stock at current levels," says Karvy's research report.

Buy Shree Cements, target of Rs 733

Karvy Stock Broking has recommended a buy rating on Shree Cements with a target price of Rs 733 in its July 16, 2008 research report. "We expect net sales for the quarter ended June'08 would increase by 44.1% yoy to Rs 6.13bn driven by 26.6% growth in despatches and 11.2% growth in realization."

"SCL is currently trading at PER of 5.6x and EV/EBIDTA multiple of 3.3x on FY10E earnings. We had valued the ICL on 4x FY10E EV/EBIDTA and rate the company as BUY with price target of Rs 733," says Karvy's research report.

Buy Bank of India, target Rs 443

Karvy research has maintained buy rating on Bank of India with target price of Rs 443 in its July 17, 2008 report. "In 1st Q FY09, BoI's advances and deposits are expected to grow at 35% and 32% (Y-o-Y); the volume-led growth would result into 32% (Y-o-Y) jump in NII to Rs 12.5 billion. Estimated 24% growth in total other income on the back of fee-income growth and cost containment would lead to 36% growth in operating profit before provisions. Strain on net interest margin, significant de-growth treasury income and higher investment depreciation provisions of Rs 850 million would result in the bank's bottomline grow by 25% (Y-o-Y) to Rs 3.96 billion. The current stock price discounts FY2010 adjusted book value at 0.97x; we rate the stock as a BUY with a price target of Rs 443 at 1.88x adjusted book value FY2010" according to Karvy report.

Buy Andhra Bank, target Rs 108

Karvy research has maintained buy rating on Andhra Bank with target prie of Rs 108 in its July 17, 2008 report. "In 1st Q FY09, we assume that the Andhra Bank's advances and deposits would grow by 24% and 26.3% (Y-o-Y). The bank's net interest income (NII) would grow marginally by 2.5% (Y-o-Y) to Rs 3.7 billion and operating profit before provisions would grow by 6.3% (Y-o-Y) to Rs 2.37 billion. Higher depreciation provisions on investments of Rs 550 million would led to 18.8% (Y-o-Y) decline in net profit to 1.14 billion. Strain on net interest margin would be due to lower CASA share, higher cost of funds and lower yield on advances. We expect healthy growth in total fee income but treasury income could report degrowth. Total net income is expected to grow by 5.6% (Y-o-Y) to Rs 5.0 billion. At current market price, the stock is available at 0.65x ABV FY2010; we rate the stock as a BUY with a price target of Rs 108 at 1.34x adjusted book value FY2010" according to Karvy report.

Ambuja Cements an outperformer

Karvy Stock Broking has rated Ambuja Cements as an outperformer with a target price of Rs 101 in its July 16, 2008 research report. "For the quarter ending June 08, we expect the net sales would go up by 6.6% yoy to Rs 15.6 billion. Volume has shown a muted growth of 1.4% to 4.44 million tones due to export ban. Average realization would go up by 5.2% to Rs 3517 per tones."

"At the current market price of Rs 79 the company is trading at PER multiple of 10.2x and EV/EBIDTA multiple of 6.1x on CY09E earnings. We had valued the company on EV/EBIDTA multiple of 7.5x and rate the company as an outperformer with price target of Rs 101," says Karvy's research report.