Dena Bank

THE buzz in the banking industry on a likely consolidation among state-owned banks, after a meeting between finance minister Pranab Mukherjee and PSU bank chiefs, appears to have been the driver for the rise in stock price of Dena Bank. The scrip has gained 31% in November 2009 compared to just 6% gained by the Nifty, with the market viewing the bank as a potential acquisition target for one of the large state-owned banks.

Despite the recent upsurge in price, the stock still remains one of the cheapest banking stocks in terms of valuations. The Dena Bank stock is trading at a price-to-book value (P/BV) ratio of 1.1. Most of the banks are trading at a much higher price than their book values. In fact, top state-owned banks such as State Bank of India, Punjab National Bank, Bank of India and Bank of Baroda are trading at an average valuation of roughly two times their book value. However, Dena Bank, historically, has traded at much lower valuations.

What is disconcerting is the huge fluctuations in Dena Bank’s performance from quarter-to-quarter. For instance, in the past four quarters, the year-onyear growth in profit ranged from 68%, at best in the June 2009 quarter, to 0% in the March 2009 quarter. In fact, on other parameters, the bank’s performance has been better than many of its peers. For instance, in FY09, it posted a net interest margin (NIM) of 2.9%. Even in earlier financial years, its NIM hovered close to 3%, which is considered as a benchmark in the banking industry.

The bank posted a return on assets (RoA) of 1.02% in FY09, which is roughly close to the banking industry average. It reported a capital adequacy ratio of 11.6% at the end of September 2009 which is in line with regulatory norms.

At around 1% of its net advances, its net non-performing assets or bad loans’ asset quality is satisfactory, if not the best in the industry. In a nutshell, the bank’s performance on the basis of these parameters is not a cause for concern. However, its growth rate is one of the lowest in the industry. In the past five financial years, its profit has not even doubled, which makes it one of the slowest-growing banks.

From a strategic investor’s perspective, Dena Bank can offer value with a branch network of 1,120 branches. But from retail investor’s point of view, it seems that, at current levels, the price has factored in synergies of consolidation, to an extent, which makes the current rise in price speculative.

Bank of Baroda

Bank of Baroda is likely to emerge as a much stronger player. Investors can invest in the stock with a long-term perspective

Beta: 1.06
Institutional holding: 38.0%
Current dividend yield: 2.9%
Current P/E: 6.5
Current m-cap: Rs 10,035.6 cr

WITH A network of over 2,800 branches across the country, Bank of Baroda (BoB) is one of the largest public sector banks in India. The bank has been growing rapidly in the last few years, and it closed FY '08 with 46 branches in abroad—a mark that very few banks have achieved. BoB's wide base has helped it to tap all the resources-in rural, semi urban and the metro markets-to grow its balance sheet and revenues. BoB's international advances grew by more than 30% in FY '08, as a result of its wide presence in overseas markets.

BUSINESS

BoB's balance sheet has grown at a compounded average growth rate (CAGR) of 25.9% per annum in '06-'08. And, in terms of the growth trajectory, BoB has joined the fray of the top PSU banks, like, Punjab National Bank (PNB) and Bank of India (BoI).

The turnaround actually started becoming visible in the FY '06, when for the first time in the current decade the balance sheet expanded by close to 20%. Since, FY '06, the bank's loan book has been increasing at a rate in excess of 25%, but the deposits have been growing at a bit slower rate. This has helped it in improving the credit-deposit ratio i.e. a higher portion of deposits is extended as advances.

However, BoB's net interest margin (NIM) has been under pressure as it has come down from 3.4% in FY '05 to 2.9% in FY '08. One may get an impression that this has happened because the bank has not been able to pass on the increase in cost of deposit to its customers. However, this is because the bank had to step up its deposit mobilisation in the last two years in order to maintain high credit growth. This resulted in higher interest payments on account of higher deposits, thereby, compressing the net interest income, which ultimately led to fall in NIM. This shows that there was a trade off between BoB's shrinking NIM and growth in its advances. And, it has paid off, as the bank's profit grew at a CAGR of 30.8% in last three financial years.

The non-interest part of BoB's revenue has not been growing as fast as the fund-based revenue. The bank needs to improve its performance on this parameter. In the six months ending September '08, the bank's profit has grown by 16.5% on a year-on-year basis, propelled by 32.5% growth in its advances. It must be noted that the growth in advances took place in a sluggish business environment.

The NIM was also under pressure in the first half of the current financial period. This is visible as the interest expenses grew by a higher percentage than interest income. However, BoB rationalised its other expenses, and this helped in boosting its profit growth.

The asset quality is very high as the net NPAs formed just 0.43% of net advances at the end of September '08 quarter and on this count the bank's performance is as good as a top private bank. Its capital adequacy ratio stands at 13% and it shows that it is well capitalised.

VALUATION

The stock is trading at a multiple of 6.5 times the trailing twelve months' earnings. The low valuations do not justify the earnings growth, which is much higher. Moreover, the stock is trading at a discount to its book value (Rs 301 per share). A fundamentally sound stock, trading at less than its book value, is often the first to rise when the market starts moving up. Investors are advised to invest in the stock with long-term horizon.

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.

Stock views on Bank Of Baroda, Bajaj Auto

Karvy Stock Broking on Bank Of Baroda - Target of Rs 295

Karvy Stock Broking has maintained its buy rating on Bank Of Baroda with a price target to Rs 295 in its research report.

"We are revising our FY2009 restructured standard assets from Rs 3.8 billion to Rs 30 billion as we believe that BOB's corporate loan portfolio has deteriorated and many of the bank's corporate customers have requested for restructuring their standard loans. As a result our ABV for FY2009 has been revised downwards to Rs 257 from our earlier estimate of Rs 302 and our FY2010 ABV has been revised to Rs 321 from Rs 368. We are downgrading our price target to Rs 295 from Rs 335 to factor the deteriorating economic environment. We continue to maintain our Buy recommendation," says Karvy Stock Broking's research report.

Sharekhan on Bajaj Auto - Target of Rs 640

Sharekhan has maintained its buy rating on Bajaj Auto with a price target of Rs 640 in its research report.

"We believe that due to the tough environment it will not be very easy for BAL to regain its market share despite the new launches. However, with stronger exports, we expect the company to record a sales growth of 9% in FY2010. Though in future the sales performance will be much dependent on the success of its new launches, the company should be able to clock a moderate sales growth from the next quarter onwards. The short-term outlook continues to be weak, with the present BAL brands not performing as well as expected and the company losing out market share to Hero Honda and the other players."

"Overall, the BAL stock may underperform in the short term on account of the uncertainties and concerns discussed in this note. We believe that the valuation gap with Hero Honda is likely to narrow down as things improve from Q1FY2010 onwards. We maintain our Buy recommendation on BAL with a price target of Rs 640," says Sharekhan's research report.

PINC on Bajaj Auto - Target of Rs 669

PINC Research has recommended a buy rating on Bajaj Auto with a target price of Rs 669 in its research report.

"Over the last two years, Bajaj Auto has disappointed the market with declining volumes. However despite lower volumes, we see profitability of the company to improve from the current levels. We upgrade our recommendation on the stock to ‘BUY’ with a target price of Rs 669 discounting FY10E earnings 10x," says PINC's research report.

Stock views on Sintex, FAG Bearing, Tech Mahindra, Bank of Baroda

HDFC Securities on BOB - Target Rs 336

HDFC Securities has maintained its buy rating on Bank of Baroda with a price target of Rs 336, in its research report." Bank of Baroda (BOB) reported strong PAT growth of 41.4% YoY to Rs 7.1 billion on the back of strong operating performance. PAT was up on the back of NII growth of 46.6% YoY as well as very good treasury performance. Bank of Baroda has improved its NII performance where it has been laggard in last few quarters. It was done by reducing reliance on bulk deposits as well as expanding yield on advances. We maintain our BUY recommendation and price target of Rs 336," says HDFC Securities' report.


Reliance Money on Tech Mahindra - Target Rs 292


Reliance Money has maintained its buy rating on Tech Mahindra with a target of Rs 292 in its research report. "Tech Mahindra (TML) reported disappointing sequential performance with revenues in USD term declining by 14% qoq to USD 231.9 million. Net profit for the quarter declined by 5% qoq to Rs 2228 million (Excluding tax write back of Rs 673 million in Q2FY09). Weak industry environment coupled with expectations of weak results have led to a significant correction in TML shares prices in the last three months, down by 65% from a high of Rs 631 in October 2008. We maintain BUY on TML with a target price of Rs 292, at our target price the stock will be valued at 4X FY10E," says Reliance Money's research report.


Angel Broking on FAG Bearing - Target Rs 350

Angel Broking is bullish on FAG Bearing and has recommended buy rating on the stock with a target of Rs 350, in its report. "FAG Bearings’ prospects are derived from demand arising in the Capital Goods and Automobile industry. We believe industry valuations are likely to remain subdued in the near term due to overall slowdown in the sector. The company posted CAGR of 14% and around 30% in Revenue and Profit over the last five years, respectively. Going ahead, over CY2008-10E, we conservatively model, volumes to record a CAGR of 7-8%, which will drive around 9-10% growth in Revenues and around 10% growth in Net Profit in the mentioned period. We believe Revenue growth will be largely driven by higher contribution from new products."

"We bank on the company’s strong fundamentals of consistently recording high RoE and RoCE. Further, its debt free status would help it post better Bottom-line growth amidst a high Interest Rates regime. At the CMP of Rs 261, the stock is quoting at 4.5x CY2009E Earnings, which is much lower than its historical P/E of around 14x. We maintain a Buy on the stock, with a Target Price of Rs 350 owing to its debt free status and strong Balance Sheet, which would act as a cushion in overall industrial slowdown," says Angel Broking's research report.


IIFL on Sintex India - Target Rs 123

IIFL has recommended an add rating on Sintex India with a target of Rs 123, in its report. "Key raw-material costs are down 40% from their peak and 15% from YTDFY09 average levels in January 2009. We believe a compensating volume growth in FY10 will be difficult, given that OEMs account for 45% of Sintex’s FY09ii revenues. Non-auto OEMs remain vulnerable in the current slowdown as the company lost a US$10m contract in the wind energy segment at Wausaukee. Though aerospace and defence businesses continue to be strong, the company mentioned pricing pressures in the wind energy and medical imaging businesses. We expect Sintex’s revenues and PAT to decline 4% and 13.7% YoY respectively in FY10ii. We downgrade the stock to ADD with a target price of Rs 123/share, at 0.8x FY10ii BV," says IIFL's research report.

Stock Views on ACC, Power Grid, Bank of Baroda, Steel Authority of India, Hindustan Construction, Reliance Industries

ABN Amro on ACC

ABN Amro has cut ACC’s earnings and downgraded it to ‘sell’. ACC seems financially well-placed with moderate expansion plans, but its earnings outlook has weakened, since the industry may see excess supply for at least two years, which will lower cement prices. FY09 cement demand growth YTD, at 6.6%, is below expectations, due to the stress in credit markets and delays in capex. So, demand estimates for FY10 and FY11 fell by 200 bps each to 8%, which exposes the industry much longer to surplus supply. Restructuring over the past five years has seen ACC exiting non-core businesses. The company, which had high gearing in the last business cycle (1997-03), now seems in a stronger financial position. ABN estimates it will have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs 3,700 crore over the next three years. This will raise its capacity by 9.6%, slightly ahead of the expected demand growth. ACC looks cheap, trading at a cement enterprise value/mmt of $61 (vs replacement cost of $110), but ABN sees more downside to its earnings, given the overhang of excess supply.

HSBC on Hindustan Construction

HSBC Global has reiterated its ‘underweight’ rating on Hindustan Construction Company (HCC). It has factored in a dividend payment of Re 1 per share, implying a dividend yield of 2.2%. Thus, the total potential return on investment in shares over the next year is -1.8%. HSBC considers the share price to be volatile. For Indian stocks, HSBC considers the average cost of equity to be 11%. A volatile Indian stock with a potential total one-year return of 10 percentage points on either side of 11%, i.e. 1-21%, merits a ‘neutral’ rating. As the potential total one-year return on HCC is less than 1%, HSBC reiterates its ‘underweight’ rating on the stock. A key upside catalyst for the stock is sharp increase in order inflows and reduction in leverage, resulting in lower interest costs. A sharp drop in execution volumes along with demand slowdown remain key downside risks to HSBC’s valuation

CITIGROUP on Power Grid Corporation

CITIGROUP has maintained its ‘sell’ rating on Power Grid Corp (PGCIL) with a target price of Rs 69. PGCIL’s shares have outperformed the Sensex, post its IPO. Despite correcting more than 55% from its peak, it is not in the value zone yet. They are trading on par with NTPC, which appears unjustified. The key upside risks are: 1) Favourable CERC regulations for FY10-14E; 2) Faster-than-expected project execution; and 3) Higher non-core business profits. PGCIL has the potential to generate 14-17% returns on its regulatory equity base, compared with NTPC’s 14-22%. NTPC under-reports its profit/net worth. PGCIL matches depreciation under the tariff with reported depreciation, whereas NTPC’s depreciation under the Company Law is higher than under the tariff. PGCIL’s target price of Rs 69 is set at 1.8x FY10E P/BV from 2.2x earlier — a 10% discount to the target P/BV multiple for NTPC. PGCIL’s H1 FY09 reported PAT, at Rs 700 crore, was down 15% y-o-y. But this is largely due to forex fluctuations and a pass-through in tariffs.

Indiabulls Securities on Bank of Baroda

INDIABULLS Securities has reiterated its ‘hold’ rating on BoB. The bank reported an average performance in Q209, even as its asset quality improved. It expects interest income to grow by 16% in FY09, against 31% in FY08, as the growth rate of advances is likely to fall to 23% in FY09 vis-à-vis 28% in FY08. In addition, the expected fall in yield on investments will affect interest income. Advances may be under pressure due to the global financial crisis and slowdown in the domestic economy. Over 20% of the loan book is accounted for by real estate and SMEs, which are prone to default in the current domestic scenario. BoB’s net interest margin (NIM) increased by a mere 4 bps sequentially to 2.8%. NIM is likely to be under pressure in the coming quarters due to increased cost of deposits, though RBI has lowered its key policy rates. With increased risk-aversion, BoB may shift the mix of interestearning assets from high-yield, risky advances to safer, low-return investments. This is likely to reduce the average yield, further pressurising NIM.

MERRILL Lynch on Reliance Industries
MERRILL Lynch has retained it ‘buy’ rating on Reliance Industries (RIL). Its refining margin has consistently been higher than the benchmark Singapore complex refining margin. Analyses suggests RIL’s superior refining margin is due to its ability to refine heavier crude than Dubai. Compared to the last refining downturn, RIL is set to benefit more in FY10-FY11E from its ability to refine heavier crude. Reliance Petroleum’s (RPL) refinery, which is expected to start operations soon, can process even heavier crude than RIL and has a superior product slate. The average discount of Arab heavy to Dubai since FY01 is $2.4/bbl. The discount has sustained at over $5/bbl even in the past six weeks, despite the slump in oil prices. Merrill Lynch estimates RPL’s refining margin at $12.9/bbl if it were to operate in Q3 FY09, vis-à-vis Singapore margin of $7.3/bbl. It will produce more gasoline than RIL. Gasoline cracks have always been at a premium to naphtha and LPG cracks. Merrill Lynch feels that a weakening in diesel and gasoline cracks is the main risk to RPL attaining such high margins when it begins operations.

EDELWEISS on Steel Authority of India

SAIL has a saleable steel capacity of 13 mt. But with no major capacity expansion over the next two years and moderate demand scenario, incremental volume growth is seen at 0.6 mtpa in FY09E and may decline by 0.4 mtpa in FY10E on production cuts. SAIL’s average volume-based growth till FY10 will be more muted than that of Tata Steel and JSW Steel. The company is targeting completion of modernisation-cum-expansion by end-FY11, which is set to hike its saleable steel capacity to 23.1 mtpa, up 78% from FY08 levels. It will also improve the company’s productivity and refine its product mix. While the project will put SAIL in the global league, its timely completion looks daunting. Due to its scale and operational vastness, SAIL is best-positioned among its peers to gain from Indian steel consumption growth in the next two years. But in the absence of tangible volume growth, slow demand growth for steel, exposure to tight coking coal market, highest susceptibility to government norms on prices, and potential delay in expansion plan, Edelweiss expects SAIL’s margins to be under pressure in the next two years.