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 Glenmark Pharmaceuticals, PSL, Federal Bank

Sharekhan on Glenmark Pharma - Target Rs 319

Sharekhan has recommended a buy rating on Glenmark Pharmaceuticals, with price target of Rs 319, in its report. The stock closed at Rs 261.35 .

"Glenmark has dropped 12% in the year till date (the stock has seen an upside of 21% since we had upgraded our recommendation to Buy from Hold in our report dated October 29, 2009) as compared to the BSE HC Index, which is up 66.5%, and the Sensex, which is up 71.1%. However, with the revival signs gaining visibility in the emerging markets and the domestic markets, where we have seen a staggering growth of 44.6% and 18.4% respectively in H1FY2010.

We expect the cash flow to improve, as the capital expenditure eases and the management attempts to rein in the working capital. This would allow the management to address its high leverage and return to free cash flow territory in FY2010. We believe that the risk-reward ratio is favourable for the stock at the current levels, given an improving macro outlook, which may see the growth rebound in the emerging markets, improving the working capital cycle. Given the healthy business performance expectations and favourable risk-reward ratio, we maintain our Buy recommendation on the stock with a revised price target of Rs 319 (16x FY2011E core earnings for the base business plus Rs 43 per share for the R&D pipeline). At the current market price of Rs 261, the stock trades at 15.1x FY2011E earnings," says Sharekhan report.

SKP Securities on Federal Bank - Target Rs 284

SKP Securities is bullish on Federal Bank and has recommended buy rating on the stock with a target of Rs 284, in its research report.

Federal Bank is set to emerge as a strong private bank through improved performance and growth. FBL has taken various steps to achieve its objective to be the no.1 bank in Kerala. FBL has shown better performance than the industry in the past and we expect it to continue the trend.

"We hereby initiate coverage on Federal Bank Ltd. and recommend buy rating with a target price of Rs 284 (25% upside) in 12 months implying1.02 x and 0.9 x to adj. Book value per share of FY2010 & FY2011 respectively."

SKP Securities on PSL - Target Rs 197

SKP Securities is bullish on PSL and has recommended buy rating on the stock with a target of Rs 197, in its research report.

"PSL is one of the largest HSAW pipe manufacturer with the installed capacity of 1.475 MTPA of pipes. The company have 13 HSAW pipe mills, 11 of which are located in five locations geographically spread throughout India and one each at UAE and USA. PSL also provide pipe coating and other ancillary products and services related to pipe industry.

About 98% of the revenues of the company are derived from domestic market.""At the current market price, the stock is trading at a P/E of 5.4x , 4.8x and 4.1x of FY10E FY11E and FY12E earnings of Rs 27.3 Rs 30.4 and Rs 35.9 respectively. We recommend BUY rating on the stock with a target price of Rs 197/- (34% upside) in 18 months implying a P/E multiple of 5.5x of FY12E earnings," says SKP Securities research report.

Indian Bank

INDIAN Bank is one of the oldest banks in the country. It is also one of the best-managed state run banks in India. Its performance in the last three years, since it absorbed all its accumulated losses in its capital, is at par with best in its industry. Investors are advised to consider it for long-term investment.
BUSINESS

Headquarted in Chennai, Indian Bank is a leading bank in South India with widespread presence in Tamil Nadu, Kerala, Andhra Pradesh and Pondicherry. It was nationalised in 1969. It is a medium-sized bank and its balance sheet size stood at Rs 84,122 crore in FY 2009. It has 1,642 branches.

In the current decade, the bank has seen a turn-around. At the end of March 2000, bad loans, or net non-performing assets, formed 16% of Indian bank’s net advances. In FY06 it absorbed all the losses in its capital, which fell to Rs 744 crore from Rs 4,574 crore in the previous year. Since then, Indian Bank’s profit has grown at compounded annual growth rate (CAGR) of 35% every year, while its balance sheet has grown at a CAGR of 21%. This shows that it has enough reach and scale to leverage.

GROWTH DRIVERS

Indian Bank’s performance is clearly a cut above most state-run banks, notorious for inconsistent performance that puts down investors. The bank has performed well on all quality parameters while maintaining an impressive growth rate, achieving a delicate balance that has eluded several of its peers.

For instance, its net interest margin (NIM) stood at more than 3.5% in last six financial years. The only banks, which can better Indian Bank on this count are Kotak Mahindra Bank, Federal Bank and HDFC Bank. Its return on assets (RoA), at 1.6% in FY 2009, was the highest across all banks.

Its bad loans formed less than 0.2% of its net advances at the end of the year. Only Punjab National Bank has better record than Indian Bank on this count. The composition of its lending portfolio is very much on the lines of other state-run banks: agriculture loans constituted 15%, SME loan formed 11% and corporate sector contributed 50% to total loan book.

That the bank’s performance is superior despite similar lending profile shows the efforts being put in to choose the customers. The bank is expanding its presence. It opened 101 new branches in FY 2009.

VALUATION

Indian Bank is trading at a price to earning (P/E) multiple of 4.8 times. This is lower than the average of smaller banks that are no match to it in performance.

This indicates that the stock market is not giving premium to its performance. Moreover, the earnings growth is far ahead of P/E, which shows that the possibility of rise in stock price is much higher. In terms of price-to-book value P/BV), the stock is trading at close to 1, which is the average at which other banks are trading. Even based on P/BV, the bank is not getting the premium it deserves in terms of valuations.

We think it will be re-rated some time in future and therefore advise long-term investors to buy the stock at current levels.

Federal Bank

Federal Bank has emerged as one of the fastest growing banks in the last three years. Investors are advised to consider exposure to the stock for the long term
Beta 0.8
Institutional Holding 70.1%
Dividend Yield 1.6%
P/E 8.4
M-Cap Rs 4143 cr

Federal Bank is the country’s fourth-largest private bank by balance sheet size. This oldgeneration private bank was set up at Travancore (modern-day Kerala) in 1931, six decades before the bigger newgeneration private banks came up post-reforms. A major chunk of its business is concentrated in the south and Kerala contributes almost half to its loan book. The bank has 624 branches in 24 states and is now increasing its presence in neighbouring states like Tamil Nadu, Andhra Pradesh and Karnataka. A market capitalisation of just over Rs 4,000 crore and a balancesheet size of Rs 39,000 crore make Federal Bank one of the smaller banks in the country, but it ranks high on many key parameters. The bank’s net interest margin (NIM) — which is a measure of spread between the cost of borrowing and yield on loans — was 4.1% in 2008-09, the highest reported by a small bank. Only Kotak Mahindra Bank and HDFC Bank fare better on this count. In fact, the bank has maintained an NIM of about 3.5% for seven years now.

Federal Bank has managed to reduce its non-performing assets (NPA) to one of the lowest within a decade. Its net NPAs formed 0.3% of net advances in 2008-09, bettered by only three other banks. In contrast, the bank was struggling with higher NPAs at the start of this decade as these unrecovered loans formed 10% of its advances in 2000-01.

A dose of capital infusion in 2007-08 improved the bank’s capital adequacy ratio (CAR) to 20.1%. As per the Reserve Bank of India norms, banks have to maintain a minimum CAR of 9%. This shows that Federal Bank has a sufficient capital base. However, the capital infusion has resulted in dilution of return on equity (RoE), which fell from 21.3% in 2006-07 to 12.1% in 2008-09. At the current levels of CAR, the bank does not need to raise capital like other banks and no further dilution is expected in near future. Federal Bank’s net profit has risen at an average rate of 30% in the last three financial years, making it one of the fast-growing banks in the country.

A diversified loans portfolio places the bank in a better position to tackle economic slowdown compared to its peers. Loans to corporate, retail and small and medium enterprises segments comprised 37%, 31% and 32% of the total loan portfolio in 2008-09. In the last five years, the bank has increased the share of retail loans in total lending. In 2003-04, retail loans formed only 19% of the loan book.

In a country that continues to face a shortage of housing units, Federal Bank’s strategy of focusing on home loans can not be better timed. In FY 2009 housing loans formed 59% of retail loan book. In fact, secured lending like mortgages helps maintain high asset quality.

The bank also holds 26% stake in life insurance company, which is a joint venture with IDBI Bank and Fortis Insurance Co.

Stock Views Patel Engineering, Federal Bank, Unity Infra

Sushil Finance on Patel Engineering - Target Rs 572

Sushil Finance has maintained its buy rating on Patel Engineering with price target of Rs 572, in its report.

“Patel Engineering has continued its strong performance on quarterly basis and we are confident that it would be able to deliver a strong growth going forward. However, rising interest rates and depreciation expense has slowed down its bottom-line growth.”

FinQuest Securities on Federal Bank - Target Rs 300

FinQuest Securities has maintained its buy rating on Federal Bank, with price target of Rs 300, in its report.

"We expect Fed Banks' profits to grow at a CAGR of 19% over FY09-FY11E leading to ROE of 14% by FY11E. Management has indicated that the merger with CSB (Catholic Syrian Bank) bank will materialise in next six months. We maintain 'Buy' rating with a target price of Rs 300 (1x FY11E ABV)," says FinQuest Securities' report.

Sharekhan on Unity Infra - Target Rs 430

Sharekhan has maintained its buy rating on Unity Infraprojects with a target price of Rs 430 in its research report.

"Unity Infraprojects (Unity)’s Q1FY2010 revenues grew by 24.6% year on year (yoy) to Rs 278.6 crore, which is in line with our expectation. We maintain our 'Buy' recommendation on the stock with the revised price target of Rs 430. At the current market price, the stock is trading at attractive valuation of 6.2x FY2010 and 5.8x FY2011 earnings estimates and 0.8x FY2011 P/BV," says Sharekhan's research report.

Stock Views on Federal Bank, TRF, Bharti Airtel

Motilal Oswal on Federal Bank - Target of Rs 277

Motilal Oswal has maintained its buy rating on Federal Bank with a price target of Rs 277 in its report.

"Federal Bank’s 4QFY09 results were significantly below our expectations. NII growth was lower than we had estimated, tax rate was higher than we had expected. Strong tier-I ratio, higher provision coverage, and lower C/I ratio of 35% are the bank’s key strengths. We expect Federal Bank to report EPS of Rs 33 in FY10 and Rs 39 in FY11. We estimate 14% earnings CAGR over FY09-11. RoA should remain strong at1.4% over FY09-11. However, excess capital would restrict RoE at 13%. The stock trades 7.1x FY10E EPS and 0.9x FY10E BV of Rs 277. We have maintained buy rating on the stock, target of Rs 277," says Motilal Oswal's report.


Emkay Global on TRF - Target of Rs 692

Emkay Global Financial Services has maintained its buy rating on TRF with a price target of Rs 692 in its report.


"TRF gave positive surprise in Q4FY09 with better-than expected operational performance. Its revenues grew by 41% yoy to Rs 2.4 billion led by sustained pick up in order booking in Project division, operating margins up 210 bps yoy to 15.5%, net profit growth at 55% yoy to Rs 239 million. TRF is sitting on strong order backlog of Rs 13.6 billion, up 33.5% yoy basis. There is ‘Project’ to ‘Product’ mix of 98:2, in favor of Project Orders. We revise our consolidated FY10E earnings upwards by 10.7% to Rs 104.9/Share and introduce FY11E earnings of Rs125.9/Share. We maintain our ‘BUY’ rating with revised target price of Rs 692, valuing at 6X 1-year forward PER," says Emkay Global Financial Services' research report.


Angel Broking on Bharti Airtel - Target of Rs 903

Angel Broking has recommended an accumulate on Bharti Airtel with a price target of Rs 903 in its report .

"Bharti Airtel is India's leading provider of GSM-based mobile services with 96.7 million subscribers at the end of April 30, 2009. In fact, in May, the company crossed 100 million subscribers. Bharti Airtel, in order to acquire a 49% stake in MTN Group, would have to fork out a gross of USD 6.8 billion at ZAR 86 per MTN share. On the other hand, the company would see an inflow of USD 2.9 billion from MTN Group as part payment towards purchase of a 36% post-transaction economic interest in Bharti. Thus, the net cash outflow required would be to the tune of approximately USD 3.9 billion."

"MTN Group is a South Africa-based communication service provider offering cellular-based services and business solutions. MTN has operations in 21 countries across Africa and the Middle East and is one of the largest emerging market mobile operators globally. Bharti Airtel is likely to trade volatile until the final result of the discussions between the two parties is out. Nonetheless, we believe this is a bold and necessary move being attempted by Bharti and investors would have to be patient and take a longer-term approach to reap the fruits of such a deal. We recommend an 'Accumulate' on Bharti with a target price of Rs 903," says Angel Broking's report.

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