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.

STATE Bank of India (SBI)

STATE Bank of India (SBI) managed to beat analyst’s estimates by a huge margin during the fourth quarter, despite unfavourable economic environment prevailing during the period. However, India’s largest bank is grappling with several issues. SBI’s strategies in last six months provide some insights into the future of the company.
PERFORMANCE:

SBI reported a 46% year-on-year growth in net profit for the March’09 quarter. But, the growth was not triggered by a growth in net interest income (NII), as in the case of the first three quarters of the fiscal. Till December’08 quarter, the growth in NII closely tracked the growth in net profit. However, the same wasn’t the case in March’09 quarter. While, the net profit grew by a handsome 46%, the NII remained flat. NII is the difference between the interest earned and interest paid, and forms the core of a bank’s operations. In the absence of a growth in NII, other income helped the bank boost its bottom line.

The bank’s other income grew by 68% during the period and its core fee income grew by 34%. Higher profits from sale of investments was the reason behind the record growth in other income. Profit from investments amounted to Rs 1,519 crore in the March’09 quarter, compared with just Rs 296 crore a year ago. The bank’s treasury also put up a stellar show, still income from this route depends on the vagaries of asset markets. The treasury income do not follow any trend other than that of the market. As a result, the income from this route is not sustainable. The point here is that the growth in profits is more on account on non-recurring income than from core banking operations.

This is not the only reason for concern. The bank offered attractive rates on deposits in the December’08 quarter, resulting in a 36% growth in deposits during the period. The trend continued into the March’09 quarter, with deposits growing at 38%. Simultaneously, the bank also stepped up lending. Its loan book grew by 30% in March’09. Though the bank managed to beat industry growth in credit offtake, its deposit mobilization was so high that its credit deposit ratio (advances divided by deposits) fell to 66.6% in March’09 from 72.6% a year ago. The challenge for the bank is to maintain high growth in advances and moderate the deposits growth.

Meanwhile, the bank tried to raise its market share in home loans and auto loans by offering attractive rates. This brought some success as its portfolio of auto loans and home loans increased by 36% and 21% in the fourth quarter. However, auto loans and home loans combined formed just over 10% of its loan book at March’09-end. Corporate and international trade loans continued to be the key growth drivers. The bank performed really well as its international loan book grew by a stupendous 54% and its corporate book jumped by 31% in March 2009. The bank is taking steps to reduce cost of funds. Last Wednesday, the bank cut deposit rates by 50 basis points for various maturities. The bank stepped up deposit mobilization by current account and savings account (CASA) route in March and put a brake on term deposits. The CASA deposits attract much lower interest rates, as they offer high liquidity than term deposits. While, term deposits grew by a mere 2.8%, the CASA deposits swelled by 15.2% in the March’09 quarter, compared with the previous one.

Though, the earnings growth was higher in the March’09 quarter, there were many issues pending. The bank did not want to sacrifice on loan growth, which made it attract deposit at higher rates than other banks. It realized that the net result of high lending and borrowing might not be favorable in short-term. At the same time, it made its treasury function more efficiently and core fee income also grew. As soon as Reserve Bank of India took steps to ease rates, the bank mobilized more deposits through CASA route and later cut deposit rates to control rising cost of funds. SBI being the largest bank in India has surely shown the way to other state-run banks to grow even in turbulent times.

VALUATION:

The bank is trading at a price to earnings multiple of 9 times. Clearly, the valuation doesn’t match the bank’s earnings growth of 35.5% in FY09. Typically, banking stocks trade at a discount to their earnings growth, but in case of SBI, the gap is too wide. So, we advise investors to invest in the stock for long-term gains.

HDFC

HDFC is facing stiff competition from state-run banks.With the P/E at a high, it may be a good idea to exit at the current price point
HOUSING Development Finance Corp, better known as HDFC, is the biggest housing loan provider in India. In fact, its success is so unparalleled that its name has become synonymous with housing loans in the country. It is also one of the most consistent performers in India Inc. For instance, its profit growth remained in the range of 20-25% in six years from FY 2002-2007. As a result, its stock has become darling of investors be it retail, high net worth individuals or foreign institutional investors. However, state owned banks; particularly State Bank of India (SBI) has upped the ante on housing loans, which has intensified the competition.

BUSINESS

India is a country with acute shortage of dwelling units. This shows that housing loans will continue to be a growth business in many years to come. Moreover, housing loan is secured lending. Unlike unsecured lending such as credit cards, the risk of non-performing loans is much lower in mortgage business. The logical conclusion from these facts is that HDFC - being the largest mortgage player - is set to grow in future. But the competitive landscape has dramatically changed. In the good days of boom, it was ICICI Bank, which was the closest competitor of HDFC in terms of housing loans.

Today, public sector banks are coming out with attractive schemes for prospective borrowers. For instance, country's largest bank, SBI, has offered home loans at 8% per annum interest rate to new borrowers. The bank has met with such success that it has become the largest home loan provider in terms of both numbers of homes and volumes.

Other top PSU banks are also offering housing loans at attractive rates. In fact, today PSU banks offer lowest rates for housing loans. No doubt HDFC is feeling the heat. Moreover, PSU Banks have adopted modern practices such as core banking solution (CBS), improved their culture by instilling customer-focused approach at branch level, hired young workforce and introduced incentive based compensation structure. These changes have radically changed the competitive landscape in banking and finance space.

HDFC, however, has an upper hand due to its relationships with many builders across the country and its valueadded services to potential home buyers like qualitative information about builders and projects. Its staff also tends to be aggressive in courting prospective customers, while state-run banks mostly rely on walk-in customers.

FINANCIALS

HDFC’s performance has slipped a few notches in the last few quarters. In fact, in the December ’08 quarter, its net profit fell 2.3% year-on-year. Though profits soared 20.7% in the June’09 quarter, still the performance is lacking on some parameters. For instance, the growth in advances has come down to a mere 8.4% in the June ’09 quarter from 31% a year ago.

It is clear that the company is finding it difficult to maintain the growth rates. Plus, the competition has intensified over last year.

Moreover, the cost of funds for banks is much lesser because 30-40% of their deposits are CASA (current account and savings account) in nature. And because such deposits provide better liquidity than term deposits, banks offer extremely low interest rates. On the contrary, the cost of funds for HDFC is high because it is a non-banking finance company (NBFC) and cannot mobilize CASA deposits. For instance, in FY 2009, the cost of funds for SBI stood at 5.9% compared to 9.7% in case of HDFC. (Refer the chart below for comparison of cost of funds between HDFC and SBI over last five years). With higher cost of funds, HDFC cannot match the interest rates offered by PSU Banks on home loans.

VALUATIONS

The stock is trading at 30 times its trailing twelve months standalone earnings. The adjacent chart shows price to earning multiple (P/E) at various points in last six years. It is clear that only once in last six years that valuations were higher than what is prevailing now. And that happened in last months of year 2007. Those were the days of great Indian bullrun, when the company was growing by leaps and bounds.

The point here is that HDFC is facing strong headwinds in form of stiff competition. However, it seems that stock market has not captured it. On the contrary, the current rally has pushed the stock price bit too far. There is no doubt that HDFC will continue o grow due to its expertise in mortagge business. But, the growth rate may not be as high as invetsors have become used to. Later or sooner, stock market will factor this into valuations. It would be wise for long term investors to sell the stock or at least reduce exposure.

Bank of India

Profile

Like all PSU banks the stress at Bank of India (BOI) also has been towards the retail sector and as a result the share of bulk deposits or corporate deposits is just 20 per cent, while rest is all retail deposits. International business of the bank contributes 17 per cent of the total business.
Current Account and Savings Account (CASA) ratio as of March 31, 2009 stood at 31 per cent, down from 40 per cent 2 years ago, which implies that the higher interest offered during the credit crisis has worked for the bank, and most of the new funds have gone into term deposits.
Currently, the bank is looking for partners for its venture into the asset management business.

Fundamental Performance

The bank has, over the years, done well to cut down on high non-performing assets (NPAs) of yesteryears. Its current net NPAs stand at 0.44 per cent of the total assets while its capital adequacy ratio stands at 13.01 per cent, up from 11.75 per cent 2 years ago. On the profitability front, it has also improved upon its wayward ways —for the past three years, the bank has been able to boost its bottom-line by 62.45 per cent annually.
Though its dividend payout ratio is not something to brag about, still BOI has been a regular dividend paying company for the past 10 years.

Stock Performance

The believer of this bank’s stock has been rewarded handsomely over the past 5 years. The stock has compounded the investors money at more than 50 per cent per year.
Currently, the stock is trading at a dividend yield of 2.03 per cent, well above its 5-year median yield of 1.71. BOI is about 1/4th the size of the PSU banking giant State Bank of India (SBI), but valuation-wise the stock is trading at a 50 per cent discount to SBI. Its price to earning (PE) ratio is 6.84 while that of SBI is 13. But comparing this with the stock’s own historic level, it is currently trading at 21 per cent below its 5-year median PE.

History

Bank of India was set up in 1906 in Mumbai. Starting off with a single branch, it now has over 3,000 branches all across India. It was nationalised in 1969.

Stock views on State Bank of India, Tata Tea

IIFL on State Bank of India - Target Rs 1777
"SBI’s focus on rapid network expansion and gaining market share has yielded results over the past two years. With 100% of its expansive branch network now linked to a common technology platform, a major constraint vis-à-vis new generation private banks is removed. The declining trend in ROE was arrested last year but the bank still lags other major government banks in this respect. Asset quality deteriorated last year and provisioning may remain high in the coming years."

"The six associate banks are in good shape and a consolidation would add value to the SBI Group. Despite the recent run-up in the stock price, valuations remain inexpensive at 1.2x core book. 'ADD' with a 12-month target of Rs 1777," says IIFL's research report.

Sharekhan on Tata Tea - Target Rs 939

"We believe with a net cash of Rs 755 crore (and a gross cash of Rs 2,963 crore as on March 31, 2009), the company is in good position to build organic as well as inorganic growth in the coming years. We broadly maintain our estimates for FY2010 and introduce FY2011 estimates through this note. At the current market price, the stock is trading at attractive valuations of 11.8x its FY2010E earnings of Rs 64.5 and 10.2x its FY2011E earnings of Rs 75.0 compared to some of the large-cap FMCG stocks. We maintain our Buy recommendation on the stock with the revised price target of Rs 939 (as we roll over our price target at 12.5x its FY2011E earnings),"

Stock views on Transformers & Rectifiers, State Bank of India, Voltas

India Capital Markets on Transformers & Rectifiers - Target Rs 160


India Capital Markets has recommended a buy rating on Transformers and Rectifiers (India) with a target price of Rs 160 in its research report. "TRIL’s revenues from furnace transformers have risen from Rs 205 million during fiscal 2005 to Rs 450 million during fiscal 2008. The Company has registered a top line growth of 41.65% y-o-y. The Company has also been able to achieve a growth of 26.25% at the net profit level. With the metal prices coming down we expect the net profit margin to stabilize around 9%-10% in the coming years. We recommend BUY with a target price of Rs 160 based on a P/E multiple of 4x its FY 10 earnings. We believe the company offers decent opportunity to play on the India T&D sector story," says India Capital Markets' research report.


Sharekhan on State Bank of India - Target Rs 1516

Sharekhan has maintained its buy rating on State Bank of India, SBI with a price target of Rs 1,516 in its research report. "During the year-to-date period in FY2009, the SBI has witnessed a strong 40%+ growth in its core fee income. This could be attributed to the strong credit growth coupled with better product offering to its clients due to technological advancement. SBI is confident of maintaining this high growth momentum in its core fee income in the quarters to come. The bank has restructured around Rs 2,000 crore worth of loans during the current year till date period. We maintain our Buy recommendation on the stock with a price target of Rs 1,516," says Sharekhan's research report.


PINC Research on Voltas - Target Rs 55

PINC Research has recommended a buy rating on Voltas with a price target of Rs 55 in its research report. "Voltas Ltd has a high cash generating business model. Cash from operation has been positive in the last three years. Cash & Bank balances and current investments were Rs 3 billion & Rs 2.3 billion respectively at the end of FY08. Robust order book for MEP/HVAC segment with significant presence in Middle East market coupled with diversified business model, Voltas has the potential to post revenues at a CAGR of 21% for the next two years. Hence, we recommend a ‘BUY’ with a price target of Rs 55 on a 12 month investment perspective," says PINC's research report.

Indiabulls Securities views on State Bank of India, NTPC

State Bank of India - Target Rs 1,541


Indiabulls Securities Research has upgraded its rating on State Bank of India (SBI) to buy in its November 10, 2008 research report. "State Bank of India’s operating profit and net profit for Q2’09 surged 54.5% and 40.2% yoy, respectively, exhibiting a strong performance. While we expect the economic slowdown to adversely impact the Bank’s performance in the near-to-medium term, we believe that most of the negatives have been factored in the current price. Our fair value estimate is Rs 1,541. We, therefore, upgrade our rating to BUY," says Indiabulls Securities' research report.


NTPC - Target of Rs 194


Indiabulls Securities Research has upgraded its rating on NTPC to buy with a target of Rs 194 in its November 11, 2008 research report. "NTPC clocked revenues to the tune of Rs 96.6 billion for Q2’09. Net profit for the quarter increased 9.6% yoy to Rs 21.1 billion. After the recent correction, we believe NTPC’s stock should prove to be a good buy. Based on our DCF valuation, we have arrived at a target price of Rs 194, assuming a terminal growth rate of 5% and a WACC of 10.5%. Since our target price implies an upside of 28% from the CMP, we upgrade our rating to Buy," says Indiabulls Securities' research report.

Stock Views on SBI, Balrampur Chini, Zee News, PSL

Karvy on SBI - Target Rs 1559

Karvy Stock Broking has maintained its buy rating on State Bank of India (SBI) with a target price of Rs 1559 in its October 31, 2008 research report. "In 2QFY09, State Bank of India's net interest income grew by 45% (Y/Y) to Rs 54.5 billion much higher than our estimates (of Rs 45.6 billion) mainly due to much higher credit growth and higher yield on advances. SBI's net profit reported 40% jump (Y/Y) to Rs 2.6 billion growth due to reversal in investment depreciation. We reiterate BUY rating with a price target of Rs 1559," says Karvy's research report.

SBICAP Securities on PSL - Target of Rs 181

SBICAP Securities has maintained its buy rating on PSL with price target of Rs 181 in its November 21, 2008 research report. "At the CMP of Rs 95, PSL is trading at a PE of 2.8x and 2.1x its FY08E and FY09E earning respectively. EV / EBITDA is at 3.9x and 3.2x FY08E and FY09E respectively. We initiate coverage on PSL with a buy rating and 12 month price target of Rs 181 implying an upside of 90%," says SBICAP Securities' research report.

Karvy on Balrampur Chini - Target of Rs 55

Karvy Stock Broking has recommended a buy rating on Balrampur Chini Mills with a target of Rs 55 in its December 4, 2008 research report. "Balrampur Chin Mill (BCML) reported revenue increase of 40.8% YoY (QoQ increase of 30.2%) to Rs 4.11 billion mainly on account of higher sugar and distillery revenue in the Q4FY08. The company reported profit of Rs 145 million translating into EPS of Rs 0.57 for the quarter."

"The company is expected to report loss of Rs 240 million in FY09 and profit of Rs 1.26 billion in FY10. We have assumed cane cost of Rs 140 per quintal in FY09 and Rs 148 per quintal in FY10. Considering lower profitability in sugar and uncertainty on cane cost, we continue our valuation based on replacement cost method. We are revising our valuation of EV/ Ton from Rs 0.35 million to Rs 0.3 million with target price of Rs 55 (Previous Rs 68), Buy," says Karvy Stock Broking's research report.

Prabhudas Lilladher Zee News - Target of Rs 57

Prabhudas Lilladher has recommended an accumulate rating on Zee News (ZNL) with a target of Rs 57 in its September 24, 2008 research report. "We expect the company to post 24% and 37% revenue and earnings CAGR, respectively in FY08-11E. The stock currently trades at 22.9x and 16.8x our FY09E and FY10E earnings estimates and remains one of the cheapest stocks in our broadcasting universe. We assume coverage on ZNL with a Accumulate rating and a target price of Rs 57," says Prabhudas Lilladher's research report.

ICICI Securities views on SBI, PNB, Infosys Technologies

State Bank of India (SBI) & Punjab National Bank (PNB)

The banking space looks good in a scenario where interest rates across the globe are heading south. The same is the situation in India which remains least impacted from the credit crisis. Market leaders such as SBI and PNB will witness 22-24% growth in their core business. Also, these banks have a robust CASA of 40% that will enable them to maintain net interest margins (NIMs) of about 3% levels going forward. Even the asset quality remains robust and are well capitalised at this point of time.

Infosys Technologies

Given the current financial turmoil in the US, tech stocks, including large caps, have been beaten down to attractive levels. Also, we believe large cap stocks having scale benefits and substantial cash on books will tide over the ongoing crisis. In such a scenario, we like Infosys because of the above factors and given their superior management capabilities.

Bonanza Portfolio Views on Large cap Banking Sector

STATE BANK OF INDIA

The bank is the largest commercial financial organisation in India. M&A among SBI group banks have started, with State Bank of Saurashtra merging into SBI. In view of growth potential of Indian economy and under banked status of the masses, with rising incomes & purchasing power, SBI has good potential going forward. The government has given strong signals of the economy heading for softer interest regime.

HDFC

The company has shown constant growth in past three decades. It is able to maintain margins in spite of slow down shown by industry. There is visibility in its earnings and growth. India is heading for softer interest regime as government is infusing more liquidity to over come the glut in economy. Further, the scrip has hidden value of about Rs 800 per share in form of its investments and subsidiaries.

Stock Views on State Bank of India, Lanco Infra, Titan Industries

MOTILAL Oswal on SBI

MOTILAL Oswal maintains ‘buy’ rating on State Bank of India (SBI). The bank’s rural and agri-business unit comprises: (1) all the business done at its rural and semi-urban branches; and (2) agriculture business done at any branch. SBI has 7,100 branches in rural and semi-urban areas which account for ~70% of its total branch network strength. About 50% of its employees work in the agri-rural business (ARB) division. The bank’s ARB loan book is currently more than Rs 1 trillion; this accounts for ~23% of SBI’s total loan book and ~28% of its domestic loan book. About 45% of these are farm loans. ARB deposits stand at ~Rs 1.7 trillion and account for ~30% of SBI’s deposits. SBI’s ARB loan and deposits account for 21-22% of the industry, while its ARB branch network accounts for 13% of the industry. SBI is consistently gaining market share in this segment. Motilal expects the bank to report consolidated earnings per share (EPS) of Rs 155 in FY09E and Rs 187 in FY10E. Consolidated book value (BV) will be Rs 1,110 in FY09E and Rs 1,282 in FY10E. Return on assets (RoA) and return on equity (RoE) are expected to be ~1% and 15-16%, respectively, over the next two years. Adjusted for value of SBI Life at Rs 205/share, the stock trades at 1x FY10E consolidated BV.

UBS Investment on Lanco Infratech

UBS Investment has upgraded its rating on Lanco Infratech to ‘buy’, but has reduced the target price by 28% to Rs 250. It has also cut its EPS estimates by 10%/20%/19% to Rs 19/22.4/33.3 for FY09/10/11E to reflect a slowdown in project execution. It has factored in a 10% discount to power, EPC (engineering, procurement & construction) and infrastructure valuations. The contributions to value are from power (44%), EPC (40%) and real estate (15%). The stock is trading at 9.5x FY09E EPS, which is a good buying opportunity. The key risks are fuel availability, execution and a further slowdown in the real estate sector.

JP Morgan on Titan Industries

JP MORGAN maintains ‘overweight’ rating on Titan Industries with a March ’09 target price of Rs 1,475 based on a forward price-to-earnings (P/E) multiple of 23x. The company has seen a revival in demand for its watches and jewellery, post-June ’08. It continues to maintain its previous guidance of 33% growth in revenue to Rs 4,000 crore and similar profit growth for FY09. Specialty and lifestyle retailing will remain the company’s core focus as there are many organic growth opportunities in a nascent market like India. Titan aims to add 750 stores over the next five years, but it has no immediate plans to expand its international business. Several initiatives in the jewellery and watch businesses should help to sustain good growth over the next 1-2 years. Goldplus, Golden Harvest Scheme and innovative collections such as ‘Jodhaa Akbar’ should support double-digit volume growth in the jewellery business. The company has planned exciting new launches in the watch segment, such as a new children’s brand and automatic watches, over the next 6-9 months. Prospects of the eyewear business look encouraging and the company plans to add 60 stores in the next one year and 200 stores over the next three years. It is targeting sales growth of 50% through its own brands to improve margins. JP Morgan feels Titan is the best proxy for attractive growth opportunities in the specialty retail space.