State Bank of India
Research: HSBC
Rating: Overweight
CMP: Rs 1312
HSBC raises the target price of State Bank of India to Rs 1,540 on lower cost of equity (COE) and revised estimates and multiples. the bank''s net profit was up 46% y-o-y at Rs 2,740 crore in Q4, primarily because of the surge in treasury profit, up 125% q-o-q. Net interest income stayed flat y-o-y due to the high cost of funds, as SBI had mobilised large amounts of funds under the 1,000-day deposit scheme. As a result, net interest margin declined 20 bps y-o-y to 2.93% for FY09. Management has guided that margins are likely to recover, as the bank goes slow on term deposit mobilisation and deposits get re-priced downwards. At end-March, gross NPA was up 21% y-o-y, at Rs 15,500 crore. The increase comes from the Rs 160-lakh loan to the Ratnagiri Power Project getting classified as an NPA. SBI also restructured loans worth Rs 8,400 crore during FY09, taking the share to 1.8% of advances at end-March; pending applications are guided at not more than Rs 800 crore for restructuring. HSBC lowers the cost of equity assumption to 14% from 15.5%, given the softening benchmark sovereign yield in the past 12 months.
BHEL
Research: Credit Suisse
Rating: Neutral
CMP: Rs 1707
Credit Suisse maintains `Neutral'' rating on Bhel. Bhel''s stated plan is to expand capacity from 10 GW to 15 GW by December ''09. However, this has been met by a healthy dose of scepticism centered on the supply chain''s ability to match the pace of capacity expansion. A fragmented supply chain ensures that there is very limited data available about vendor plans, which is critical as Bhel outsources a significant portion of its capacity. Higher volumes, the supply chain''s low bargaining power and a highly competitive environment has helped Bhel to sharply reduce costs this year. Falling costs are good for Bhel, as it provides room to cut prices to ward off competitive pressures and pocket a portion of the gains into better margins next year. The entire supply chain has been built over the past 25-30 years and it would be difficult for industry peers to replicate the degree of perfection achieved by any new entrant in only a few years. Credit Suisse views Bhel as a strong story with most near-term positives already reflected in its stock price.
NTPC
Research: Goldman Sachs
Rating: Sell
CMP: Rs 188
Goldman Sachs downgrades NTPC to `Sell'' from `Buy'' as NTPC''s premium valuations on the back of its financial strength are unjustified as NTPC is likely to miss its Eleventh Plan target of about 22 GW primarily due to fuel, water and power equipment issues. The EPS CAGR over FY09-12E is to be muted at 6.3%. NTPC is currently trading at FY10E price to book value of 2.5x at a premium to its emerging market peers (1.6x) and to its historical average of 2.1x. Goldman Sachs forecasts NTPC''s RoE (return on equity) to decline from 14.8% in FY09E to 13.6% in FY11E primarily due to an increase in capital work in progress on account of delays in commissioning of its projects. Investors will now focus more on NTPC''s timely execution of power projects rather than the defensive nature of its earnings. Over the past 12 months, NTPC has fallen 2.0% versus a 30.2% drop in the BSE30-Sensex. The revised 12-month target price for NTPC is Rs 154 with a potential downside of 18%. Goldman Sachs'' FY10E P/B and P/E analyses imply a downside of 17% and 19%, respectively.
Asian Paints
Research: Citigroup
Rating: Buy
CMP: Rs 955
Citigroup upgrades Asian Paints to `Buy'' from `Sell'' with a revised target price of Rs 1,090. The company''s consolidated PAT rose 7% y-o-y, driven by a strong 25% y-o-y revenue growth. This was in contrast to the expectation of a 20% profit decline. During the analyst meeting, the management indicated that: a) demand in the key decorative paints business continues to remain firm, b) growth in the international business remains steady and c) cost pressures are abating. Citigroup increases target price to Rs 1,090 from Rs 801 based on 20x September FY10E EPS. It also raises target multiple to 20x from 18x, in line with the average multiple of the past five years. Over the last year, Asian Paints has underperformed the FMCG index by 10%; more recently year to date (YTD), it has underperformed the broad market and peers by 22% and 4% respectively.
Jain Irrigation
Research: Merrill Lynch
Rating: Buy
CMP: Rs 468
Merrill Lynch reiterates `Buy'' rating on Jain Irrigation with a price target of Rs 575 pegged at 17x FY10E and 0.5x PEG (price earnings to growth). The company posted a better quality of earnings in Q4 and higher revenue visibility, and Merrill Lynch has raised FY10 and FY11 estimates by 1% and 5% respectively factoring in higher margin in the micro irrigation system (MIS) business. Merrill Lynch expects 36% EPS CAGR driven by 70-bps margin improvement over FY09-11. Revenue visibility has improved given: i) strong order flow and inquiries in pipes, ii) current order book in onion dehydration forms ~60% of FY10 segmental estimate, and iii) continuing strong performance in MIS. Domestic MIS remains the main earnings driver for the company. The company''s strategy of growing in new states is succeeding given strong growth in Tamil Nadu (260% y-o-y), Madhya Pradesh (80% y-o-y) and Karnataka (44% y-o-y). Also, it is consistently deriving better than expected margins given its pricing power and declining raw material prices.
Bank of India
Research: Deutsche Bank
Rating: Hold
CMP: Rs 246
Deutsche Bank recommends `Hold'' rating on Bank of India with a target price of Rs 250. Loan growth is likely to moderate in the present sluggish environment and margins may remain under pressure even if they do not fall much. Low-cost deposit ratio has failed to pick up for a long time and asset quality headwinds are increasing. The management is targeting a 22% loan growth and 20% deposit growth for FY10. Though the medium term NIM target is 3%, they admit that there is pressure on spreads due to high cost of funds and yields dropping sharply. They believe that it could take still another two quarters for the high-cost deposits to run off. They also have the tough task of taking the low-cost deposit ratio of current account and savings account (CASA) from 31% to 35% in FY10 - CASA had fallen in FY09 due to strong growth, high term deposit rates and an over-aggressive deposit mobilisation campaign. BoI''s slippages have been rising both on a basic and lagged basis, and Q4FY09 NPL formation was high compared to historical trends.
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