Investor's Eye [April 26, 2010]

HDFC Bank

Cluster: Evergreen

Recommendation: Buy

Price target: Rs2,205

Current market price: Rs1,991

Price target revised to Rs2,205 Result highlights HDFC Bank?s Q4FY2010 performance was largely in line with our expectations. The bank?s net profit grew by 32.6% year on year (yoy) to Rs836.6 crore vs our expectation of Rs826 crore. The profit growth was mainly driven by a healthy growth in the net interest income (NII) and lower provisioning during the quarter. The NII for the quarter grew by a healthy 27% yoy to Rs2,351.4 crore. The NII growth was largely driven by an improved credit growth as well as a sequential expansion in the reported net interest margin (NIM). The sequential expansion in the NIM could be traced to a 50-basis-point sequential decline in the cost of deposits that outpaced the contraction in the yields on customer assets. Moreover, the current account and savings account (CASA) ratio improved to 52%, which also helped the bank in maintaining its margins. As expected, the non-interest income performance was weaker as the non-interest income declined by 19% yoy to Rs903.6 crore. Importantly, the fee income growth was decent at 7% yoy (considering one time items in Q4FY2009) while the foreign exchange (forex) related income grew by 18% yoy. However, this was outweighed by a treasury loss of Rs47.3 crore vs a Rs243.6-crore profit in the year-ago quarter, leading to decline in the overall non-interest income. The operating expenses growth was contained at 11.8% yoy. Consequently, the cost-to-income ratio for the quarter stood at 47.9%. Though the pre-provisioning profit was moderate at 8% yoy, the core operating profit grew by an impressive 31.3%% yoy to Rs1,741.7 crore. Importantly, the provisions during the quarter declined by 33.1% yoy to Rs439.9 crore. Of the total provisions, a major chunk was towards loan losses. Consequently, the provisioning coverage stood improved at 78.4% compared with 72.4% in the previous quarter. The asset quality of the bank improved on a sequential basis. The gross non-performing assets (GNPA) declined by 8% quarter on quarter (qoq) to Rs1,816.8 crore while the net NPAs (NNPA) declined by 28% qoq driven by the improvement in the provision cover during the quarter. In relative terms, the %GNPA declined to 1.43% from 1.98% in Q4FY2009. The restructured assets now form 0.3% of the advances book, down from 0.4% at end of Q3FY2010. In Q4FY2010, the advances grew by 27.3% yoy to Rs125,830.6 crore with the deposit growth relatively slower at 17.2% yoy to Rs167,404.4 crore. Importantly, the demand deposits grew by a strong 37.5% yoy and 8.9% qoq while the term deposits were largely flattish yoy. Consequently, the CASA ratio of the bank improved to 52%. The capital adequacy ratio (CAR) of the bank as at the end of Q4FY2010 stood comfortable at 17.4% compared with 18.3% during the previous quarter. HDFC Bank continues its streak of consistent performance. Banking on its consistent performance, visible optimisation of CBoP assets and further revival in credit demand in FY2011, we maintain our positive stance on the stock. We draw significant comfort from the bank?s healthy asset quality position. We are maintaining our earnings estimates for FY2011 and introduce our FY2012 estimates. At the current market price of Rs1,990, HDFC Bank trades at 17.9x FY2012E earnings per share (EPS), 9.8x FY2012E pre-provisioning profit (PPP) and 3.2x FY2012E price-book value. We maintain our Buy recommendation on the stock with a revised price target of Rs2,205. ICICI Bank

Cluster: Apple Green

Recommendation: Buy

Price target: Rs1,243

Current market price: Rs960

Price target revised to Rs1,243 Result highlights For Q4FY2010 ICICI Bank reported a bottom line of Rs1,005.6 crore, which includes a gain of Rs203 crore from the sale of the merchant acquisition business. Adjusting for the same the bottom line is largely in line with our estimate. The net interest income (NII) came in at Rs2,034.9 crore, down 5% year on year (yoy) and below our estimate, as the bank continued to contract its balance sheet against our expectation of a flattish trend. Meanwhile, the net interest margin (NIM) was stable at 2.6% sequentially. The non-interest income registered a growth of 13% yoy and stood at Rs1,890.8 crore, driven by a healthy fee income growth and a treasury gain of Rs196 crore (includes a gain of Rs203 crore from the sale of the merchant acquisition business). The continued declining trend in absolute terms of the operating expenses for the previous seven quarters reversed during Q4FY2010 with a sequential increase of 12%. The bulk of the increase can be traced to staff expenses, which witnessed a sequential rise of 36.5%. On asset quality front, during the quarter under review, the bank witnessed a 6% sequential increase in its gross non-performing assets (GNPA). However, the incremental gross slippages came off to Rs700 crore in Q4FY2010 from Rs750 crore in the previous quarter and approximately Rs1,200 crore run rate seen in the few quarters before that. The %GNPA stood at 5.06% (up 22 basis points quarter on quarter [qoq]) while the % net NPA (NNPA) stood at 2.12% (down 30 basis points qoq). The provisioning coverage of the bank improved significantly by 830 basis points qoq to 59.5%. ICICI Bank?s advances dipped by 17% yoy to Rs181,206 crore and the deposits contracted by 7.5% yoy to Rs202,017 crore, though on a sequential basis there was a growth of 1.1% and 2.2% in the advances and deposits respectively. Though the bank continued to operate in capital preservation mode, the bank is clearly turning to balance sheet growth (FY2011 loan growth guidance 16-20% yoy). Importantly, the current account and savings account (CASA) ratio improved sharply by 210 basis points qoq to 41.7%, driven by a strong 7.6% sequential growth in the demand deposits. The bank?s capital adequacy ratio (CAR) as on March 31, 2009 was 19.4% (as per Basel II norms), in line with that in the previous quarter. Importantly, the tier-I CAR stood high at 14.0%, one of the highest among its peers. Going forward, the bank intends to leverage its capital by focussing on balance sheet growth again. The consolidated profit of the bank for FY2010 grew by a healthy 31% Rs4,670 crore yoy, driven by improved bottom line performance for the insurance subsidiaries of the bank as well as mutual fund related business. The life insurance business of the bank turned profitable over the year while the general insurance business saw its bottom line increase five-fold over the year. At the current market price of Rs960, ICICI Bank trades at 15.8x its FY2012E earnings per share (EPS), 9.2x FY2011E pre-provisioning profit (PPP) per share and 1.8x its FY2012E standalone book value (BV) per share. We have tweaked our earnings estimates to factor in the additional information. We maintain our Buy recommendation on the stock with a revised price target of Rs1,243. Godrej Consumer Products

Cluster: Apple Green

Recommendation: Hold

Price target: Rs309

Current market price: Rs298

Downgraded to Hold Result highlights Godrej Consumer Products Ltd (GCPL)?s Q4FY2010 results are not comparable on a year-on-year (y-o-y) basis on account of consolidation of Godrej Sara Lee?s 49% stake in Q2FY2010. The bottom line growth for Q4FY2010 exceeds our estimate due to a higher-than-expected operating profit margin (OPM), however the stand-alone revenue growth, at just 2.1%, was disappointing. The consolidated net sales for the quarter went up by 48.6% year on year (yoy) to Rs509.2 crore, which is less than our estimate of Rs533.7 crore. The stand-alone (domestic) business registered a disappointing performance with the sales growing by just 2.1% yoy to Rs282.4 crore. This we believe is mainly on account of ~5% y-o-y decline in the sales of the soap segment (which contributes ~60% to the stand-alone sales). On the other hand, the international operations logged in a strong performance with the revenues growing by ~19.0% yoy, mainly on account of a robust performance of Rapidol and Kinky, which saw their revenues grow by ~60.0% yoy and ~27% yoy respectively during the quarter. Godrej Sara Lee contributed Rs147.0 crore to the consolidated revenues during the quarter. In spite of high spends towards advertisement cost and other expenditures, the OPM improved by 176 basis points to 21.1% (ahead of our estimate of 19.5%) mainly on account a lower y-o-y raw material cost as percentage to sales. The raw material cost as percentage to sales stood at 44.5% in Q4FY2010 as against 50.9% in Q4FY2009. The operating profit grew by 62.1% yoy to Rs107.2 crore, ahead of our estimate of Rs103.8 crore. Thus, despite a lower-than-expected growth in the top line, the bottom line grew by 54.6% yoy to Rs91.8 crore (ahead of our estimate of Rs85.6 crore), which is in line with a strong expansion in the OPM. We have revised our bottom line estimates for FY2011 and FY2012 downwards by 6.4% and 5.0% respectively, primarily to factor in the lower sales growth trajectory in the soap segment and the higher raw material cost. We expect the international business along with the recent acquisitions to register a robust growth in the coming years. In the domestic operations though the performance of the soap business (that showed signs of stress in Q4FY2010) needs to be watched out. At the current market price, the stock trades at 23.7x its FY2011E earnings per share (EPS) of Rs12.6 and 20.3x its FY2012E of Rs14.7. In line with our downward revision in the earnings estimates, our revised price target stands at Rs309 (21x its FY012E EPS). In view of the limited upside from the current level, we are downgrading our recommendation from Buy to Hold. However, we believe, the investors would do well to hold on to the stock as the likelihood of further acquisition announcements (especially in Latin America) would keep the stock in flavour and could bring in further upside potential. Also, though not quantifiable currently due to lack of information, the EPS accretive nature (as indicated by the management) of the Megassari deal could bring in a further upside to the EPS estimates and hence the stock price.

Maruti Suzuki India

Cluster: Apple Green

Recommendation: Hold

Price target: Rs1,473

Current market price: Rs1,335

Price target revised to Rs1,473

Result highlights

• Maruti Suzuki India (Maruti)?s Q4FY2010 results were in line with our expectation at the operating level, however a lower-than-expected other income pulled down the net profit below our expectations.
• The total income for the quarter grew by 30.7% year on year (yoy) to Rs8,280.8 crore on the back of a robust 21.5% year-on-year (y-o-y) growth in the volumes and a 7.5% y-o-y growth in the net average realisation.
• The operating profit margin (OPM) at 11.7% was in line with our expectation of 11.2% and was higher by 614 basis points on a y-o-y basis. The margin expansion was on account of a 277-basis-point y-o-y decline in the raw material cost as a percentage to the total income at 77.4% (the same was however 162 basis points higher on a quarter-on-quarter [q-o-q] basis). Furthermore, a 310-basis-point y-o-y decline in the other expenses as a percentage to the total income at 9% for the quarter led the operating profit to grow by a hefty 175.8% yoy to Rs967.3 crore (against our expectation of Rs914.2 crore).
• On account of much lower yields on investments in the quarter as compared to the corresponding quarter of the last year, the other income came in significantly below expectations, at Rs222.7 crore (a growth of 9.2% yoy), which subdued the performance at the operating level. Consequently, the reported net profit surged by a stellar 170% yoy to Rs656.5 crore (as against our expectation of Rs731 crore).
• For FY2010, the company has also announced a final dividend of Rs6 per share (face value of Rs5 per share).
• Maruti is likely to face headwinds both on the sales volume growth and the profit margin front going ahead. While the high base of FY2010, aggravating competition and upturn in the interest rate cycle pose a challenge to growth in volumes, the rising commodity prices are likely to pressurise the profitability.
• Though we maintain our estimates for FY2011, we are reducing our estimates for FY2012 by 4.8%. Our FY2012 estimates stand revised downwards factoring in a higher capital expenditure (capex) of Rs3,000 crore for FY2012, which will reduce the free cash on the books, thereby leading to a higher depreciation and lower other income.
• As a consequence of the downward revision in our earnings estimates for FY2012 and to factor in the above risks to the growth going ahead and a moderate earnings compounded annual growth rate (CAGR) of 10.3% for FY2010-12E, we have reduced our target price multiple to 14x (from 16x earlier). We have also rolled over our price target to FY2012 earnings.
• At the current market price, the stock is trading at 14.2x its FY2011E earnings and 12.7x its FY2012 earnings. We maintain our Hold recommendation on the stock with a revised price target of Rs1,473. We expect the stock to underperform in the near term and rather prefer Mahindra & Mahindra (M&M) in the automobile space.

Sun Pharmaceutical Industries

Cluster: Ugly Duckling

Recommendation: Buy

Price target: Rs1,757

Current market price: Rs1,604

Price target revised Rs1,757

• The twin blow of unfavourable decisions for Protonix and Eloxatin would remain as an overhang on the stock in the near term. In order to factor in the loss in the Eloxatin opportunity, we downgrade our earnings estimate by 4.2% for FY2011. Our FY2012 earnings estimate remains largely unchanged given the resumption of Eloxatin sales in FY2012. This brings our earnings per share (EPS) estimate to Rs72 for FY2011 and to Rs84.5 for FY2012. We await more clarity on the Protonix front from the management and the court?s decision.

• However, we continue to believe that Sun Pharma remains one of the best pharmaceutical plays in India with its superior business model, leadership in chronic therapies, strong balance sheet and more limited competition opportunities like Effexor XR. With the impact of Caraco Pharmaceuticals and Taro Pharmaceuticals (Taro) already built in the price, we believe that the stock?s valuations reflect most of the negatives and the risk-reward ratio has become favourable for investors. At the current market price of Rs1,604, Sun Pharma is valued at 22.4x FY2011E and 19.1x its FY2012E fully diluted earnings. Thus, we maintain our Buy recommendation on the stock with a revised price target of Rs1,757 (20x its FY2012E and Rs67 for Taro).

Reliance Industries

Cluster: Evergreen

Recommendation: Hold

Price target: Rs1,215

Current market price: Rs1,070

Earnings below estimates; time to look for cash flow utilisation strategy

Key points

• Reliance Industries Ltd (RIL)?s Q4FY2010 adjusted net income grew by 29.9% year on year (yoy) to Rs4,710 crore, which is significantly below our and the street?s estimates. This is due to a lower-than-anticipated margin in the oil & gas business (on account of a higher-than-expected depletion rate for KG D-6 block) and a lower-than-expected gross refining margin (GRM) of USD7.5 per barrel for the refining business. However, at the operating level, the performance was much better and only marginally below the expectations. A large part of the swing in the net profit is due to a sudden jump in the depreciation charge, which went up to Rs3,392 crore in Q4FY2010 as compared to Rs2,795 crore in Q3FY2010.
• We have revised our earnings per share (EPS) estimate for FY2011 and FY2012 to incorporate: (1) the revision in our exchange rate assumption to Rs45 for FY2011 and Rs44 for FY2012, 2) a higher depreciation expenses, and 3) a slightly lower KG D-6 gas volume in FY2011. The negative impact of the above assumption is partially offset by higher petrochemical production volume and an increase in our GRM assumption for FY2012 to USD10.9 (we maintain our FY2011 GRM assumption at USD9.5 per barrel). Consequently, our revised EPS estimates now stand at Rs70.9 for FY2011 and Rs81.1 for FY2012.
• With strong demand for petroleum products, we expect the crack spreads for the middle distillates (especially gasoline and gas oil) to improve in the near to medium term. This coupled with a likely increase in the light heavy crude oil price differential at the level of USD2-3 per barrel, will help RIL to enhance its spread over the Singapore GRM. Further, RIL has signed up with Cairn for the supply of 55-60 barrel per day of cheaper Mangala crude and is also consuming KG D-6 gas for its refineries. Hence, we expect the GRM of the refining segment to improve strongly to USD9.5 per barrel in FY2011 and USD10.9 per barrel in FY2012 from USD6.6 per barrel in FY2010. We highlight that the additional supply of petroleum products on account of addition of new capacities would also remain under check due to closure of 1.43 million barrels per day (mbpd) of refining capacity.
• As per our expectation, the petrochemical segment reported a strong earnings before interest and tax (EBIT) in Q4FY2010 with the EBIT margin increasing by 45 basis points on a sequential basis to14.4%. Although the petrochem margin has been strong (supported by delay in new capacity additions), we expect the same to narrow down slightly in the next few quarters due to significant capacity addition in the Middle East. In terms of the domestic market, we see strong demand coming in from agriculture, packaging, infrastructure and automobile sectors.
• The gas production from KG D-6 field averaged 60mmscmd in Q4FY2010 (which is close to the exit rate of Q3FY2010). The company has said that the design capacity of KG D-6 gas production facilities has achieved a flow rate of 80mmscmd. With the production volumes being tested by RIL, the production ramp is largely dependent upon the HVJ pipeline capacity expansion by GAIL (which is expected by October 2010). We have factored in a gas price of USD4.2 per mmbtu and a seven-year income tax holiday in our valuations and estimates.
• Although the company?s Q4FY2010 earnings were significantly below our estimate, we are more focused on the company?s strategy to utilise the huge cash flow (USD10-12 billion over FY2011-12E) that it is expected to generate over the next couple of years. The company?s recent acquisition of a 40% stake in Atlas Energy?s Marcellus Shale gas acreage is a small-ticket acquisition. Hence, we expect strong acquisition related news flow to continue in the near term, which would indicate towards the deployment of cash flow and the long-term growth prospects of the company.
• We maintain our price target of Rs1,215 and Hold recommendation on the stock, as the company still faces uncertainties on: 1) the tax benefits on the natural gas business under section 80-IB (clarity still awaited), and (2) the gas pricing including the court case with Reliance Natural Resources Ltd (RNRL). At the current market price, the stock trades at a price/earnings ratio of 13.2x FY2012 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.3x FY2012.

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VIEWPOINT

Pantaloon Retail

Robust same stores sales growth drives the top line

Result highlights

• Pantaloon Retail?s Q3FY2010 top line grew by 25% year on year (yoy) to Rs2,057 crore, which is in line with our expectation of Rs2,050 crore. 71% (Rs1,440 crore) of the turnover came from the value segment, whereas 29% (Rs628 crore) was chipped in by the lifestyle segment.
• As expected, discount offerings during the quarter (Sabse Saste 4 din) led the gross margin dilute by 90 basis points and 120 basis points on a quarter-on-quarter (q-o-q) and year-on-year (y-o-y) basis respectively to 29.1%? which is in line with our projection of 29.3%. The gross margin for the value retail segment stood at 25%, while that for the lifestyle segment came in at 38.9%
• The operating profit went up by 25% yoy to Rs216 crore, close to our projection of Rs215 crore. The value retail and the lifestyle segment registered an operating profit margin of 7.4% and 17.8% respectively.
• The profit after tax (PAT) registering a robust 63% y-o-y and 10% q-o-q growth to Rs56 crore came in slightly higher than our expectation of Rs54 crore. The bottom line growth was aided by strong operating performance coupled with lower finance cost during the quarter. The Future value subsidiary reported a profit of Rs23 crore (PAT at 1.6%), while the lifestyle segment earned Rs30 crore as profit during the quarter.
• During the quarter, the company dropped down its value retail business and transferred the same into a wholly-owned subsidiary?Future Value Retail. Hence it has reported results for the stand-alone Pantaloon Retail without incorporating the earnings of Future Value Retail segment. Further, the company proposes to evolve to a consolidated reporting from FY2011 to provide a holistic view of the performance.