23 June 2012
Edelweiss, QE3 – a billion dollar question
Bernanke did warn policymakers about the nefarious effects of “the so-called fiscal cliff,” noting that a “sudden and severe
contraction in fiscal policy” posed a major risk to what has been a feeble recovery.
The Chairman’s speech came with no surprises. The speech avoided talking about further quantitative easing, keeping to the
usual language of FOMC statements, leaving the door open but neither announcing nor rejecting QE.
According to Bernanke, a weak housing sector caused by an oversupply of foreclosed properties has dried down the green
shoots of recovery.
Subsequently, concerns in Europe over the sovereign debt crisis could provide additional turbulence going forward. This has
fastened the process of risk aversion across the globe.
Financials - TOP PICKS Syndicate Bank ( TP : ` 149, Buy) Dolat Capital
Financials - TOP PICKS
Syndicate Bank (TP : ` 149, Buy)
We observe a change in bank’s stance with the new senior management. It now intends to grow
faster than industry, in the range of 22-24%. We believe given the cushion of high PCR and lower
slippages, it is achievable subject to overall environment. We expect credit book to grow 19% CAGR
in FY12-14
During FY11 and FY12, due to moderate balance-sheet growth and widespread branch, the bank
has been maintaining high composition of low-cost deposits at ~30% level which aided margin.
Going forward, in FY13, we factor in 14 bps decline in margin to 2.92% (on yearly average basis)
primarily due to decline in interest rates and re-pricing lag of liabilities
On the back of higher loan growth and levying processing charges, fee income growth is expected
to enhance further from current levels. We expect the bank’s other income to grow by 12% YoY in
FY13
As on Mar’12, the bank’s asset quality deteriorated; however, higher PCR gave a buffer to
provisioning in case of increase in bad debts. We expect the bank to do substantial recoveries in
Q1FY13, given the aggressive focus
At current price, the stock quotes at 0.7x and 0.6x adjusted book value (ABV) FY13 and FY14
respectively. Based on our price target of ` 149, the stock will trade at 1.0x and 0.9x ABV FY13 and
FY14 respectively
Financials - TOP PICKS ICICI Bank ( TP : ` 1,367, Buy) Dolat Capital
Financials - TOP PICKS
ICICI Bank ( TP : ` 1,367, Buy)
ICICI Bank conscious efforts towards managing lower than the system balance sheet growth over
the last few years has helped the bank to rebalance its deposit profile, improve low-cost deposit
base and maintain margin at healthy level (3% in Q4 FY12 from 2.74% in Q4 FY11)
We believe that the loan book contraction is now over, and we expect the loan book to grow high
teens (19.8% CAGR during FY12-14E) driven by domestic corporate, retail, industrial capex &
working capital requirements
We expect NIMs to be maintained at 2.6-2.7% on improved yield on investments, better yields on
incremental loans disbursed in 2H FY12, traction in overseas business and stability in CASA deposit
share
We are in sync with the management stance to improve ROAA to 1.7% over the next two years
(1.5% in FY12). Standalone ROE is also set to expand to 14% and Consolidated ROE to 15% by
end of FY13.Given the adequate capitalisation, we see it better placed verses other banks to sustain
credit growth in case of an economic recovery
We also believe that the current valuations are close to the bottom, hence offer an opportunity to
add to the positions. Our distress case scenario values the core bank at ` 505 (1xFY14E book
value) and other business at ` 200, giving us an SOTP of ` 705. At current price, the stock quotes at
1.6x and 1.5x adjusted book value (ABV) FY13 and FY14 respectively. Based on our price target of
` 1,367, the stock will trade at 2.7x and 2.4x ABV FY13 and FY14 respectively
MEDIA Speed bump: Edelweiss
Finally, acknowledging that on-ground progress of digitization has been
slow and the Phase 1 deadline cannot be met, GoI has extended June 30
deadline by another four months. Requests of a six-month extension by
various stakeholders, including state governments, smaller MSOs and
LCOs, have compelled it to extend the deadline. This is in line with our
expectations (we had projected 3-6 months delay in our report, ‘Padding
up for the digital revolution’, dated June 14, 2012). We do not expect this
development to materially impact the overall scheme of things and
consider it a minor hiccup. In fact, a silver lining we see is that, the govt
will monitor the progress closely and will take strict action for any delay.
In the near term, however, companies like Hathway who are well
prepared will have to bear additional financing costs of boxes for the
incremental period.
Financials - TOP PICKS HDFC Bank ( TP : ` 590, Acc) Dolat Capital
Financials - TOP PICKS
HDFC Bank (TP : ` 590, Acc)
Loan book expansion higher than industry in Q4 FY12 and has always maintained above industry
th ( 22% growth (~to 27%) in the past. We expect credit to expand faster than the system at CAGR of
25% over FY12-14; primarily led by higher growth in retail book as compared to corporate loan book
The bank has been able to maintain the CASA ratio above 48% over the past few years (one of the
highest CASA share in thebanking space), thereby maintaining the cost offunds at a lowlevel, and
aiding margin
Change in credit book composition towards high-yielding credits, jump in yield on advances (mainly
due to higher composition of retail loanbook) and higher C-D ratio aid margin. Goingforward, we
expect NIM to stabilize at 4.2-4.3% on yearly average basis
Has a strong and diversified source of fee based income which contributes nearly 83% to the nonfundincome
Even in turbulent times, the bank managed to contain erosion in asset quality with stable gross NPA
& restructured loan. The bank’s has been maintaining best asset quality amongst the peer group
with gross NPA at 1.02% and NNPA at 0.2%. Total restructured assets were 0.4% of the bank’s
gross advances as of Q4 FY12
At current price, the stock quotes at 3.7x and 3.1x adjusted book value (ABV) FY13E and FY14E
respectively. Based on our price target of ` 590, the stock will trade at 4x and 3.4x ABV FY13E and
FY14E respectively
OMO expectations prop up gilts; Edelweiss,
OMO expectations prop up gilts; No announcement yet
• The markets were able to overcome the disappointment of unchanged rates as
expectations of an OMO this week helped gilts negate initial weakness and close the day
in the green. The fact that an OMO announcement has not come in yet as per usual
practice might result in negative sentiment for the rest of the week.
• The new 10-Y benchmark was the strongest of the lot as supply scarcity resulted in
position builders running up prices. The G-Sec closed the day at 8.11% vs 8.17%,
recovering almost half of the losses since policy announcement.
• The OIS market was comparatively quiet and has not yet seen as much of a pullback as
seen in the domestic bonds, though swap rates came off the day’s highs. Both the 1yr and
5yr OIS traded flat at 7.78-7.84% and 7.26-7.32% respectively.
Non-SLR Market
HDFC Bank placed Sep maturity CD worth INR 25.75bn at 9.47%. Canara Bank placed 3M
CDs worth INR 5bn at 9.47% and INR 2bn at 9.40%. Bank of Maharashtra placed Sep
maturity CD worth INR 6.5bn at 9.48%. Apollo Tyres placed 3M CP worth INR 1bn at 9.87%.
Tata Motors Finance placed 3M CP worth INR 1bn at 9.42%.
Money Market
Liquidity conditions tightened further and LAF borrowing surged to a 2-month high at INR
1.33tn – this might remain elevated till advance tax flows find their way back into the
system. Similarly call rates were at a 1-month high with the range widening to 8.00-8.35%
and the WAR for the day settling at 8.29% vs 8.15%.
Maruti Suzuki - Cautiously optimistic; visit note; Buy :: Edelweiss PDF link
Maruti Suzuki (MSIL IN, INR 1,102, Buy)
We met the Maruti Suzuki India (MSIL) management for latest update on business. The company expects reversal of fuel price hike to revive demand and maintains FY13 sales growth guidance of 10% despite challenging demand environment. Also, it expects better product mix to negate the impact of high discounts on petrol cars. MSIL does not expect any steep hike in excise duty on diesel vehicles. Margin pressure springs from weak INR, where it has unhedged exposure against USD. Maintain ‘BUY’.
MARUTI SUZUKI INDIA SPIL acquisition: A right move: Edelweiss,
Maruti Suzuki (MSIL) has bought Suzuki Motor Corp.’s (SMC) stake in
Suzuki Power Train (SPIL), a diesel manufacturing associate company, in a
share swap deal. With this, MSIL will have better control over diesel
engine sourcing. The move also indicates that management has accepted
increasing dieselization in India as an irreversible trend. MSIL will fund
this buy-out through fresh issuance of share to SMC (4.5% dilution). Since
SPIL is profitable, it is unlikely to be EPS dilutive. Maintain ‘BUY’
TTK Prestige -Capacity addition and alliances to aid growth; Buy:: Anand Rathi
TTK Prestige
Capacity addition and alliances to aid growth; Buy
Our interaction with the TTK’s management has led us to reiterate its
strengths. Its strategic partnership with Schott, alliances with World
Kitchen, Meyer Corp and Vestergaard Frandson reiterated its focus on
kitchen appliances. Management has guided to 30-35% revenue growth
in FY13, and a 15-16% EBIDTA margin. We maintain a Buy.
Financials - TOP PICKS Karur Vysya Bank (TP : ` 512, Buy) Dolat Capital
Financials - TOP PICKS
Karur Vysya Bank (TP : ` 512, Buy)
Continues to be ranked amongst the best managed private banks in India, demonstrating right mix
of growth across key variables over sustained period of time — asset growth (28% CAGR over
FY07-12), profitability growth (26% CAGR over FY07-12)
In particular, we like the management stance to play to its strength on its better understanding of
local regions and clientele drive quality credit growth. That reflects well in the business growth of 28-
34%, significantly higher than the industry average over the last couple of years, while GNPAs have
declined from 2.8% in FY07 to 1.3% in FY12
On liability side, continuous focus on brick & mortar branch banking strategy and best of the class
product offerings have led to CASA deposit share at 19% even as the balance sheet shown a
consistent growth
While margins during FY12 dipped by 28bps on higher cost of funds, however the earnings
continued their growth on account of cushion from high PCR of earlier years. During FY12, this
came off to 75% as the bank derived advantage of high provisions made in previous years
Hence, the decline in CASA deposits as a share of total deposits remain our near term concern. We
are building dip in FY13 interest margins by another 26bps, as a conservative stance. We expect
GNPAs to hold in the current range even as the marginal pressure on asset quality during FY13 is
mitigated by the recoveries and upgrades
At current price, the stock quotes at 1.5x and 1.3x adjusted book value (ABV) FY13 and FY14
respectively. Based on our price target of ` 512, the stock will trade at 1.8x and 1.6x ABV FY13 and
FY14 respectively
Banking sector Q4 FY12 Review :Dolat
In Q4FY12, private sector banks clearly outperformed its state-owned peers. On balancesheet
expansion issue, private sector banks under coverage outperformed barring ICICI
Bank. Among state-owned banks, majority of banks grew their deposit base faster than the
overall industry; Andhra Bank, Syndicate Bank and UBI recorded much faster growth
On credit book expansion front, bigger private sector banks (barring Axis Bank) grew their
books prudently at a slower pace. Among PSU banks, most of banks grew in-line or at slower
pace than the industry barring PNB and UBI. In case of Union Bank, most of credit book
accretion took place in Q4 itself
On margin front, majority of banks under coverage reported decrease in margin. BoI, ICICI
Bank and Syndicate Bank recorded improvement in margin on Q/Q basis. On YoY basis,
most of banks under coverage reported decline in margin except for Axis Bank, ICICI Bank,
SBI and Syndicate Bank
On fee income front, majority of banks recorded healthy growth on Q/Q and Y/Y basis.
Majority of banks reported good traction in fee income; Canara Bank, ICICI Bank, KVB and
Syndicate Bank recorded de-growth on YoY basis
LIC Housing Finance – Margins to improve going forward, Rating changed to Accumulate: Aditya Birla Money
LIC Housing Finance announced its unaudited results for Q4FY12. The top-line as well as
bottom-line came below our expectations on the back of lower NIMs.
Domestic Formulations – May, 2012: 2MFY12 – Robust growth continues ::Karvy
Domestic Formulations – May, 2012: 2MFY12 – Robust growth continues
Growth for 2MFY13 (Apr,12 + May,12) at 17.6%, while growth for May‐12 at 16.8% y‐o‐y. Growth for the month has been lower than 18.4% reported for Apr‐12. Companies that
have witnessed higher than industry growth for 2MFY13 basis are Sun (+19.6%), Glaxosmithkline (+23.1%), Zydus Cadila (+21.0%), Sanofi‐Aventis (+17.8%) IPCA (+21.7%),
Indoco (+19.8%), Glenmark (+33.6%), Mankind (+22.1%) and Pfizer (+31.8%). Companies that have witnessed a single digit growth include Dr.Reddy’s (+9.2%) and Unichem
Labs (+6.2%). Ranbaxy is the only company showing a a big negative divergence
for May 12.
Tata Motors- Downgrade to Neutral Risk-reward balanced at current levels – global slowdown remains key risk ::Nomura
Action: Downgrade to Neutral; TP reduced to INR251
JLR’s 4QFY12 EBITDA declined by 240bps q-q to 14.6%, well below our
estimate and consensus of 18-19%. JLR’s current margins are in line with
those of global peers and management’s guidance. We estimate the
EBITDA margin will stabilise around current levels of 14-15% over the
next two years, as upside from an improved China mix is likely to be
balanced by a weaker product mix and higher marketing expenses. We
thus reduce our FY13F/FY14F margins from 17.7%/18% to 14.1%/14.5%.
We now expect a 5% decline for domestic MHCVs in FY13F, compared
with 0% growth previously. The key argument for our Buy rating so far was
our above-consensus earnings estimates, which is no longer the case.
Even though our estimates are below consensus, we believe that the
recent stock price correction factors this in. Thus, the risk-reward appears
balanced, in our view.
Eicher Motors - Motorcycles the near-term growth driver; visit note; Buy :: Edelweiss PDF link
Eicher Motors (EIM IN, INR 1,991, Buy)
We met the management of Eicher Motors (Eicher) to get the company’s latest business update. Waiting period for Royal Enfiehld motorcycle continues, with the company not being able to meet demand. Thunderbird 500 launch is due in Q3CY12. Additional capacity is coming on stream in Q1CY13. On the truck side, the company is still gaining market share, although demand has slowed down. Increase in discounts could pose margin risk in near term. Maintain ‘BUY’ with TP of INR2,807.
Housing Development and Infrastructure Ltd. (HDIL) -Traction on approvals should aid collections :: JPMorgan
Our Overweight thesis on HDIL has been predicated on two primary
assumptions i.e. 1. Approvals scenario in Mumbai should improve over FY13,
which then should aid collections from presold FSI and help new launches and
2. Expectations of visible action on the airport project by the government by
end of the year and ahead of 2014 elections. Over the last week, approval
deadlock finally seems to have broken with about 78 buildings getting
approvals after a gap of more than a year. Whilst airport resettlement
continues to be a contentious issue, in the current week a rather high profile
meeting of the Chief Minister/Airport Ministry seems to suggest that a
resolution could come by the end of the year. At CMP of Rs73, we think
HDIL's stock price not only writes down airport project to zero but also
implies significant write down on its rather cheap cost Mumbai land bank. We
think the risk reward remains favorable. Maintain our Mar13 PT of Rs200.
Bond yields and the state of the economy:: Tata MF
When a country borrows money, it issues a documentation called a bond. This document is like a contract that establishes that the county has borrowed a sum of money under stipulated conditions. One of the vital conditions is the interest rate.
Monsoon - Eye in sky: IMD retains 'normal' forecast :: Edelweiss PDF link
In its second stage forecast of South West monsoon (June to September), the IndianMeteorological Department (IMD) has retained its normal forecast, although quantitatively, rainfall forecast has been revised down to 96% of Long Period Average (LPA) from 99% in April. As per IMD, while the risk of El Nino conditions in later part of monsoon still exists, it is lower compared to April. Further, rainfall is likely to be well-distributed both spatially and temporally. In particular, Central India and South Peninsula, where rain dependency is relatively high, are likely to receive normal or close to normal rainfall; this augurs well for oilseeds and pulses production.
How safe is your bank locker? :: Economic Times
Sample this: A major fire broke out at the Punjab National Bank headquarters in New Delhi recently, trapping hundreds of people inside and triggering panic across the capital. In another case, in a daring robbery at a Central Bank of India branch in UP some time ago, at least 45 lockers are claimed to have been emptied out.
In another daylight bank heist in February this year, second in a row in Chennai, armed men made away with Rs 14 lakh from the Keelkattalai branch of Indian Overseas Bank, triggering panic among customers and forcing many of them to clear out their lockers and close their accounts. These are not lone incidents, but just the tips of an iceberg!
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