CLSA on Banks::: Cracking the code Secrets of annual reports revealed

Cracking the code
For more than six centuries, the world has struggled to decipher the smile of
Leonardo Da Vinci’s Mona Lisa. Thankfully, Indian banks’ annual reports are
not so mysterious. However, it would be naïve to regard them as artless. In
endeavouring to decode the cryptex of 13 such reports, we discover that
banks have reined in exposure to risky segments but asset quality between
public and private lenders is diverging. Further, current and savings accounts
growth has decelerated while the investment cycle slowdown has hurt fee
income. Our top picks are ICICI, Axis and HDFC Bank

BoB-Diversified growth; retail, SME focus; high maturity mismatch :: Motilal Oswal

Diversified growth; retail, SME focus; high maturity mismatch
FY12 Annual Report highlights
 Diversified growth across sectors, with the share of various segments remaining largely
stable. Focused strategies on SME segment leading to continued strong growth.
 Asset quality has deteriorated, but remains better than peers. Healthy profitability
has helped BOB to maintain provision coverage ratio (PCR) at 80%+.
 Discounting factor for pension liability calculation increased by 25bp, in line with
hardening of interest rates. Significant build-up of foreign currency translation reserves
(INR16.9/share) due to currency depreciation.
 Given the continued asset quality pressures and expected fall in return ratios, we
maintain our Neutral rating.

JSW Steel - Iron ore sufficiency aids volume visibility; visit note; Buy:: Edelweiss

JSW Steel (JSTL IN, INR 674, Buy)

Key takeaways from our meeting with JSW Steel (JSW) management are: (a) with restart of category A mines in Karnataka, pending auction of ~4mt iron ore inventory, and possible blending of low grade iron ore, it sees no risk to the 8.5mt FY13 production guidance (our estimate 8mt); (b) project investments in Ispat to yield high returns and help double EBITDA in two years. We retain our estimates and maintain ‘BUY’.

State Bank of India (SBI) TP: INR2,350 Buy :: Motilal Oswal

Focus on retail liabilities and core revenue
Net stress loans remain flat in FY12
 Core strategy of focusing on NIMs yielded superior results; NIMs improved 50bp+ YoY
 Net stress loan were flat for SBIN (v/s increase of 175-450bp for peers), led by
improvement in PCR and strategy of recognizing stress upfront.
 On the consolidated book, growth in power and metals was high; however, proportion
of some other sensitive segments, viz, Textiles, Commercial real estate moderated.
 Core Tier I ratio improved led by better capital management and equity infusion.

Punjab National Bank (PNB)TP: INR950 Buy :: Motilal Oswal

Asset quality deteriorates; asset-liability well-matched
Highlights of FY12 Annual Report
 Though growth in overall industrial exposure moderated, funded exposure growth
remained high in the Power and NBFC segments. These two segments constituted
over 25% of incremental funded exposure and 15% of overall funded exposure.
 Net slippages increased from 1.5% in FY11 to 1.8%. Outstanding restructured loans
increased to 7.9% (of which 3% relate to state government entities) v/s 4.2% in FY11.
 Discounting factor for pension liability increased to 8.8% and is in line with 8.7-9% for
peers. However, salary escalation assumption at 5% is higher than peers’ 4%.
 Healthy core operating performance would enable better absorption of credit cost.
Expect RoA of 1.1% and RoE of ~19% in FY13/14. Maintain Buy.

11.75% Interest - Shriram City Union Finance NCD

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• Retail portion Rs.200 Crores - Retail investors can invest up to Rs.5 lacs.
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• Very attractive interest rates of upto 11.75% for 5 years and 11.50% for 3 years.
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Issue opens on 12/09/2012. Allotment is only on "First Come First Serve" basis. As we except the issue to get subscribed on the first day itself, please submit your application as immediately as possible.

8 Sept: Morning News (click on link to read article) : IFCI Financial Services Limited

Morning News (click on link to read article)

Economic Times		Business Standard
Ø  OVL to buy Hess' stake in Azeri-Chirag-Gunashli oil field Ø  RCom lost 20.5 mn mobile customers in July Ø  Court rules for Cipla against Roche in patent case Ø  CLSA expects RIL to double profits by 2016 Ø  Forex reserves rise by $282.3 mn to $290.46 bn Ø  Banks reducing bulk deposits rates on reduced credit off-take		Ø  Govt lines up divestment in three miners to rake in Rs 10K cr Ø  Gold rushes to six-month high after US jobs data Ø  Total market turnover on Sep 7 at Rs 1.29 lakh crore Ø  FIIs net buyers of Rs 502 cr in cash mkt today Ø  China approves $157 bn infrastructure spending Ø  Aurobindo Pharma gets US nod for anti-hypertension pills
Business Line		DNA
Ø  BSE, NSE to hold special trading session today Ø  Fitch: Macro situation weak on slow growth, inflation Ø  Mah Satyam parks its funds with Tech Mah as ICDs Ø  TCS inks Rs 103-cr pact with W. Bengal Ø  Mah Satyam’s minority investors oppose valuation, swap ratio Ø  Cotton dives 5% on monsoon revival		Ø  Sensex soars 337 points on ECB's bond buying plans; ICICI, RIL lead Ø  Differential deposit rates worrying RBI Ø  Second Sebi consent order in HDFC MF front running
Financial Express		Financial Chronicle
Ø  HDFC, Kotak Bank in Forbes' Asia Fab 50 Ø  India remittances at $66 bn in 2011-'12 Ø  L&T, TCS in world's most innovative list Ø  Fiscal consolidation must: FinMin Ø  Godrej Industries exits Godrej Hershey		Ø  RBI permits investment in Pakistan by Indian corporates Ø  Cost overrun of over Rs 52k cr due to project delays: Govt Ø  Ficci for changes in land acquisition Bill Ø  Govt to place views on coal blocks by Sept 14

(Click on link to view article)

Thanks and Regards

IFIN: IFCI Financial Services Limited

07th Sept: Two mins Nifty wrap up for the day ::GEPL capital

Swift bounce back suggests further upside ahead

The markets were in a euphoric mood all along the trading session after the ECB announced an unlimited bond-buying program to stimulate the stalled European economy.  Nifty opened positive and maintained its upward momentum throughout the day to end the day with a gain of 103 points at 5342. Amongst the sectoral indices the BSE CG and Realty indices were up the most. All the indices gave a positive close.

The 2% - 3% rally  in European indices yesterday was followed by a near 1% rise in indices as positive mood continued in Europe. However, there was a small blemish to this euphoria which went unnoticed. The ECB also predicted a cut of 0.4% in GDP growth for CY2012 against its previous prediction of a 0.1% cut.

Nifty opened higher with a gap and maintained its momentum to conclude at 5342 with a gain of 103 points. It has swiftly retraced its recent fall and is now trading near the resistance of 5360. In the immediate term the level of 5260 has now turned as a support. Any decline below that would confirm further sell off till atleast 5000.However till the time it trades above 5260 it may test the resistance of 5360 and beyond that retest the high of 5450. Any advance beyond that may take it to the level of 5500 and beyond that 5592 is a possibility. 

 

Coal India :BoD gives nod for FSAs, not on price pooling:Nomura research

What’s new: CIL Board agrees on modifications to new FSAs…
Media reports (Financial Express, Business Line) and our interaction
with the Coal India (CIL) management suggest that CIL’s Board of
Directors (BoD), in its meeting on August 31, has agreed to the proposed
modifications in the new Fuel Supply Agreements (FSAs), wherein:
 The trigger level (minimum guaranteed supply) is pegged at 80% (65%
domestic, 15% imported) of annual contracted quantity (ACQ).
 If a consumer does not opt for receiving imported coal, the trigger level
would be restricted to 65% (i.e. committed supply of domestic coal).
 Penalty structure is graded (from 1.5% to 40%) depending upon the
supply shortfall below the trigger level (details in Figure 1).
 Amendments to the ‘force majeure clause’ have broadly been agreed
upon.
We understand that the modified FSA, including the Side Agreement for
terms & conditions of supply of imported coal (work-in-progress), is
expected to be formalized at the next Board meeting, expected in mid-
September.

How negative is the merger of JSWISPAT? ::Nomura research

News reports of merger of JSW Steel and JSW ISPAT; the company
has denied the news
There have been news reports suggesting that JSW ISPAT (JSWI IN,
not rated) might be merged into JSW Steel in next few weeks (Source:
business today, August 29, 2012). Earlier, management had guided that
the merger would happen once JSWI turns profitable. The company has
said that these are media rumours and asked us to ignore it. However,
we present below our view on the merger, if it happens.

Thomas Cook India BUY Strong fundamentals:: ICICI Sec

We initiate coverage on Thomas Cook India (TCI) with a BUY rating and a target
price of Rs66/share. Travel Industry – part of the consumer discretionary segment
– has benefited from the strong economic growth of the past decade that led to a
14-year CAGR of 10% in outbound tourists from India. This trend may moderate in
CY13, owing to the economic slowdown but is unlikely to be impacted severely,
keeping the structural story intact. The fact that TCI’s revenues grew 18% YoY in
H1CY12 supports this thesis. The company is built on an over 130-year-old ‘brick
and mortar’, face-to-face interaction based business model and intends to drive
cost improvements by increasing internet based delivery of products and
services and outsourcing of non core functions. We factor-in revenue CAGR of
12% over CY11-13 and margin expansion by 240bps to 28.2%, driven by the move
into the online space and other cost-cutting avenues, driving an EPS CAGR of
18% over the period. We value the stock at a 1-year forward P/E multiple of 18x
arriving at a fair value of Rs66/share. Initiate with BUY.

Bank of India - TP: INR340 Neutral :: Motilal Oswal

Asset quality volatile; focus on de-bulking balance sheet
Highlights of FY12 Annual Report
 Net slippages increased significantly from INR9.8b in FY11 to INR37b in FY12. However,
aggressive write-offs (INR24b v/s INR8.1b) helped to contain GNPA increase.
 In FY13, Bank of India (BOI) intends to continue focusing on de-bulking its balance
sheet. It expects the Retail and SME segments to drive loan growth.
 Infrastructure and Electricity constituted 22% of its incremental funded exposure,
and is at 11% of overall exposure.
 Foreign currency translation reserve stood at INR9.6b (INR17/share).
 Concerns over macro-economic environment and higher proportion of stress loans
compared to peers will keep valuations under check. Maintain Neutral.

Banks: Significant stress addition for state-owned banks in FY12 :: Motilal Oswal

Significant stress addition for state-owned banks in FY12
Exposure to sensitive sectors moderates; large banks adequately capitalized
We analyzed state-owned banks' annual reports for FY12. Our key takeaways:
 Banks restructured 3.1% of overall loans in FY12, of which ~20% pertains to CDR.
Overall NPV loss / sacrifice was contained at 4% of overall restructured loans.
 Aggregate gross slippage ratio was 2.6% (2.2% in FY11) and net slippage ratio was 1.7%
(1.3% in FY11). GNPAs and NNPAs were up 54% YoY and 58% YoY respectively.
 Growth in overall Power sector exposure moderated from 70% in FY11 to 19% in
FY12. Infrastructure segment constituted 13.7% of overall funded exposure.
 Core tier-I ratio increased 50bp to 8.9%, led by infusion of equity by the government.
Large-cap banks are better placed than their smaller counterparts.
 TOP PICKS: ICICIBC (strong capitalization and asset quality; improving return ratios),
SBIN (lowest net stress loan among state-owned banks and healthy core operations),
YES (healthy asset quality performance and attractive valuations) and OBC (valuation
factors in negatives).

Have contingency funds for liquidity requirements ::Business Line

I am 41 years old and my annual business income is Rs 6.5 lakh. I also receive interest income of Rs 2.49 lakh annually from my deposits.

My monthly expenses are Rs 20,000 and my son’s school fee is Rs 1 lakh a year. I manage a monthly surplus of Rs 10,000 per month.