16 January 2014

DCB Bank Ltd - Results Update - Results vindicate our positive stance:: Centrum

Rating: Buy; Target Price: Rs70; CMP: Rs57; Upside: 24%



Results vindicate our positive stance

DCB Bank’s Q3FY14 results were marginally ahead of our estimates and
vindicate our positive stance. The progressive steps towards a) cost
rationalisation - cost/income ratio at 63.5% (-270bps qoq) b)
concentrated loan profile, granularity in the deposit franchise and c)
abating asset quality concerns (GNPA at 2.8%, -12% yoy) are certain to
bear fruit. We believe the focus on balance sheet growth should
translate into sustainable return ratio at 1.2% / 14.3% (RoA / RoE)
over FY13-16E. Retain BUY with a target price of Rs70 (Dec’15E ABV of
Rs56). It remains a preferred pick in our coverage universe.

$ Asset quality surprises on the upside: Efforts to rationalize loan
exposure with focus on recovery have reduced asset quality concerns in
the past few quarters.  Q3FY14 GNPA at Rs2.1bn declined 12% yoy and
was led by higher than expected write-offs, primarily from the
personal loan segment. Slippages for the quarter stood at Rs237mn
(1.3% annualized).  We do not expect any write-offs in Q4FY14 and
factor in slippages/ GNPA at 1.3%/ 3.1% respectively for FY14.
Restructured portfolio stood at 0.4% of loans.

$ NIM compression along expected lines: Q3FY14 NIM at 3.55% (-13bps)
was along expected lines as the bank benefited from low cost
borrowings in the preceding quarter (CP raised in early-July’13). We
believe that sticky deposit profile (70% retail in nature), recent
upgrade in credit rating and focused loan exposure should enable DCB
bank to retain its NIM at 3.1% levels over FY13-16E. Also, as the
benefit of operating leverage continues with economies of scale, we
expect c/income ratio to go down to sub-60% by end-FY16 or 2.4% of
assets.

$ Loans grow 23.4% yoy; growth in deposits higher at 27% yoy: Cautious
strategy towards loan portfolio has ensured that growth comes from
secured assets of retail (35% yoy), agri (48% yoy) and corporate (25%
yoy) sectors. Growth in deposits at 27% yoy was led by a sharp 34% yoy
uptick in term deposits. Hence, CASA ratio at 24.8% declined 211bps
qoq. We, however, believe that the enhanced branch reach will help
further improve CASA’s proportion.

$ Retain BUY: We have revised our estimates by +4% / +2% for FY14/15E
and are now factoring in 21% CAGR in both NII and loans over FY13-16E.
Cost efficiency with stable margins and receding asset quality
concerns will translate into a higher 30% CAGR in profit over the same
time frame. With positive levers in place, the bank offers decent
value proposition at reasonable valuations of 1x Dec’15E ABV of Rs56.
We have valued the bank at 10% premium to PB multiple (under our
single-stage Gordon growth model) and arrived at a target price of
Rs70. BUY.



Thanks & Regards

Exide Industries Lower base beckons; Buy :: Anand Rathi

Exide Industries
Lower base beckons; Buy
Key takeaways
Weak demand. During the quarter, following a weak demand trend, Exide
Industries’ had been forced to reduce prices. Competitors followed this move
after a two month lag. This move came about after a disappointing
performance in 2QFY14, where revenues declined 5.9% yoy, with subdued
demand from both auto OEMs and industrial segments (telecoms,
infrastructure, inverters).
Subdued sales growth. While OEM sales continue to be subdued in
3QFY14, auto-replacement demand is expected to be the major growth
driver. We expect sales growth to come at just 4.9% yoy, to `15.3bn. In FY13,
the company had regained some of its lost market share and hopes to further
recover lost share.
Margin to improve yoy. We expect a 300bps yoy EBITDA margin growth
(80bps higher yoy), to 14.7%. On the lower base of the previous year, we
expect 26.1% yoy profit growth, to `1.4bn.
Our take. While FY13 performance was average, 4QFY13 and 1QFY14 had
registered a markedly better trajectory. 2QFY14 saw a subdued trend again
due to weak demand, which price increases could not counter. Consistency in
operating performance and pricing discipline ahead would be crucial. We have
a Buy rating, with a price target of `144, based upon a one-year forward
standalone PE of 16x (amounting to `130), and value the company’s
investments in ING Vysya Life Insurance and Hathway Cable at `14. At the
ruling price, the stock trades at 15.3x FY15e standalone earnings.
Risks. Market-share loss, sustained low demand, price wars, commodity risk
and currency depreciation.

Shed the flab in your equity fund portfolio :: Business Line


Ceat Improved trajectory, but valuations appear fair; Hold :: Anand Rathi

Ceat
Improved trajectory, but valuations appear fair; Hold
Key takeaways
Robust trajectory to continue in 3Q. We expect sales tonnage to have
improved 10.4% yoy to ~58,500 tons. We expect revenue to have grown
10.7% yoy, to `13.3bn (flat yoy realisations). For 2QFY14, we expect the
EBITDA margin to be 13%, up 450bps yoy (10bps higher qoq). Ahead,
higher input costs can act as a dampener. Our EBITDA growth expectation is
70% yoy to `1.7bn. On the lower profit base, we expect standalone profit in
3Q to grow ~3x, to `758m.
Re-rating faster than expected. The re-rating in Ceat’s valuations has been
rapid, and much faster than expected. While a decent trajectory is likely to be
persisted with in terms of financial performance in 4Q as well, a further rerating appears unlikely. Fresh capex plans are also on the anvil.
Our take. In 1HFY14, Ceat benefited from lower prices of rubber. However,
demand is yet to pick up significantly. The post-monsoon period may see
improved offtake in replacement. The company’s strategy of pursuing an
asset-light model is bearing fruit, as evidenced by the success of its twowheeler tyres. The profitable segments - exports, passenger vehicles and
overseas areas - now constitute a greater share of the mix. This explains the
improvement in margin profile. The upcoming Bangladesh plant may provide
opportunities similar to those provided by Sri Lanka earlier.
However, the valuations are no longer as inexpensive post the run-up in the
stock price. Hence we downgrade to Hold. At the ruling price, the stock
trades at 4x FY15e EPS. Risks. Downside: Spike in rubber prices, late
recovery in truck-tyre replacement demand, high leverage and price wars.
Upside: further re-rating of the tyre industry, decline in rubber prices.

Bharat Forge Export boost; Hold :: Anand Rathi

Bharat Forge
Export boost; Hold
Key takeaways
Tonnage to grow on low base. Bharat Forge’s production tonnage is
expected to grow 14% yoy during 3QFY14 on a lower base of the previous
year, where the company witnessed shrunken customer demand in India and
Europe. Qoq, the trajectory is expected to be flat. At home, continued
slowdown in M&H CVs and lower non-auto offtake have impacted sales, but
higher exports, along with better rupee realisation would boost it. We are
optimistic about the company’s long-term strategy to become a diversified
forgings-parts manufacturer as well as strong US demand in FY13, but believe
these will not suffice to counter stagnation in domestic revenue.
Standalone profitability benefits from lower base. We expect standalone
income to grow 24.4% yoy, to `8.4bn. We expect a sequential reduction of
40bps in the EBITDA margin, to 26%, and a 52.7% yoy growth in EBITDA.
EBITDA per ton is expected to be 34% higher yoy. Our profit expectation is
`934m, a 96.6% yoy growth on a depressed base.
Subsidiaries too expected to do well. As in 2QFY14, Bharat Forge’s
wholly-owned subsidiary and China revenues are expected to do well, boosted
by strong demand from Europe. The key would be to sustain the momentum
into CY14, which may prove to be difficult. We also expect PBT losses at the
China operations to continue.
Our take. As the company largely depends on M&H CVs, the ongoing
slowdown in the segment could weigh on its results. Favourable currency
movement, though, is a positive, together with a better product mix. On
short-to–medium term concerns, we retain Hold on the stock. It trades at 18x
FY15e consolidated EPS, which would be a 20% discount to its past fouryear average). Risks. Downside: Slowdown in execution, drop in US sales.
Upside: Quicker-than-expected CV recovery, improved overseas demand.