State Bank of India
Reco: Buy
PT: Rs378
CMP: Rs282
Earnings and asset quality show revival, Buy maintained
Key points
Earnings up 23% YoY: In Q4FY2015 State Bank of India (SBI) reported a 23% Y-o-Y growth in net profit, aided by treasury income of Rs1,659 crore and net interest income (NII) growth of 14% YoY. However, there was a one-off income from interest on income tax refund which led to better than
expected growth in NII and Q-o-Q uptick in net interest margin (up 4BPS QoQ to 3.16%). The bank’s advances grew by 7.5% YoY, lower than the industry rates though adjusted for credit substitutes growth was at 10.5%.
Slippages moderate, restructured loans rise: The reported NPA ratio declined on a Q-o-Q basis due to an impressive decline in fresh NPA additions (Rs4,769 crore vs Rs7,043 crore inQ3FY2015) and write-off of Rs4,874 crore (relating to a sale of around Rs4,510 crore to an asset reconstruction company). The cash recovery was also better (Rs1,200 crore) leading to lower NPAs. However, the bank restructured Rs11,880-crore worth of loans in Q4FY2015 which was higher than the previous quarters (withdrawal of regulatory forbearance post Q4FY2015 contributed to lumpiness).
Maintain Buy with price target of Rs378: SBI’s operating performance and asset quality are showing gradual improvement, which is a positive indication. The management has taken various initiatives in areas like HR, technology, recoveries etc which would have positive impact over medium term. While there are concerns relating to some sectors (iron and steel, infra etc) the aggressive recovery efforts, likely pick-up in the economic growth, better capital adequacy ratio (tier 1 CAR of 9.60%) could ease challenges. We maintain our Buy rating on the stock with an SOTP-based price target of Rs378.
ITC
Reco: Hold
PT: Rs365
CMP: Rs328
Weak Q4; Hold maintained with revised PT of Rs365
Key points
Earnings below Street estimates, cigarette volume declined further: For Q4FY2015 ITC posted a flattish performance with revenues and operating profit being flat, while PAT grew marginally by 4% (aided by a 39% Y-o-Y increase in other income). Though cigarette volumes declined by 14% YoY, yet the price hike supported the revenue growth of 3%. However, the decline of 28% YoY in the agriculture business revenue, led to a flattish overall top line performance. The PBIT margin of the cigarette business (which accounts for 86% of ITC’s overall PBIT) improved by 170BPS, fully offset by decline in the PBIT of its hotel business. The overall performance for the quarter was below the Street’s expectation.
No respite on cigarette business, other segments’ performance remain mixed: The company continues to feel the pressure on cigarette volumes due to a steep rise in excise duty, while any further stringent action from the government on selling of loose cigarette (which constitutes a major chunk of the revenues) would be detrimental to volume growth. On the other side, the company is very keen on increasing its share of non-cigarette revenues by expanding the product portfolio, new launches and enriching product mix (particularly in personal care, bakery and confectionery foods businesses), which would support revenue growth going forward.
Benign valuation, lacks re-rating triggers, maintain Hold: Owing to a weak performance in Q4FY2015 and back to back miss on cigarette volumes, we have tweaked our earnings estimates for FY2016 and FY2017. Though, ITC has underperformed the overall FMCG basket and is trading at a reasonable valuation of 26x and 22.5x of FY2016E and FY2017E earnings respectively (at a steep discount in the FMCG space), yet we believe the pressure on cigarette business and the overhang of government regulations would limit the meaningful re-rating on the stock. Hence, we maintain our Hold rating on the stock with a revised price target of Rs365.
CESC
Reco: Buy
PT: Rs730
CMP: Rs560
Ahead of estimates, negative priced in
Key points
Earnings ahead of estimates: For Q4FY2015 CESC reported flat earnings but beat the Street’s as well as our estimates at stand-alone level. The stand-alone PAT was reported at Rs244 crore. The Q4FY2015 results reflect the benefits of a tariff revision and some prior-period adjustments; hence, the same are not comparable with the Q4FY2014 results. Nevertheless, the revenue growth was mainly driven by the tariff revision, as the volume grew by 1% YoY even though one of its old plants was shut down during Q3FY2015. The company reported a sharp rise in the other expenses because of higher power purchase from outside and prior-period expenses.
Subsidiaries’ performance a mixed bag: The performance of its subsidiaries was a mixed bag in Q4FY2015; the Haldia power project was fully operational during the quarter and started supplying to CESC via dedicated transmission lines. The store-level profitability of Spencer’s remained on expected lines (the same-store EBITDA stood at 79 per square feet in FY2015) along with a same-store sales growth of 9% YoY. On the other hand, the operating performance of the BPO subsidiary, Firstsource Solutions Ltd (FSL), was flat. However, the management of FSL remained committed to improving the margin by 100-120BPS in FY2015 and repaying the principal debt. On the contrary, the new power project at Chandrapur (600MW) continues to face challenges in the absence of FAS and PPA, and hence continues to incur losses. It incurred a cash loss of Rs350 crore during the quarter. Nevertheless, the management is making efforts to secure a PPA and is actively pursuing a PPA with Noida Power Company.
Negative priced in, maintain Buy with price target of Rs730: We believe the negative related to the loss in the Chandrapur plant is already priced in and it doesn’t contribute meaningfully to our SOTP valuation. However, on the positive side, the Haldia power plant (600MW) will improve its cash-generation capacity substantially and partially cover the loss of the Chandrapur plant. Hence, we retain our Buy rating on the stock, given its inexpensive valuation and the potential upside from any possible positive development in the Chandrapur plant as the company is negotiating for a PPA with Noida Power Company. We have fine-tuned our FY2016 earnings estimates and introduced our FY2017 estimates in this note. We maintain our positive stance on the company with an unchanged SOTP price target of Rs730.
Reco: Buy
PT: Rs378
CMP: Rs282
Earnings and asset quality show revival, Buy maintained
Key points
Earnings up 23% YoY: In Q4FY2015 State Bank of India (SBI) reported a 23% Y-o-Y growth in net profit, aided by treasury income of Rs1,659 crore and net interest income (NII) growth of 14% YoY. However, there was a one-off income from interest on income tax refund which led to better than
expected growth in NII and Q-o-Q uptick in net interest margin (up 4BPS QoQ to 3.16%). The bank’s advances grew by 7.5% YoY, lower than the industry rates though adjusted for credit substitutes growth was at 10.5%.
Slippages moderate, restructured loans rise: The reported NPA ratio declined on a Q-o-Q basis due to an impressive decline in fresh NPA additions (Rs4,769 crore vs Rs7,043 crore inQ3FY2015) and write-off of Rs4,874 crore (relating to a sale of around Rs4,510 crore to an asset reconstruction company). The cash recovery was also better (Rs1,200 crore) leading to lower NPAs. However, the bank restructured Rs11,880-crore worth of loans in Q4FY2015 which was higher than the previous quarters (withdrawal of regulatory forbearance post Q4FY2015 contributed to lumpiness).
Maintain Buy with price target of Rs378: SBI’s operating performance and asset quality are showing gradual improvement, which is a positive indication. The management has taken various initiatives in areas like HR, technology, recoveries etc which would have positive impact over medium term. While there are concerns relating to some sectors (iron and steel, infra etc) the aggressive recovery efforts, likely pick-up in the economic growth, better capital adequacy ratio (tier 1 CAR of 9.60%) could ease challenges. We maintain our Buy rating on the stock with an SOTP-based price target of Rs378.
ITC
Reco: Hold
PT: Rs365
CMP: Rs328
Weak Q4; Hold maintained with revised PT of Rs365
Key points
Earnings below Street estimates, cigarette volume declined further: For Q4FY2015 ITC posted a flattish performance with revenues and operating profit being flat, while PAT grew marginally by 4% (aided by a 39% Y-o-Y increase in other income). Though cigarette volumes declined by 14% YoY, yet the price hike supported the revenue growth of 3%. However, the decline of 28% YoY in the agriculture business revenue, led to a flattish overall top line performance. The PBIT margin of the cigarette business (which accounts for 86% of ITC’s overall PBIT) improved by 170BPS, fully offset by decline in the PBIT of its hotel business. The overall performance for the quarter was below the Street’s expectation.
No respite on cigarette business, other segments’ performance remain mixed: The company continues to feel the pressure on cigarette volumes due to a steep rise in excise duty, while any further stringent action from the government on selling of loose cigarette (which constitutes a major chunk of the revenues) would be detrimental to volume growth. On the other side, the company is very keen on increasing its share of non-cigarette revenues by expanding the product portfolio, new launches and enriching product mix (particularly in personal care, bakery and confectionery foods businesses), which would support revenue growth going forward.
Benign valuation, lacks re-rating triggers, maintain Hold: Owing to a weak performance in Q4FY2015 and back to back miss on cigarette volumes, we have tweaked our earnings estimates for FY2016 and FY2017. Though, ITC has underperformed the overall FMCG basket and is trading at a reasonable valuation of 26x and 22.5x of FY2016E and FY2017E earnings respectively (at a steep discount in the FMCG space), yet we believe the pressure on cigarette business and the overhang of government regulations would limit the meaningful re-rating on the stock. Hence, we maintain our Hold rating on the stock with a revised price target of Rs365.
CESC
Reco: Buy
PT: Rs730
CMP: Rs560
Ahead of estimates, negative priced in
Key points
Earnings ahead of estimates: For Q4FY2015 CESC reported flat earnings but beat the Street’s as well as our estimates at stand-alone level. The stand-alone PAT was reported at Rs244 crore. The Q4FY2015 results reflect the benefits of a tariff revision and some prior-period adjustments; hence, the same are not comparable with the Q4FY2014 results. Nevertheless, the revenue growth was mainly driven by the tariff revision, as the volume grew by 1% YoY even though one of its old plants was shut down during Q3FY2015. The company reported a sharp rise in the other expenses because of higher power purchase from outside and prior-period expenses.
Subsidiaries’ performance a mixed bag: The performance of its subsidiaries was a mixed bag in Q4FY2015; the Haldia power project was fully operational during the quarter and started supplying to CESC via dedicated transmission lines. The store-level profitability of Spencer’s remained on expected lines (the same-store EBITDA stood at 79 per square feet in FY2015) along with a same-store sales growth of 9% YoY. On the other hand, the operating performance of the BPO subsidiary, Firstsource Solutions Ltd (FSL), was flat. However, the management of FSL remained committed to improving the margin by 100-120BPS in FY2015 and repaying the principal debt. On the contrary, the new power project at Chandrapur (600MW) continues to face challenges in the absence of FAS and PPA, and hence continues to incur losses. It incurred a cash loss of Rs350 crore during the quarter. Nevertheless, the management is making efforts to secure a PPA and is actively pursuing a PPA with Noida Power Company.
Negative priced in, maintain Buy with price target of Rs730: We believe the negative related to the loss in the Chandrapur plant is already priced in and it doesn’t contribute meaningfully to our SOTP valuation. However, on the positive side, the Haldia power plant (600MW) will improve its cash-generation capacity substantially and partially cover the loss of the Chandrapur plant. Hence, we retain our Buy rating on the stock, given its inexpensive valuation and the potential upside from any possible positive development in the Chandrapur plant as the company is negotiating for a PPA with Noida Power Company. We have fine-tuned our FY2016 earnings estimates and introduced our FY2017 estimates in this note. We maintain our positive stance on the company with an unchanged SOTP price target of Rs730.
