Motilal Oswal views on Inidan Bank, Pantaloon Retail, HDFC, Great Offshore and TCS
Indian Bank (INBK IN; Mkt Cap USD1.1b, CMP Rs122, Buy);
Indian Bank’s reported NII grew 25% YoY (adjusted NII grew 49% YoY) v/s our estimate of 19% YoY growth. Business growth remained strong and asset quality improved.
n In 3QFY09 NIMs improved 5bp QoQ and 8bp YoY to 3.91%.
n Loans grew 38% YoY and 5% QoQ to Rs505b. Deposits grew by 31% YoY and 8% QoQ to Rs697b. Core deposits grew 21% from March 2008 levels v/s overall deposit growth of 14%. The share of bulk deposits reduced to 9.5% v/s 10.3% in 2QFY09.
n Fees grew by 43% YoY to Rs1.5b. In 9MFY09, fee growth was 34% YoY to Rs4.7b.
n Asset quality continues to remain strong with GNPA ratio below 1% and provision coverage ratio of 83%. The bank has comfortable CAR of 12.7% (Tier I at 10.6%).
Maintain Buy: We like the bank’s strategy of growing core deposits, focusing on margins and growing fees. However, We expect margins to decline in FY10 (15bp) as we expect loan repricing to be faster than deposit repricing. Other income growth would remain under pressure as fees growth slows down and recoveries drop. We have upgraded our net profit estimates by 4% in FY09 to account for higher loan growth and improvement in margins. We have kept the FY10 estimates unchanged and factored in the slippage ratio of 3% v/s 0.5% in 9MFY09. We expect the bank to report EPS of Rs30 and BV of Rs150 in FY10. RoE and RoA would be 21% and 1.4% in FY10. The stock trades at 0.8x FY10E BV and 4.2x FY10E EPS. Maintain Buy.
Pantaloon Retail (PF IN; Mkt Cap USD0.5b, CMP Rs166, Buy);
n Pantaloon Retail’s 2QFY09 results were below estimates with sales of Rs15.3b (v/s est of Rs18.2b), up 24.4% YoY. Gross margins declined 30bp YoY to 30.1%. While EBIDTA at Rs1.6b is lower than est of Rs1.7b, margins is higher at 10.3% v/s est of 9.3%. Adjusted PAT grew 6% to Rs335m (v/s est of Rs439m) impacted by 78% YoY increase in interest costs and 60% increase in depreciation.
n Slow down in discretionary consumer spend hits sales growth: Net sales at Rs15.3b grew 24% YoY v/s 56% increase in FY08. Decline in discretionary spend by consumers was visible in product categories like Mobiles, Electronics and Furniture, which impacted sales growth. In addition, sales in IT hubs have been impacted due to current uncertain economic environment. Same store sales growth declined 3% in value retailing, 10% in lifestyle and 14% in home retailing in the month of December.
n Lower material and staff cost results in 140bp margin expansion: Gross margin declined only 30bp due to change in product mix (decline in share of low margin Furniture, Mobile, Electronics etc). EBITDA margin increased 140bp on the back of lower staff cost (140bp decline) and other expenditure (30bp decline). We believe sustaining such margin would be challenging if the high margin lifestyle retail segment continues to witness demand slowdown.
n Downgrading estimates on lower space addition, same store sales: We believe the current economic slow down could have severe implication on expansion plans of retail majors, both on account of funding constraints and visibility of sales growth. During the first half the companies has added ~1msf of retail space, which is lower than guidance. Our revenue estimates stand lowered by 10% for FY09 and by 16% for FY10. Consequently, our PAT estimates are downgraded by 11% to Rs1.6b for FY09 and by 27% to Rs2.1b for FY10. The stock trades at 17.2x FY09E EPS of Rs9.6 and 13.3x FY10E EPS of Rs12.4. Maintain Buy.
HDFC (HDFC IN; Mkt Cap USD8b, CMP Rs1,372, Buy);
Below estimates: Reported PAT in 3QFY09 declined 16% to Rs5.5b (v/s est. of Rs6b). HDFC has provided towards exchange loss of Rs500m towards outstanding FCCBs during the quarter (booked in interest expense) – impacting the overall earnings Disbursements grew 17% YoY to Rs94b and sanctions declined 8% YoY to Rs96b in 3QFY09. Loan growth (incl. real estate CDs and bonds) slowed to 23% YoY (from 30% YoY in 1HFY09). Spreads declined QoQ from 2.23% to 2.17%. Fee income was Rs289m in 3QFY09 v/s Rs110m in 3QFY08. We await clarification.
n Investment in MF has increased from Rs14.5b in September 2008 to Rs46.4b in December 2008. This liquidity built up was partly to take care of borrowing repayment commitments (Rs15b) during first week of January 2009. Management has consciously opted to remain liquid due to uncertainties in wholesale borrowing markets.
n The difference between disbursals of Rs96b and actual increase in loan book of mere Rs17b during 3QFY09 was due to bulk repayments from corporate loan book.
Cutting estimates and target price: We have cut our earnings estimates by 2% for FY09 and by 8% for FY10. Key investment are valued (post 20% holding company discount) at Rs406 per share on FY09 basis and Rs467 per share on FY10 basis. Adjusted for these ventures the stock trades at 10.4x FY10E EPS and 2.1x FY10 adjusted book (for investments in subs). Maintain Buy with a revised target price of Rs1,688/share, an upside of 23%.
Great Offshore (GOFF IN; Mkt Cap USD0.2b, CMP Rs241, Buy);
n Consolidated revenue and PAT sharply higher than expected: Great Offshore standalone 3QFY09 revenue is up 42% YoY at Rs2.8b. Consolidated revenue at Rs3.5b is significantly higher than our expected Rs2.8b. Standalone PAT is flat at Rs577m. However, consolidated PAT is at Rs781m is sharply higher than our expected Rs572m. The major reasons for higher than expected revenue and PAT are: (1) higher than expected utilization levels of assets, (2) in-chartering of vessels; and (3) higher than expected revenue (Rs290m vs Rs185m) in its international subsidiary Great Offshore (International), which operates a high-end AHTSV.
n Operating highlights for the quarter: During the quarter, drilling rigs and harbor tugs were fully utilized. Utilization level for OSVs was also high at 94% (91% in 3QFY08). Towards end of November 2008, Great Offshore commenced operations for its heavy lift vessel, Malaviya Thirty-Three, at Khafji Oilfieds for Saudi Aramco. The value of the one-year firm charter is US$22 million, with option for two more extensions. Great Offshore commenced billing on its Rs2.34b lump-sum turnkey engineering contract with ONGC.
n Raising FY09E EPS by 8%: Based on the 9mFY09 performance, we have raised our FY09 revenue estimate by 6%. We have lowered our FY09 EBITDA margin estimate from 44.5% to 43.3%. FY09 PAT and EPS estimates are revised up 8%. FY10 EPS estimate is down 1% mainly due to higher depreciation.
n Stock at 4x FY09E, DCF-based target of Rs660, Buy: Great Offshore stock is currently trading at an undemanding P/E of 4x FY09E and 5x FY10E. Our DCF valuation suggests a target price of Rs660, 173.5% upside from current levels. We maintain Buy.
Tata Consultancy Services (TCS IN; Mkt Cap USD9.8b, CMP Rs491, Buy);
We met TCS’ CEO and MD, Mr Ramadorai, and COO and ED, Mr Chandrasekharan. We present our key takeaways:
n ‘Deal qualification’ assuming greater importance; higher focus on DSOs: In the aftermath of the credit crisis, TCS is focusing on risk mitigation strategies like additional due diligence on deal profitability. According to the management, ‘deal qualification’ is assuming greater importance given concerns on margin management. TCS is evaluating deals (specifically those with outcome focus) with caution, given the possibility of delays and cost overruns.
n Pricing concerns to dominate in the near term; predatory pricing to aggravate further: Pricing concerns are beginning to dominate and the situation could worsen, going forward. The market is seeing predatory pricing in a bid to garner larger volume share. However, price cuts might not be as steep as in the aftermath of the dot com bust.
n Decline in pricing to be countered by margin levers: The management mentioned that margin pressures would be countered through the following margin levers: (1) lower SGA expenditure, (2) increased offshoring, (3) larger contribution from fixed price projects, and (4) better utilization.
n Deal pipeline healthy though uncertainty on ramp-ups continues; budgets could lose relevance: TCS would continue to have a healthy deal pipeline, as seen in increased RFIs and RFPs furnished by the clients. However, the question mark on timely project ramp-ups continues. Visibility is clouded owing to the lack of clarity on project execution. CY09 budgets might not be sacrosanct amidst ongoing uncertainty and budgets could be revisited if the macro environment deteriorates.
n Valuation and view: Our interaction confirms our belief that accommodative billing rates are a fast-approaching reality and pricing would be the key topic of client discussion, going forward. Our estimates factor in declining realizations for all the companies under our coverage in FY10. We value TCS at 10.4x FY10E EPS (20% discount to the target P/E multiple of Infosys v/s 27% discount now). Maintain Buy with a target price of Rs584, an 19% upside.
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