Share Market Update on Central Bank of India for 1QFY2012

Share Market Update on Central Bank of India for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, Central Bank of India posted a 16.6% yoy decline in its net profit primarily due to higher provisions. However, results were above our estimates on lower-than-estimated operating expenses. A sharp sequential dip in NIM and high slippages despite the pending switchover to system-based NPA platform were the key highlights of the results. We maintain our Neutral view on the stock.

NIM dips on lower yield on investments; slippages remain elevated: The bank’s business momentum slowed during the usually lean quarter. Advances declined by 2.8% qoq (up 17.2% yoy) and deposits increased by 3.6% qoq (up 20.3% yoy). CASA deposits growth moderated to 14.7% yoy, resulting in a 259bp qoq decline in CASA ratio to 32.6%. Bulk deposits and CDs constituted a relatively higher ~33% of total deposits. The reduction in CASA ratio and the higher interest rate environment resulted in a sharp 72bp qoq rise in cost of deposits to 6.8%. The yield on advances went up by 77bp qoq to 11.4%. Reported NIM declined sharply by 48bp qoq to 3.0% primarily due to fall in yield on investments (fall of 73bp qoq). The sequential decline in NIM was exacerbated by the benefit of interest on income tax refund of ~`130cr in 4QFY2011. Overall asset quality of the bank deteriorated during the quarter, with annualised slippage ratio remaining elevated at 1.8% (1.1% in 1QFY2011) and net NPAs rising by 27.7% qoq. Slippages remained elevated at 1.8% as compared to 1.1% in 1QFY2011. Provision coverage ratio including technical write-offs declined to 65.2% from 67.6% in 4QFY2011. The bank is yet to switchover to the system-based NPA recognition platform, which could result in a substantial rise in slippages given the bank’s rural branches (37%) and a relatively large agri (16%) portfolio.

Outlook and valuation: At the CMP, the stock is trading at cheap valuations of 0.8x FY2013E ABV compared to its trading range of 0.5–1.5x with a median of 1.1x since listing in 2007. However, due to near-term asset-quality concerns because of system-based NPA recognition, we remain Neutral on the stock.

Stock Market Update on Hero Honda for 2QCY2011

Stock Market Update on Hero Honda for 2QCY2011 with a Neutral recommendation.

 

Hero Honda’s (HH) 1QFY2012 results were in-line with our estimates on the top-line front, but its EBITDA margin was below our expectation due to raw-material cost pressures. However, driven by increased other income and lower tax rate, net profit registered an in-line performance. While we broadly maintain our volume and revenue estimates, we upgrade our earnings estimates for FY2012E/FY2013E by 6%/4% to account for lower tax rate as guided by management. We remain Neutral on the stock, considering the uncertainty regarding access to technology and product development capability post the split with Honda Motor Co.

Raw-material cost pressures restrict operating performance; lower tax rate boosts the bottom line: HH registered in-line revenue growth of 32.3% yoy (5.4% qoq) to `5,683cr, led by a robust 23.9% yoy (5.2% qoq) jump in volumes and a 6.7% yoy (0.2% qoq) increase in average net realisation. Adjusted EBITDA margin (adjusted for royalty payments) declined by 275bp yoy (84bp qoq) to 11.3% against our estimates of 12.1%, as raw-material costs increased by 355bp yoy (190bp qoq). Net profit increased by 13.5% yoy (11.2% qoq) to `558cr, supported by higher other income and lower tax outgo.

Outlook and valuation: We broadly maintain our volume estimates and model the company to record a CAGR of ~14% in revenue over FY2011–13E, aided by ~11% CAGR in volumes during the period. We expect margins to remain under pressure on account of higher advertising, rebranding and R&D spends. As a result, net profit is expected to register a CAGR of ~10% over FY2011–13E. Further, due to intense competition in the two-wheeler segment, we believe HH’s market share will remain under pressure, leaving limited room for earnings upgrade. We remain Neutral on the stock.

Stock Market Update on Wipro for 1QFY2012

Stock Market Update on Wipro for 1QFY2012 with an Accumulate recommendation and a Target Price of `419 (12 months)

   For 1QFY2012, Wipro reported lower-than-expected results. The major disappointment came from the price realisations front, which declined by 1.7% and 1.2% qoq for onsite as well as offshore in constant currency (CC) terms, respectively. During 1QFY2012, Wipro’s IT services revenue came in at US$1.408bn, while Cognizant has given a revenue guidance of at least US$1.45bn for the quarter (results not yet out), which (if achieved) makes Cognizant the third largest Indian IT player. Revenue guidance for Wipro’s IT services segment for 2QFY2012 looks lacklustre at US$1.436bn–1.464bn, only 2–4% qoq growth, as 2Q is seasonally the strongest quarter for IT companies. Wipro continues to lag its peers and is undergoing new organisational restructuring at the top end. Thus, we expect volumes to remain tepid. Accordingly, we downgrade our recommendation to Accumulate from Buy.

Quarterly highlights: For 1QFY2012, Wipro registered 3.1% qoq growth in revenue to `8,564cr. Volume growth of the IT services segment came in tepid at 1.8% qoq. Revenue from IT products and consumer care and lightening segments grew strongly by 20.9% and 17.6% yoy, respectively. EBIT margin of the IT services and consumer care and lightening segments fell by 10bp and 22bp qoq to 22.0% and 11.9%, respectively; while for IT products, EBIT margin increased by 56bp qoq to 4.2%. Overall EBIT margin declined by 35bp qoq to 17.5%.

Outlook and valuation: In FY2011, Wipro added incremental revenue of only US$830mn vis-à-vis Infosys, TCS and Cognizant (in CY2010) adding US$1.23bn, US$1.83bn and US$1.31bn, respectively. Further, management guided for revenue growth of only 2–4% qoq for 2QFY2012. Management maintained that it will take another 2–3 quarters to grow at rates comparable to its peers. Thus, we expect revenue CAGR for IT services (US$ terms) to be muted at 15% (17.4% earlier) over FY2011–13E, underperforming not only tier-I companies but also tier-II companies such as KPIT, Persistent and Hexaware. We value Wipro at 16x FY2013E EPS of `26.2 and downgrade our rating to Accumulate from Buy with a target price of `419. 

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