Stock Market Update on Dena Bank for 1QFY2012

StockMarket  Update on Dena Bank for 1QFY2012 with a Neutral recommendation

For 1QFY2012, Dena Bank reported healthy growth of 21.1% yoy and marginal growth of 7.1% qoq in its net profit to `168cr, above our estimates, mostly due to lower provisioning built in by us. Slippages surprised positively, while NIM contracted by 19bp qoq to 2.9%. We recommend a Neutral rating on the stock.

Sequential contraction in business; slippages surprise positively: In 1QFY2012, on a qoq basis, advances and deposits declined by 4.4% and 1.5% to `42,871 and `63,253cr, respectively. On the deposits side, CASA deposits declined by 2.2% qoq (up 16.9% yoy). CASA ratio for 1QFY2012 stood at 35.2% (down 25bp qoq). Yield on advances increased by 78bp qoq to 11.3% in 1QFY2012; however, cost of deposits increased by 67bp qoq to 6.7% in 1QFY2012, leading to a sequential decline of 19bp in reported NIM to 2.9%. During 1QFY2012, non-interest income declined by 31.2% qoq to `124cr, primarily because of an 83.5% dip in recoveries from written-off accounts to `10cr. Slippages witnessed a sharp decline in 1QFY2012, with slippage ratio decreasing from 3.1% in 4QFY2011 to 1.3% in 1QFY2012. Sequentially gross NPA ratio and net NPA ratio remained stable at 1.9% and 1.1%, respectively. NPA provision coverage ratio including technical write-offs increased to 77.9% (from 74.6% in 4QFY2011).

Outlook and valuation: Dena Bank, with a strong CASA ratio of 35.2%, is better placed than its peers to protect its NIM in a rising interest rate environment.
After the equity capital infusion of about `540cr by the government, the bank's tier-I ratio has improved to 9.7%. At the CMP, the stock is trading at 0.6x FY2013E P/ABV, the cheapest among PSU banks. However, considering that NPAs could surprise negatively in the next quarter as all accounts below `50 lakh come under system-based NPA recognition system and the hefty exposure to the power sector (~20% of the loan book), which might lead to some chunky NPAs or large restructuring in the books in the coming quarters, we recommend Neutral, and would look to upgrade the stock only once the near-term headwinds subside.

Stock Market Update on Blue Star for 1QFY2012

StockMarket  Update on Blue Star for 1QFY2012 with a Neutral recommendation

In 1QFY2012, Blue Star posted 6.0% yoy growth to `705cr (`665cr). OPM fell by 524bp yoy and 730bp qoq to 3.9% due to higher raw-material and other expenditure. Consequently, PAT declined by 73.6% yoy to `10cr (`37cr). According to management, the current scenario is going to continue for the next six quarters owing to cost overruns. Hence, we change our recommendation to Neutral on the stock.

Weak top-line growth, margin dips significantly: Blue Star reported 6.0% yoy top-line growth in 1QFY2012 to `705cr. The company’s growth was muted on the back of an 8.7% yoy decline in its electromechanical projects and packaged air conditioning systems (EMPPACS) segment to `342cr (`374cr), which accounted for nearly 49% of the total revenue. The segment also reported an EBIT loss of `9cr vs. profit of `34cr in 1QFY2012, negatively affecting margins. Owing to the losses in this segment, overall OPM declined by 524bp yoy to 3.9% (9.2%). Consequently, PAT and PAT margin also declined to `10cr and 1.4%, respectively.

Outlook and valuation: Demand from the key market segments has still not picked up. However, growth in the cooling products segment and DS Gupta remains strong. Overall, management is not very optimistic and expects the current scenario to continue over the next six quarters. Management also expects margin to contract by 3–5% on a yoy basis going ahead until 1QFY2013. We have revised our estimates downwards and changed our recommendation to Neutral.

Stock Market Update on Bhushan Steel for 1QFY2012

StockMarket  Update on Bhushan Steel for 1QFY2012 with a Neutral recommendation.

Strong top-line growth: During 1QFY2012, Bhushan Steel’s (BSL) net sales grew by 62.6% yoy to `2,232cr mainly on account of higher volumes of flat products. Flat products sales volumes grew by 80.2% yoy to 388,790 tonnes, while long product sales volumes grew by 7.6% yoy to 100,664 tonnes in 1QFY2012. Long product average realisation increased by 18.2% yoy to `42,915/tonne, while flat product average realisation decreased by 3.2% yoy to `49,294/tonne.

Depreciation and interest costs mute net profit growth: During 1QFY2012, EBITDA increased by 62.1% yoy to `661cr, representing EBITDA margin of 29.6%, compared to 29.7% in 1QFY2011. EBITDA/tonne increased to `13,505 (US$300) in 1QFY2012, compared to `13,186 (US$293) in 1QFY2011. Depreciation expense increased by 182.4% yoy to `151cr due to increased capacity, while interest expense increased by 173.8% yoy to `216cr because of higher debt. A sharp increase in depreciation and interest costs resulted in net profit growth of only 2.0% yoy (despite 62.1% growth in EBITDA) to `210cr.

Outlook and valuation: At the CMP, the stock is trading at 8.1x FY2012E and 7.1x FY2013E EV/EBITDA, a significant premium over its peers. Although we expect sales volume growth of 24.8% over FY2011–15E, we believe it is too early to play the volume growth story of BSL as strong volume growth is expected only post FY2013. Further, although BSL uses a combination of BF-EAF technology to produce steel, rising prices of iron ore and coal will affect its margins. Moreover, BSL’s debt-equity ratio remains high. Further, we believe the increase in the stock price in the past three months fairly discounts the growth prospects of BSL. Hence, we maintain our Neutral view on the stock.