Sunidhi Research | 1 Sunidhi’s Super Seven-II Investment Ideas Sunidhi’s Super Seven-I outperformed the broader index by 9% Amidst concerns over macro recovery, our super seven stocks (Report dated August 12, 2013) outperformed the broader index by 9%, vindicates our confidence on our theme of Quality Investing with key stock selection parameters such as strong earnings visibility over the medium term, compelling valuations, strong cashflows and no corporate governance issues. We do highlight the fact that in contrast to street- we had showed reliance on the 7 stocks in our universe, which have delivered an average return of 18% since our last recommendation against Nifty return of 8% and CNX500 return of 9% during the same period. Sunidhi’s Super Seven-II is expected to deliver superior return Post bolstered performance of our first edition of Sunidhi’s Super Seven, we are introducing second edition of Sunidhi’s Super Seven. In the second edition of super seven we are adding Dhanuka Agritech Ltd and Oil India Ltd, while removing Berger paints and GMDC. We are removing Berger paints from Sunidhi’s Super Seven due to its strong price performance and trading near to our fair value target and GMDC due to continuous non delivery of the company on volume growth front. Our addition of above mentioned stocks is based on our rigorous stock selection process and fits in our broader theme of Quality Investing. Performance of first edition of Sunidhi’s Super Seven Company Name Reco. Price Price as on 27-Nov-13 Div/per share Total Return Berger Paints 203 230 -- 13% Cadila 708 735 -- 4% Federal bank 63.6 78 -- 22% GMDC 95 100 3 9% NMDC 102 125 7 30% Unichem Lab 150 185 -- 24% Yes bank 287 356 -- 24% Average Return 18% Nifty 5612 6057 8% CNX500 4293 4680 9% Source: Sunidhi Research November 28, 2013
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Sunidhi Research | 1
Sunidhi’s Super Seven-II
Investment Ideas
Sunidhi’s Super Seven-I outperformed the broader index by 9% Amidst concerns over macro recovery, our super seven stocks (Report dated August 12, 2013) outperformed the broader index by 9%, vindicates our confidence on our theme of Quality Investing with key stock selection parameters such as strong earnings visibility over the medium term, compelling valuations, strong cashflows and no corporate governance issues. We do highlight the fact that in contrast to street- we had showed reliance on the 7 stocks in our universe, which have delivered an average return of 18% since our last recommendation against Nifty return of 8% and CNX500 return of 9% during the same period. Sunidhi’s Super Seven-II is expected to deliver superior return Post bolstered performance of our first edition of Sunidhi’s Super Seven, we are introducing second edition of Sunidhi’s Super Seven. In the second edition of super seven we are adding Dhanuka Agritech Ltd and Oil India Ltd, while removing Berger paints and GMDC. We are removing Berger paints from Sunidhi’s Super Seven due to its strong price performance and trading near to our fair value target and GMDC due to continuous non delivery of the company on volume growth front. Our addition of above mentioned stocks is based on our rigorous stock selection process and fits in our broader theme of Quality Investing. Performance of first edition of Sunidhi’s Super Seven
Company Name Reco. Price Price as on 27-Nov-13 Div/per share Total Return
Domestic formulations to recover from FY15 Domestic formulations faced hurdles during H1FY14 on account of inventory adjustment due to pricing policy and trade related concerns but growth will be normalized from Q3FY14. Its key segments like GI, Gynaec, respiratory & Derma continues to do well while it needs to focus on CVS & CNS segments. We expect company’s domestic formulation segment to get impacted in FY14E but to recover in FY15E and show around 12% CAGR over FY13-15E.
Expect strong growth in Wellness segment Company posted modest growth in Wellness segment in HFY14 due to stiff competition in its Nutralite & Everyuth brand. We believe growth will be back on track in FY15 with double digit growth on account of huge promotional spending. Company maintains its leadership position in Sugarfree (92% mkt share) & revamped entire everyuth brand version. We expect Wellness segment to show 12% CAGR over FY13-15E.
US business to see traction from FY15 backed by niche pipeline Cadila is the fastest growing company in US which showed 39% CAGR over FY08-13. However growth slowed down in FY14 with just 18% growth in H1FY14 due to delay in new approvals & price erosion in existing products. However shortfall in FY14 will be covered in FY15 where we will see traction in business as the company has strong pipeline in US. Management has guided for 20 approvals in US market in 12-15 months. Cumulatively ANDA filings stand at 179 out of which 78 are approved. Total filings include 4 topicals, 5 nasal sprays & 28 injectables (19- through patners & 9-owned) out of which 8 injectables (7 through patners & 1 owned) are approved with 6 launches (5 through partners & 1owned). Launch of Divalproex will also benefit the company in coming quarters. Cadila has also started filing for transdermals (4 filed) & expecting approval in FY15 which will be the next long term growth driver for the US market. Total filings will be around 7 for transdermals by FY15. Nesher acquisition will also prove beneficial in the long run as it is in a niche segment of controlled substances. Till date it has launched 3 products & expecting one approval in Q1FY15. We expect revenue CAGR of 21% over FY13-15E.
Emerging markets to continue to show momentum Company has filed cumulatively 102 dossiers in Brazil out of which 40 are approved. Company has filed 6 dossiers with regulatory authority in Mexico taking cumulative filings to 20. We expect Cadila to post steady growth in emerging markets like South Africa, Brazil & Asia Pacific.
Retain Outperform rating with the target price of `860
At CMP of `735 the stock is trading at 21xFY14E & 16xFY15E EPS. Going ahead, we believe US business to drive growth on back of niche launches. We continue to remain positive on stock & maintain Outperform rating with the target price of `860 at 19XFY15E of `45.3.
maintain capacity utilization in the range of ~ 60-65% & delivering a topline CACR growth of 18.4% over FY13-15E.
Aggressive Marketing Initiatives to develop Brand Image – To drive Sales In order to develop a better brand image & penetrate the premium emulsion paints market, Berger Paints has initiated marketing & advertising spends to promote it top brands like “Silk”, “Bison” and “Weathercoat”.
Backed by good monsoons across geographies, Dhanuka reported stellar H1FY14 performance with 33.6% YoY jump in top-line, EBITDA margin expansion by 170bps at 16.4% and 41.6% jump in bottom-line at `494mn. Revenue jump was primarily backed by volumes with 5-6% jump in prices. Management has guided for over 25-30% jump in revenues for H2FY14E with YoY EBITDA margin expansion (FY13 EBITDA margin at 14.1%). To cater the incremental demand, the company has earmarked `500mn capex at its upcoming facility in Keshwana, Rajasthan. Construction work has already been started and the facility is likely to be commissioned by Q3FY15E. Apart from new products, the company is likely to transfer products from its Gurgaon facility to Keshwana over the next 2-3 years (and monetization of Gurgaon land). We believe that with new product additions the company is likely to exhibit consistently better performance going ahead with margin expansion. We remain optimistic on the growth prospects of the company and hence recommend ‘Buy’ with a price target of `212.
Stellar H1FY14 performance depicts growth story: Dhanuka reported 33.6% YoY jump in H1FY14 revenues at `4.2bn which was backed primarily by volumes. The company has been focusing on high margin products and cost rationalisation which led to 170bps YoY expansion in EBITDA margins at 16.4%. With higher cash flows the company repaid part of its debt in Q2FY14 thus containing its interest outgo. Volume growth, margin expansion and lower interest outgo led to 41.6% YoY jump in H1FY14 bottom-line at `494mn.
New facility to commence operations by Q3FY15E: Dhanuka has started work on its
new facility in Keshwana, Rajasthan which is likely to be commissioned by Q3FY15E.
Company is expected to spend over `500mn on this facility which would be funded
entirely through internal accruals. The new facility would enhance company’s
production capabilities for newer products. Gurgaon facility would eventually be
shifted to the new location and the land would be monetized after about 2-3 years.
New product introductions to drive future growth: Dhanuka launched 4 new products in FY13 and 3 this year and is expected to launch about 2 products p.a. going ahead. These high margin products are expected to contribute to the overall performance over the next 2-3 years. Out of the existing portfolio, couple of products has the potential to become next Targa Super (over `1.0bn in sales).
Scope for margin expansion, attractive valuations: Outlook for H2FY14E remains positive with industry growth pegged at about 25-30% (equally in terms of volume and price increases). To boost sales, the company has roped in Amitabh Bachchan as a brand ambassador, the effect of which would be felt in medium term. New facility at Keshwana would further enhance production capabilities of the company. We like Dhanuka due to its free cash flows, sustainable high return ratios, margin expansion, low debt and progressive introduction of new products. We expect 25.0% and 28.4% CAGR in revenues and earnings respectively over FY13-15E. The stock is available at attractive valuations of 8.9x and 7.3x FY14E and FY15E EPS of `17.4 and `21.2 respectively. We have assigned 10x multiple for the company and recommend ‘Buy’ with a price target of `212.
Source: Company, Sunidhi Research Dividend (117) (128) (151) (176) (205)
Others 359 (136) (77) (41) (42)
CF from Fin Activities 147 (381) (284) (217) (247)
Net inc /(dec) in cash 29 38 (34) (10) 60
Op. bal of cash 20 50 87 54 44
Cl. balance of cash 50 87 54 44 104
Sunidhi Research | 7
Federal Bank Ltd
Decent growth at attractive valuation
With the RBI looking at issuing new bank licenses, competition in the banking industry is expected to heat up. In such a situation the future of old private banks which are smaller in size and geographically concentrated appears uncertain. In our opinion one of two scenarios are likely to play out 1) old private banks especially those with poor profitability and asset quality concerns could become takeover targets for new private sector banks and 2) larger old private banks could scale up operations and re-engineer business processes to bridge the gap between themselves and new private banks. This in turn could lead to a re-rating in the stock price of these banks. Given its large size and proactive management, we believe that Federal bank is amongst the best placed old private sector banks to make the transformation into a new generation bank. NIM likely to improve to 3.4% in FY15 Federal Bank reported calculated NIM of 3.2% for Q2FY14, which improved sequentially by 24 bps. The NIM improvement came on the back of a reduction in bulk business, lower interest reversals and an improvement in the CASA ratio. Also, the YoA too improved by 48 bps qoq. Going ahead we expect Federal Bank’s NIM to improve further as the bank continues to focus on reducing bulk deposits and improving CASA. Non-interest income to pick up going ahead Federal bank’s initiatives such as tying up with foreign banks for raising LC’s, installing CRM solutions to identify cross selling opportunities, leveraging on NRI clientele to increase other income etc would lead to a pick up in fee based income going ahead. We expect fee based income to grow by a CAGR of 18% from FY13-15. SME, Agri and Retail slippages are in check Federal Bank revamped its processes to improve asset quality. Some of the measures undertaken by the bank included – separation between loan sourcing and sanctions, improving loan appraisal systems and focus on credit monitoring and collection. Post the revamp, the bank has managed to keep in check slippages in the SME, Agri and retail segments. However volatile corporate slippages have impacted asset quality. Once the economy stabilizes, corporate slippages are likely to stabilize. Additionally the bank has a strong provision coverage ratio of 72% including technical write offs. This will act as a buffer in case of asset quality deterioration. Adequately capitalized The bank is adequately capitalized with a capital adequacy ratio of 15% almost entirely comprised of Tier 1 capital. As the bank leverages on its capital, return on equity is likely to improve going ahead.
Maintain Buy with a revised price target of `105 At the current market price, the bank trades at 1.0x its FY14E ABV and 0.9x its FY15E ABV. We believe the worst in terms of NIMs compression, asset quality and return ratios is behind us and focus on strong and profitable growth, prudent lending and likely improvement in asset quality will drive earnings growth going forward. Thus we
maintain our Buy rating on the stock with a price target of `105 (1.3x FY15E adjusted for slippages from restructuring). we have a Buy rating on the stock with a price target of `547 (1.5x FY14E ABV adjusted for slippages from restructuring).
ROAE 12.0% 14.4% 13.9% 13.2% 13.5% Source: Company, Sunidhi Research
Sunidhi Research | 10
NMDC Ltd Strong balance sheet at compelling valuations
After subdued production growth in the past (CAGR of -1.8% in FY08-13), we expect
iron ore production to perk up going forward on the back of impressive capacity
expansion and relatively firm domestic demand. Going forward, we anticipate
production and sales will grow at a CAGR of 5% and 6.5%, respectively, in FY13-15E.
We believe that iron ore supply is getting tighter in India, which will help NMDC in
maintaining strong margins. We believe, iron ore sales volume pick-up, inexpensive
valuations keep the risk-reward trade-off favorable for NMDC.
Pricing concerns remain but would fade eventually
The pricing concerns have somewhat eased over last few months and the company has
been able to take minor price hike recently. The favorable exchange rate has
prompted several Odhisa players to look at export market as it yields better realization
than domestic sales. Though pricing uncertainty still persists due to pricing gap
between Odhisa players and NMDC but we believe the same would fade away
eventually once clarity emerges over illegal mining in Odhisa and will prompt genuine
players to quote market rates. Improving global demand scenario also augurs well for
the sector and the company per say.
Capacity expansion on track to aim a gain in market share
The company has undertaken a capacity addition programme wherein it is on track to
exit FY15 with a mining capacity of 48 MT from 32 MT in FY13. The plan includes
increasing the existing capacity of Bacheli Complex in Chhattisgarh from 15 MT to 17
MT, a new mining block in Kirandul complex, Chhattisgarh (capacity :7 MT) and a new
mining block in Kumaraswamy, Karnataka (capacity :7 MT). It has also been working on
a plan to augment its excavation capacity by increasing the rake loading capacity.
NMDC is also mulling over a dedicated slurry pipeline with its major customers that
will provide further fillip to its sales volume.
Other ventures like pellet plant in offing…
The company is also setting up a pellet plant with a capacity of 1.2 MT in Donimalai,
Karnataka. We believe pellet sales will drive incremental EBITDA for the company on
the back of optimal and captive raw material feed. The company proposes to use only
40% of its fines produce as the raw material feed for its pellet plant and intends to use
the idle slimes lying at its mining complex in Karnataka as the remainder of raw
material feed.
Valuation and Recommendation
We maintain our positive stance on the company and continue to believe its dominant position in iron supply especially in restricted iron ore supply market. NMDC has robust balance sheet with a healthy liquidity position (cash as of FY13 end at 210bn). We have valued the stock at 5x FY15E EV/EBITDA thus arriving at a target price of 160. Possession of superior quality iron ore reserves, the company’s position in the lower quartile of the iron ore cost curve & dominance in domestic market reiterate our faith on the company.
Net CF From Operations 48616 45946 30711 57458 52572
EBIT 85247 87958 72367 75706 78171
Inc/(dec) in F.A + CWIP -5163 -15088 -19774 -40000 -44885
Interest 0 15 132 0 0
(Pur)/sale of Investments -869 -1042 -19 0 0
PBT 97272 107595 94624 98737 99727
others 11090 19658 22010 22652 21169
Tax 32151 34941 31219 33571 31913
CF from Invst Activities 5057 3528 2216 -17348 -23717
PAT 64992 72654 63405 65167 67815
Loan Raised/(repaid) 0 0 0 0 0
Source: Company, Sunidhi Research
Dividend -9942 -19109 -23094 -23094 -23094
CF from Fin Activities -9942 -19109 -25343 -32332 -36951
Net inc /(dec) in cash 43731 30365 7612 7778 -8096
Op. bal of cash 128549 172281 202646 210258 218036
Cl. balance of cash 172281 202646 210258 218036 209940
Sunidhi Research | 12
Oil India Ltd FY15E a game changer, Outperform
We believe that FY15E to be a game changer year for Oil India (OIL) with over 30% jump in YoY earnings benefitted from higher natural gas prices and volume growth expected in both crude oil and natural gas. This substantial earnings growth is
expected even after considering 4% YoY jump in subsidy sharing at `88.9bn. We believe the production of oil and gas at its Assam blocks to return to normalcy which has been affected due to Bandhs and Blockades since past several quarters. The company is making progress in its international ventures with production ramp-up in Carabobo, Venezuela, discovery in Gabon and ongoing production in its shale gas asset in the US. We believe these investments in overseas projects would yield
value in future. With cash pile of over `125bn OIL is well placed to propel inorganic growth through acquisitions of producing/non-producing assets overseas. Available at attractive valuations and with multiple triggers in FY15E, we remain optimistic on the company’s earnings growth and hence recommend ‘Outperform’ with a price target of `590. Natural gas price hike – an earnings kicker for FY15E: The government has decided to almost double the APM natural gas prices from current US$4.2/mmbtu (to about US$8.4/mmbtu) which would benefit earnings of the company. However, we remain skeptical on the entire benefit of natural gas price hike to OIL and hence assumed US$6.8/mmbtu realisations for OIL in FY15E. US$1.0/mmbtu increase/ decrease in natural gas realisations would impact OIL’s earnings by about 7%. Good domestic and international asset base with consistently high reserve replacement ratio (RRR): OIL boasts of 62 domestic and 14 overseas oil and gas blocks. Although the company has increased its natural gas production capacity, currently production is depressed due to lower off take from consumers. Additionally, the crude and natural gas production has been affected by Bandhs and Blockades in Assam. However, the situation is improving which would benefit FY15E production performance. The company has maintained consistently higher RRR over the past 5+ years with FY13 RRR at 1.6x. Overseas assets to contribute going ahead: Currently the overseas assets are largely in investment phases which shall start contributing to the overall performance going ahead. Carabobo, Venezuela is procuring oil albeit at lower rates along with marginal gas production from the US shale gas asset. Although, the company has been scouting
for overseas producing assets since a long time (and with a war chest of over `125bn) a sizable acquisition in medium term cannot be ruled out. FY15E game changer for OIL: OIL’s operational performance has been affected by external factors i.e. unrest in Assam which should normalize in FY15E thus benefitting the overall production. Company’s exploration success has been consistent over the past few years with 1.0x+ RRR. OIL’s overseas ventures are expected to add value going ahead with ramp up in Carabobo, Venezuela production, successful discovery in Gabon and ongoing production in the US shale gas asset. With expected natural gas price hike from FY15E onwards, OIL’s earnings are likely to jump substantially. We believe the stock is available at attractive valuations of 8.3x and 6.4x FY14E EPS of `56.8 and FY15E EPS of `73.7. We have valued OIL at 8.0x and have arrived at a price target of `590. Maintain ‘Outperform’.
CF from Fin Activities (11,776) (43,214) (12,097) 1,480 (23,525)
Net inc /(dec.) in cash 32,245 (8,320) 11,975 42,998 14,657
Op. bal of cash 85,429 117,675 109,355 121,329 164,328
Cl. balance of cash 117,675 109,355 121,329 164,328 178,985
Sunidhi Research | 14
Unichem Labs
Poised for strong growth; Maintain Buy
Domestic growth to be back on track backed by focused promotional strategy Domestic formulation business faced hurdles in the market during H1FY14 mainly on account of inventory adjustment in domestic market due to implementation of drug pricing policy, trade margin related issues & lower industry growth. After implementation of NLEM, domestic portfolio under coverage will be around 20%. Pricing policy impact would be around `200mn. We believe domestic business growth will be back on track gradually as the company has already strengthened its field force domestically is now looking to improve its productivity (currently 2.9mn). Among top 10 brands Losar, Ampoxin Tg-Tor & Trika are continuously struggling in market which the management attributes to matured basket. Company is trying to improve growth in its matured brands through focused promotional strategy on general physicians & also focusing on other high growth brands like Unienzyme & Telsar group to improve its overall domestic growth. Company is also planning to introduce 6 new products in acute segment & 9 products in chronic segment. We expect growth to remain flat in FY14 impacted by drug pricing policy but will be back to double digit growth in FY15 through increased sales force & marketing strategies taken by the management.
Contract manufacturing business slowed down but expect momentum in US & EMs Export formulation business is impacted due to pressures in contract manufacturing business (contri-65%) on account of price erosion seen in existing products supplied by the company. However Emerging markets & US markets will continue to do well and show around 30-35% growth. Company’s total ANDA filings in US stands at 29 and received 15 approvals out of which 10 products have been commercialized till date. Management has identified 10 molecules to be filed in FY14-15 mainly from CNS, CVS & pain management & 10-15 oral prefilled syringes to be filed beyond FY15. Company sold its Indore SEZ unit to Mylan for `1600mn & proceeds will be used for capex plan at its formulation, API plants & pilot plant in bioscience segment. Company has excess capacity due to delay in ANDA approvals & foresees a long gestation period for SEZ project to effectively contribute to its topline & profits. On the contrary company intends to expand its Goa facility as it is already approved which could be done at a lower cost & lower gestation period which in turn will improve margins.
Expect operating margin to improve by 200bps & return ratios to remain healthy Despite single digit revenue growth in past years, company was able to deliver 18% plus margins largely driven by change in product mix in domestic market & high focus on chronic segment. Revenues & margins impacted in FY12 on account of domestic restructuring which got over in FY13 & the company started reaping the benefits from it as a result company delivered 23% revenue growth & 16% margins in FY13. We expect revenues to show 13% CAGR over FY13-15E and operating margins to increase by 200bps from FY13 to FY15E as now the company is focusing more on C&F agents, sales productivity,& promotional strategies undertaken by management. Also, the lower growth in exports will be compensated by the domestic business. Turnaround in its subsidiary, Niche Generics which started contributing profits in FY13 will also help margins to expand.
Unichem had strong financial ratios in the past which got impacted at the end of FY12 due to restructuring in domestic business. However, return ratios is back on track in FY13 post restructuring and will improve in FY14E & FY15E through focus on domestic business, US & EMs.
Retain Buy rating with the target price of `214 We believe domestic growth to be impacted in FY14 on back of NLEM implementation and trade margin issues but will be back on track in FY15 on account of improved productivity through increased field force & introduction of new products. Overall Margins are expected to improve by 200bps in FY15E from FY13 on back of positive turnaround in UK subsidiary and focus on US & emerging markets. We maintain our Buy rating with the target price of `214 based on 12xFY15E EPS of `17.8.
Inc/(dec) in F.A + CWIP -895 -1114 -972 -810 -1103
Interest 9 30 33 36 39
(Pur)/sale of Investments 404 79 -217 0 0
PBT 1268 940 1461 1734 2092
others 15 16 4 0 0
Tax 316 228 328 399 481
CF from Invst Activities -476 -1018 -1184 -810 -1103
PAT 952 713 1132 1335 1611
Loan Raised/(repaid) 119 145 -203 -9 11
Minority 2 0 0 0 0
Equity Raised 3 4 6 0 0
Sh. of Associates 0 0 0 0 0
Dividend -417 -292 -316 -476 -476
Ex. ordinary -10 -49 0 0 0
CF from Fin Activities -295 -142 -514 -485 -465
Adj Pat 940 664 1132 1335 1611
Net inc /(dec) in cash -85 81 14 -16 -28
Source: Company, Sunidhi Research
Op. bal of cash 236 152 232 184 236
Cl. balance of cash 152 232 246 231 202
Sunidhi Research | 16
Yes Bank Growth concerns overdone
Yes bank is one of the newest private sector banks in the country. Set up in 2004 by Dr Rana Kapoor, the bank rapidly expanded its balance sheet. The bank today, has a total asset base of `1008 bn and a branch network of 475 branches. Despite the disadvantages of being a new bank, such as a small branch network and low CASA base, Yes Bank has consistently managed to maintain its ROA within a narrow band across business cycles.
Stable NIM though slowdown in business and tight liquidity Yes Bank’s NIM was stable around 2.9% in H1FY14 despite slowdown in business and tight liquidity. This is due to the consistent improvement in the bank’s CASA ratio on deregulation of savings deposit rates. Strong traction is visible in CASA deposit which grew at 52.5% yoy resulting in CASA ratio improving to 20.4% in Q2FY14 (20.2% in Q1FY14). Additionally the bank has a high proportion of floating rate advances at ~ 90%. As a result, advances re-price almost immediately while deposits re-price as and when they reach maturity which will protect its NIM. Management has also clarified that bulk deposits do not pose significant threat of repricing as 86% of its deposits are contributed by less than 0.2% of total deposit base individually and cost pressures would be mitigated through judicious monitoring and lending rate hikes.
Asset quality appears comfortable Yes bank has the best asset quality amongst its peers with %GNPAs at 0.28% and NNPAs at negligible levels. The banks slippage rate stood at 0.6% in FY13. The banks knowledge banking approach has helped keep asset quality issues at bay. Going ahead we do not expect asset quality to deteriorate significantly as the bank has a well diversified loan book with limited exposure to risky segments. Additionally the bank has a strong provision coverage ratio of 88.5% which would act as a buffer in case of asset quality deterioration. Total standard Restructured Advances stand too is negligible at `1.25 bn (0.26% of advances) lower than Q1FY14 with no fresh restructuring during the Q2FY14.
Loan book to grow at a CAGR of 22% from FY13-15 Due to its small size the bank, has managed to grow its loan book at a rapid pace, well above that of the industry. Loan book grew at a CAGR of 38% from FY08-13. Going ahead we expect the bank to continue growing at a pace faster than that of the industry. We have factored in a loan book CAGR of 22% from FY13-15E.
Lower RWA as a proportion of total assets to free up capital Yes bank has managed to bring down its total risk weighted assets to total assets from 67.8% in FY13 from 80.6% in FY09. Going ahead we expect this ratio to improve further to ~ 62% in FY15. Lower risk weighted assets as a proportion of total assets would help free up capital for the bank and reduce the additional capital requirement for the bank.
Hold with a target price of `410
At the CMP, the bank trades at 1.9x its FY14E ABV and 1.5x its FY15E ABV. Due to expected pressure on margins and visible stress on asset quality, we have hold rating on the bank with a price target of Rs 410 (1.7x its FY15E ABV) though the bank is best placed to reap the benefits of easing liquidity in the system.
RoE 21.1% 23.1% 24.8% 23.1% 23.4% Source: Company, Sunidhi Research
Yes Bank
Sunidhi Research | 19
Sunidhi’s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral.
(For Mid & Small cap stocks from 12 months perspective)
BUY Absolute Return >20%
ACCUMULATE Absolute Return Between 10-20%
HOLD Absolute Return Between 0-10%
REDUCE Absolute Return 0 To Negative 10%
SELL Absolute Return > Negative 10%
Apart from Absolute returns our rating for a stock would also include subjective factors like macro environment, outlook of the industry in which the company is operating, growth expectations from the company vis a vis its peers, scope for P/E re-rating/de-rating for the broader market and the company in specific.
SUNIDHI SECURITIES & FINANCE LTD
Member: National Stock Exchange (Capital, F&O & Debt Market) & The Stock Exchange, Mumbai
SEBI Registration Numbers: NSE: INB 230676436 BSE: INB 010676436
Maker Chamber IV, 14th Floor, Nariman Point, Mumbai: 400 021
Disclaimer: "This Report is published by Sunidhi Securities & Finance Ltd.("Sunidhi") for private circulation. This report is meant for informational purposes and is not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. While utmost care has been taken in preparing this report, we claim no responsibility for its accuracy. Recipients should not regard the report as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without any notice and this report is not under any obligation to update or keep current the information contained herein. Past performance is not necessarily indicative of future results. This Report accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. Sunidhi and its associated companies, directors, officers and employees may from time to time have a long or short position in the securities mentioned and may sell or buy such securities, or act upon information contained herein prior to the publication thereof. Sunidhi may also provide other financial services to the companies mentioned in this report."