Monday, April 20, 2009

Sharekhan Investor's Eye dated April 20, 2009

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Hold
Price target: Under review
Current market price: Rs560

Q4FY2009 results: First-cut analysis

Result highlights

  • In Q4FY2009, Tata Consultancy Services (TCS) consolidated top line declined by 1.4% quarter on quarter (qoq) to Rs7,171.8 crore. In dollar terms, the revenues dropped by 3.4% to US$1433 million during the quarter due to a decline in volumes (2.65%), a dip in pricing (1.97%) and a higher proportion of offshore revenues (2.4%). This was partially offset by revenue contribution from Citigroup Global Services Ltd (CGSL)s acquisition (4.94%) and a favourable currency impact (0.62%).
  • The earnings before interest and tax (EBIT) margin dropped by 106 basis points to 23.7% during the quarter due to higher selling, general and administrative (SG&A) expenses (159 basis points) and reduction in productivity (44 basis points). This was partially offset by higher proportion of offshore revenues (67 basis points) and a favorable currency impact (31 basis points). Consequently, the companys EBIT fell by 5.7% sequentially to Rs1,700 crore during the quarter.
  • The net income in Q4FY2009 dipped by 2.8% to Rs1,314.4 crore, slightly below our expectation of Rs1,327 crore. The decline in the net income was lower than the EBIT growth rate due to lower foreign exchange (forex) losses. The company reported forex losses of Rs192 crore in Q4FY2009, lower than Rs251 crore in Q3FY2009.
  • The companys board of directors has proposed a bonus issue of 1:1 and a final dividend of Rs5 per share (taking the total dividend in FY2009 to Rs14 per share), which is subject to shareholders approval. 
  • In terms of demand environment, the company continues to see uncertainty especially in manufacturing, hi-tech and telecom verticals. The management highlighted that the demand impact is more pronounced in manufacturing and hi-tech verticals and the same is expected to continue for some time. Further, the discretionary spend is also getting delayed in the uncertain environment. On the positive side, the management mentioned that the company is seeing a rise in offshore volumes. In Q4FY2009, TCS revenue proportion from offshore business increased by 4.1% to 47.7%.
  • On the hedging front, the company mentioned that hedges aggregating to US$120 million (at an average exchange rate of Rs41) are expected to mature in the next quarter. The unrecognised forex losses sitting on the balance sheet declined marginally to Rs715 crore in the quarter compared to Rs738 crore seen in the previous quarter. 
  • At the current market price, the stock is trading at 10.6x FY2009 earnings estimate and 10x FY2010 earnings estimate. We will review our estimates in detail shortly in order to incorporate the cautious demand environment. We maintain our Hold recommendation on the stock.

Axis Bank
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs515
Current market price: Rs510

Q4FY2009 results: First-cut analysis

Result highlights

  • For Q4FY2009 Axis Bank has reported a net profit of Rs581.5 crore, up by 60.9% year on year (yoy), which is well above our and street expectations. The increase primarily stemmed from a healthy top line growth coupled with a lower than expected growth in the operating expenses, which improved the profitability of the bank. 
  • The net interest income (NII) for the quarter stood at Rs1,032.6 crore, up by 24.6% yoy. A 56-basis-point year-on-year (y-o-y) contraction in the net interest margin (NIM) to 3.37% (reported) restricted the NII growth despite a strong 36.7% y-o-y advances growth.
  • A significant increase in the cost of funds (82 basis points yoy) outweighing the increase in the yields (47 basis points yoy), took its toll on the NIM during the quarter. Importantly, the NIM improved by 25 basis points on a sequential basis. 
  • The non-interest income grew by a robust 51.9% yoy to Rs845.5 crore on the back of a significant spike (a 272.2% y-o-y increase) in the treasury gains and a healthy 41.9% y-o-y increase in the fee income.
  • The operating expenses for the quarter at Rs739.6 crore grew by just 11.7% yoy, resulting in an over 1,000-basis-point y-o-y improvement in the cost to income ratio (to 39.4% in Q4FY2009). The tight leash on the operating expenses led the operating profit to grow by a strong 57.5% yoy to Rs1,138.5 crore.
  • On the asset quality front, the gross non-performing assets (NPAs) increased by 14.0% sequentially. As a result, the gross NPAs in percentage terms (% GNPAs) and the net NPAs in percentage terms (% NNPAs) increased to 0.96% and 0.35% respectively. During the quarter, the provision coverage ratio improved to 63.6% vs 56.6% in Q3FY2009.
  • Surge in loan restructuring: As expected, the quarterly financials reveal a 68.7% quarter-on-quarter jump in the total restructured assets to Rs1,625.9 crore (of which Rs996.2 crore were restructured during FY2009). The total restructured assets form about 1.74% of the gross customer assetsa rise of 63 basis points sequentially (refer table below). While a larger portion (about 61%) of the restructured assets involves principal deferment only, the share of loans with principal deferment and interest concessions is on rise (up 303 basis points quarter on quarter). Dissecting further, the large and mid corporate segment has contributed about half of the loans restructured during the year (amounting to Rs996.2 crore), followed by small and medium enterprises (SMEs; contributing 38%). From industry perspective, three troubled sectors (textiles, auto ancillary and real estate) contributed nearly 45% of the loans restructured.
  • In Q4FY2009, the advances grew by a strong 36.7% yoy primarily due to a strong growth witnessed in the agricultural (up by 49.0% yoy) advances and large and mid corporate (up by 42.0% yoy) advances. Meanwhile, the deposits registered a growth of 33.9% yoy. Surprisingly, the current account and savings account ratio jumped up sharply to 43.0% during the quarter from 38.0% in Q3FY2009.
  • Reins to change hands: The board of directors of Axis Bank has narrowed down on Shikha Sharma, currently the managing director (MD) of ICICI Prudential Life Insurance, as the next MD and chief executive officer (CEO) of the bank. However, P J Nayak, the current CEO, has expressed his dissent to the appointment of Shikha Sharma and his desire to leave the bank with immediate effect, well before the official expiry of his term on July 31, 2009. We believe that the controversial exit of Mr Nayak is sentimentally negative for the stock. 
  • As on March 31, 2009, the capital adequacy ratio of the bank stood comfortable at 13.69%. The tier-I capital ratio was at 9.26%, which provides the bank with enough headroom to raise tier-II capital.
  • At the current market price of Rs510, Axis Bank trades at 9.0x 2010E earnings per share, 4.4x 2010E pre-provisioning profit and 1.7x 2010E price-adjusted book value. We maintain our Hold recommendation on the stock and shall return soon with a detailed analysis of the banks Q4FY2009 performance post the management conference call. 


Monthly economy review

Economy: All eyes on RBI monetary policy review 

  • The Reserve Bank of India (RBI) will announce its annual policy review on April 21, 2009. The policy review is staged against the backdrop of near-zero inflation (in terms of the Wholesale Price Index [WPI]) but near double-digit increase in the Consumer Price Index (CPI) and slowing economic growth. Besides, the credit growth has witnessed a sharp deceleration while the banking system is awash with liquidity. In view of this, we expect the RBI to announce a token cut of 25 basis points each in the repo and reverse repo rates in keeping with its stress on a low interest rate regime. The central bank is expected to keep the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) unchanged. However, we feel the business growth target for the banking system and the outlook for the economy to be given by the RBI for the current fiscal will remain a key monitorbale. 
  • Indias trade deficit stood at USD4.91 billion in February 2009 compared with USD6.07 billion in the previous month. The trade deficit for February 2009 declined (for the second consecutive month in FY2009) by 26.9% year on year (yoy).
  • In February 2009, industrial production growth once again entered the negative zone as it declined by 1.2% yoy. The fall in the industrial output was led by a y-o-y decline of 1.4% and 1.6% in the output of the manufacturing and mining segments respectively. On a YTD basis, the IIP growth for the period April 2008-February 2009 stood at 2.8% and was significantly weaker compared with the 8.8% growth achieved during the comparable period of the previous year. Importantly, the Index for Industrial Production (IIP) figure for January 2009 has been revised upwards to indicate an increase of 0.4% yoy against a drop of 0.5% (provisional) earlier. While there has been some improvement in automobile sales, cement dispatches and steel production during March 2009 (indicating better industrial activity), the high base effect is likely to play a spoilsport. 
  • Inflation continued its southward journey and stood at 0.18% for the week ended April 04, 2009 after touching a record high of 12.91% in August 2008. However, on a week-on-week (w-o-w) basis, the inflation rate inched up by 0.4% on the back of higher food and fuel prices. The inflation rate is at near zero levels and we believe it is likely to enter the negative territory in the coming few weeks as the high base effect comes into play. Furthermore, the Indian Meteorological Department (IMD) expects the monsoon rainfall to be near normal to normal this year (96% of the long-period average). We believe a near normal to normal monsoon would help in bringing down the food inflation, which is currently at elevated levels.
  • Globally, the real economies showed some early signs of revival. However, data only suggests that the pace of deterioration in global economies has slowed down and in no way does it indicate a reversal in the economic cycle. Clearly, the effects of the unprecedented measures announced by various governments are yet to be seen (read more under Global round-up).

Banking: Credit growth decelerates further

  • The non-food credit growth (as on March 27, 2009) decelerated further to 17.5% yoy vs the 18.5% y-o-y growth seen a month ago. This is significantly lower than the RBIs revised credit growth target of 24.0% for FY2009. Besides the slowing economic growth, heightened risk aversion and lower disbursements by the private and foreign banks affected the overall credit growth. The deposit growth too decelerated to 20.0% yoy as against the 21.0% y-o-y growth registered in the previous month. 
  • Yields on government securities (G-Secs) cooled off a bit in April 2009. After touching a high of 7% in March 2009, the ten-year G-Sec yield stood at 6.65% as on April 15, 2009. We expect the movement in the bond market to remain volatile on the back of the recent government-borrowing plan. 

Equity markets: Volumes head northwards

  • Since March 2009, the markets have rallied sharply as a result of which the benchmark index (BSE Sensex) has seen an increase of 9.2% during the month, followed by another 16.2% increase during the month-till-date (MTD) period in April 2009 (April 01-15, 2009). Consequently, during the MTD period, the average daily volumes in the futures and options (F&O) segment were higher by ~12% as compared with the levels seen in the previous month. Meanwhile, the average daily volumes in the cash segment spiked by 57.6% compared with that in the previous month. For April 2009, the MTD fund flows indicate the foreign institutional investors (FIIs) have remained net buyers while the local mutual funds (MFs) have remained net sellers. 
  • After registering a sequential increase in the total assets under management (AUMs) for the mutual fund (MF)industry in the past three months, the total AUMs dipped by 1.5% month on month (mom) in March 2009. On a y-o-y basis, the total AUMs for the MF industry fell for the sixth consecutive month by recording a 7.2% dip in March 2009 to reach Rs493,985 crore.

Insurance: The downfall continues

  • In February 2009, the annualised premium equivalent (APE) for the life insurance industry declined by 23.7% yoy and by 14.4% mom. The APE for the private players continued its declining trend for the fourth consecutive month as it dropped by 27.1% yoy. The APE for Life Insurance Corporation of India (LIC) fell by 18.5% yoy.
  • In the non-life insurance business, the gross premium underwritten for the industry registered a paltry growth of 2.2% yoy in February 2009. The growth in the gross premium underwritten of the public sector players was much lower at 1.7% yoy vs the 2.5% y-o-y growth seen in January 2009. Meanwhile, the gross premium underwritten for the private sector players increased by 2.9% yoy in February 2009.

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