Results Flash - Axis Bank - 4QFY2011 - Buy

Result Flash on Axis Bank for 4QFY2011 with a Buy recommendation and a Target Price of Rs1,770 (12 months).

 

Axis Bank registered a healthy 33.4% yoy growth in its net profit for 4QFY2011 to Rs1,020cr, which was in line with our estimates of Rs995cr. However NII was lower than estimated due to a sharp sequential compression in Reported NIMs of 37bp which was offset by stronger other income led primarily by fee income. Strong yoy growth ahead of peers in balance sheet, fee income and branch network was the key positive from the results.

The sequential NIM compression of 37bp was unusually high during 4QFY2011 as the bank had to fulfill its priority sector lending obligations through term deposits (in a sharp rise in term deposits rates scenario), as CASA deposits growth moderated (CASA ratio on a daily average basis down by 400bp qoq). Also the full benefit of re-pricing on the advances side did not flow through during 4QFY2011, as the lending rate hikes were carried out in mid-January and mid-February. During 4QFY2011, apart from NIM, performance of the bank on other operating parameters was strong as evident from the strong fee income growth (39% adjusted yoy), cost-to-income ratio stable at 42.2%, slippages rate contained within 1.0% and gross NPAs brought down to 1.01% with a strong 80.9% provision coverage ratio (including technical write-offs).

The stock is currently trading at valuations of 2.3x FY2013E ABV. We remain positive on the bank owing to its attractive CASA franchise which is likely to be bolstered further on the back of strong branch expansion (increased network by 41.4% during FY2011), multiple sources of sustainable fee income, strong growth outlook and A-list management. We maintain a Buy recommendation on the stock with a Target Price of Rs1,770.

 

Exhibit 1: 4QFY2011 Actual vs. Estimates
(Rs cr)	Actual	Estimates	Var (%)
Net interest income	1,701	1,803	(5.7)
Non-interest income	1,450	1,219	19.0
Operating income	3,151	3,022	4.3
Operating expenses	1,331	1,245	6.9
Pre-prov. profit	1,821	1,777	2.5
Provisions & contingencies	254	250	1.6
PBT	1,566	1,527	2.6
Prov. for taxes	546	532	2.7
PAT	1,020	995	2.5

  Source: Company, Angel Research

 

Exhibit 2: 4QFY2011 Performance summary

 

(Rs cr)	4QFY2011	3QFY2011	% chg (qoq)	4QFY2010	% chg  (yoy)
Interest earned	4,367	3,838	13.8	2,988	46.1
Interest expenses	2,666	2,105	26.6	1,528	74.4
Net interest income	1,701	1,733	(1.9)	1,460	16.5
Non-interest income	1,450	1,148	26.4	934	55.4
Operating income	3,151	2,881	9.4	2,394	31.7
Operating expenses	1,331	1,222	8.9	1,010	31.8
Pre-prov. profit	1,821	1,658	9.8	1,384	31.6
Provisions & contingencies	254	314	(19.0)	202	26.0
PBT	1,566	1,345	16.5	1,182	32.5
Prov. for taxes	546	453	20.5	417	31.0
PAT

IDBI Bank - RU4QFY2011 - Neutral

Result Update on IDBI Bank for 4QFY2011 with a Neutral recommendation.

 

For 4QFY2011, IDBI Bank posted robust net profit growth of 62.1% yoy (54% after adjusting for the merger) to `516cr. Improvement in asset quality and strong growth in non-interest income, driven by 58.2% qoq growth in fee income and 231.8% qoq growth in recovery from written-off accounts, were the key highlights of the result. We recommend a Neutral rating on the stock.

 

Strong advances growth; NIMs sustain above 2%:  For 4QFY2011, the bank's net advances grew by robust 16.8% qoq to `1,57,098cr, while total deposits grew by 20.1% qoq to `1,80,485cr, driven by 115.4% growth in current account deposits. Savings accounts grew by 20.3% qoq and 58.6% yoy to`13,936cr in 4QFY2011. Due to the year-end surge in current account deposits, CASA ratio jumped from 15.1% in 3QFY2011 to 20.9% as of 4QFY2011. NII declined by 7.9% qoq due to the increase in cost of liabilities by 33bp to 6.73%. Consequently, reported NIM dropped from 2.28% in 3QFY2011 to 2.10% in 4QFY2011. During 4QFY2011, overall asset quality improved considerably with slippages coming down to `187cr compared to slippages of ~`694cr in 3QFY2011. Annualised slippage ratio for the quarter fell to 0.5% in 4QFY2011 compared to 2.1% in 3QFY2011.

 

Outlook and valuation: IDBI Bank's discount to bigger PSU banks is quite low despite considerably lower RoEs, largely due to the prospect of diminishing performance gap vis-à-vis peers. We believe IDBI Bank is set to improve its credit and deposit mix going forward. However, at the CMP, the bank is trading at 1.3x FY2013E P/ABV adjusting for SASF (0.9x P/ABV without adjusting), which we believe is relatively expensive in light of cyclical headwinds. Hence, we recommend Neutral on the stock.

HDFC Bank - RU4QFY2011 - Accumulate

Result Update on HDFC Bank for 4QFY2011 with an Accumulate recommendation and a Target Price of `2655(12 months)

 

For 4QFY2011, HDFC Bank reported healthy 33.2% yoy growth in net profit to `1,115cr, in line with our estimate of `1,110cr. The bank continued to maintain healthy operating performance with strong profitability growth. We maintain our Accumulate recommendation on the stock.

Consistently healthy performance on all parameters: Overall business growth of the bank was healthy for 4QFY2011 despite a typical fourth quarter slowdown in advances. The bank was able to maintain its reported NIM at 4.2% despite the rising cost of funds for the system as a whole. Over the past few quarters, the bank has been witnessing a slowdown in saving account deposit growth, which came down to 27.2% in 4QFY2011 from 42.8% in 4QFY2010. Despite this, the bank's CASA ratio remained the best in the industry at 52.7% (51% after adjusting for one-offs). The asset quality continued to improve substantially with slippages halving from 2.6% in FY2010 to 1.1% in FY2011 and provisioning expenses to average assets declining to 0.8% in FY2011 from 1.1% in FY2010. NPA coverage improved further to 82.5%, even without considering the strong floating  provisions (accounting for over 53.4% of provisioning expenses during the quarter). The bank currently has an outstanding floating provision pool of ~`730cr, building a cushion against future asset-quality pressures.

Outlook and valuation: At the CMP, the stock is trading at 3.2x FY2013E P/ABV, which is below our target multiple of 3.6x (benchmarked at ~25% premium to our Sensex target multiple). We believe HDFC Bank is well positioned for high qualitative growth, with CASA and cost-to-income ratio returning to pre-CBoP levels. In our view, with strong capital adequacy and healthy branch expansion, the bank is set to further gain credit and CASA market share accompanied by reduction in NPA provision costs. We maintain our Accumulate recommendation on the stock with a target price of `2,671.

Event Update - McNally bags order worth Rs379cr (Errata)

Event Update on McNally Bharat Engineering

 

McNally bags order worth Rs379cr

McNally Bharat Engineering's MHE division has bagged order from Steel Authority of India Ltd worth Rs379cr for design, engineering and supply of By-Product Plant at its Bhilai plant. Order is to be delivered over 24 months. The company's consolidated order book at the end of 3QFY2011 stood at Rs4,370cr (2.4x FY2010 revenues), which currently stands at Rs4,340cr (2.4x FY2010 revenues).

 

We believe that an improving economic scenario, continuous government focus on infrastructure spend and pick-up in private capex augurs well for the companies providing EPC solutions to the core sectors of the economy.

 

At Rs222, the stock is available at attractive valuations of 7.6x and 5.5 FY2012E and FY2013E earnings and 4.5x & 3.7 FY2012E &FY2013E EV/EBITDA. We maintain our Buy rating on the stock, with a Target Price of Rs307.

Planning for Retirement

Amruta is keen to save for the long term. She still has over 15 years of service in her job with a bank, and will be eligible for pension when she retires. Should her savings consider her retirement needs? Or is too far for her to worry? It is never too early to plan for retirement. We all go through a stage in life, when we hold a regular income yielding job or profession, and reach the stage when we no longer work. To plan for retirement is to set aside today’s funds for tomorrow. And to ensure that we receive a comfortable level of income from our investments, even if our regular income ceases to flow in.

There are two components to planning for retirement. The first is the building of a corpus by saving from our regular income. The deployment of this corpus should have the single objective of accumulation into a large value by the time we are ready to retire. The second is the deployment of the corpus to fund our retirement. How much we save, how we invest the saving, and how we modify the investment pattern based on our needs, is the gist of planning for retirement.

Amruta, like so many of us, contributes to her provident fund and plans to invest the proceeds after retirement into an annuity scheme which will pay her a regular fixed pension in her retirement years. She thinks it is good to invest in safe avenues and to deploy the corpus such that the capital is not put to risk. Is she doing the right thing?

Not really, Amruta needs to worry about a few things. If the need is growth, her investments need to focus on assets such as equity funds. Her pre-retirement saving needs to be growth-oriented to become a larger corpus. If the need is income, investments needs to focus on assets such as debt funds. Her post-retirement investment needs to be income-oriented to provide for her regularly. Amruta needs to harness the power of asset allocation. If she chooses to stick to one type of income-yielding asset when she accumulates her corpus as well as draws from it, she exposes herself to risk. She needs an equity-oriented strategy when she accumulates, and a debt-oriented strategy after her retirement when she draws upon her investments. Retirement planning is a deft and dynamic exercise in asset allocation that rebalances equity and debt, or growth and income, based on the changing need of the investor.

Amruta’s asset allocation in the pre-retirement stage should leverage the time available before her retirement. Amruta will be able to invest in growth assets like equity, which may be volatile in the short term, but earn a higher return in the long term. She should target building a larger corpus for the same level of saving. To invest at a fixed rate for the long term could be a low risk strategy, but it would also mean taking the slow train to corpus-building. Amruta should choose long term growth investments such as diversified large cap equity funds, which invest in large, more liquid blue-chip companies that are leaders in their sectors. Such an investment is likely to provide Amruta with a higher rate of return, so her corpus can grow at a faster rate. Since she is not investing in a lump sum, but in regular instalments over a long period, she will not be timing the markets either.

Amruta’s asset allocation in the post-retirement period should primarily generate a regular income while also shielding her from inflation during her retirement years. She needs to choose a hybrid allocation, with a high portion in income-oriented investments, and a small portion in growth-oriented investments. A fixed corpus invested into fixed income assets will lead to a lower income in her later years, after inflation. If she needs an increasing rate of income over the years into retirement, she can achieve that only by allocating at least a portion of her money into equity assets. She should periodically transfer the growth in her equity funds to debt funds that will generate her income. She can begin with an equity allocation of say 40% when she retires, and reduce it over time to about 20% by the time she is 80 years old.

-By 
Dr. Uma Shashikant,
Director, Centre for Investment
Education and Learning