Monday, October 15, 2007

Sharekhan Investor's Eye dated October 15, 2007

 

STOCK UPDATE

Axis Bank 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,054
Current market price: Rs815

Price target revised to Rs1,054

Result highlights

  • Axis Bank's Q2FY2008 numbers are much above the market's and our expectations with the profit after tax (PAT) reporting a growth of 60.4% to Rs227.8 crore compared with our estimate of Rs199 crore. The high growth was driven by a robust increase in both interest and non-interest income segments. Due to the excellent set of numbers reported during Q2FY2008 we have upgraded our earnings estimates by 15.7% and 16.7% for FY2008 and FY2009 respectively.
  • The net interest income (NII) was up by 72.9% year on year (yoy) and 39.9% quarter on quarter (qoq) to Rs588.7 crore. However the bank had raised capital of Rs4,534 crore during the quarter and excluding the possible interest income earned on such float funds, the quarter-on-quarter (q-o-q) NII growth would moderate to 15.7%.
  • The reported net interest margin (NIM) expanded by 36 basis points yoy and by 56 basis points qoq. Our calculation suggests that around six basis points were added to the NIM due to the possible income earned on the follow-on public offer (FPO) float funds. A marginal sequential increase in the NIM was expected as the asset yields were expected to improve after the low yielding priority sector advances taken on the books during Q4FY2007 had run off. However, the substantial portion of the expansion in the NIM was due to the improvement in the cost of funds brought about by the retirement of high-cost term deposits with the capital raised by the bank. 
  • The bank's assets grew by 39.8% yoy and 5.6% qoq, driven by a strong advances growth of 53.5% yoy and 8.3% qoq. The deposits grew by 30.9% yoy and 8% qoq with an improvement in the savings deposits, which grew by 48% yoy and 17% qoq. The term deposits declined by 7.9% qoq, which helped the bank to improve its reported cost of funds by 25 basis points sequentially to 6.18% from 6.43% in June 2007. 
  • The non-interest income was up 87% yoy and 4% qoq to Rs382.9 crore, driven by a higher trading income of Rs102.5 crore, which grew by 339% yoy and 6% qoq. The core fee income was also up by a robust 69% yoy and 7.1% qoq.
  • The operating profit was up 85.3% yoy and 25.8% qoq to Rs368 crore while the core operating profit was up 70.8% yoy and 37% qoq to Rs368 crore. Provisions and contingencies grew by 236.3% yoy and 13.4% qoq to Rs114.5 crore. Despite the strong asset growth, the asset quality improved with the net non-performing assets (NPAs) at 0.55% of customer assets, down four basis points sequentially. 
  • Axis Bank raised capital to the tune of Rs4,534 crore through a combination of global depository receipt (GDR), qualified institutional placement (QIP) and preferential allotment during the quarter. This helped to improve its capital adequacy ratio (CAR) to 17.6% (from 11.5% in June 2007) with the Tier-I CAR at 13%. This substantial capital-raising programme (almost 25% of the pre-issue equity) has depressed its return on equity (RoE) to 13.6% from 19%, which is along the expected lines. 
  • The bank has also recently decided to foray into the mutual fund business. It has already set up its wealth management business and planned a private equity fund to invest in the infrastructure segment. We feel these are the building blocks that the bank management is putting in place and that would adequately complement its banking business. This strategy would also open up a new channel of steady fee income. Thus, its robust fee income growth could help in restoring the fall in its RoE much sooner than in the past occasions when it had raised capital. It has been registering a phenomenal asset growth without compromising on its margin and asset quality. All these developments make Axis Bank one of the best growth stories available in the private banking space.
  • We have upgraded our earnings estimates by 15.7% and 16.7% for FY2008 and FY2009 respectively. The upward revision in the earnings is mainly because of the improvement in the core net interest income prospects with a decline in the term deposits during the quarter, the robust trend in the fee income and higher trading profits than envisaged at the beginning of the financial year. This has also resulted in our estimated RoE improving by 90 basis points and 150 basis points for FY2008 and FY2009 respectively.
  • At the current market price of Rs815, the stock is quoting at 21.6x its FY2009E earnings per share (EPS), 10.1x its FY2009E pre-provisioning profit (PPP) and 3x its FY2009E book value (BV). We maintain our Buy recommendation on the stock with a revised 12-month forward price target of Rs1,054.

 

Tata Consultancy Services    
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,073

A decent performance

Result highlights

  • Tata Consultancy Services (TCS) has reported a growth of 8.4% quarter on quarter (qoq) and of 25.8% year on year (yoy) in its consolidated revenues to Rs5, 639.8 crore during Q2FY2008. The sequential growth in the revenues was contributed by an 8.2% overall growth in the volume, an 85-basis-point improvement in the billing rates (including productivity gains) and a hedging profit of 86 basis points (around Rs45 crore). On the other hand, the appreciation in the rupee and offshore shift adversely affected the revenue growth by 51 basis points and 99 basis points respectively, on a sequential basis. 
  • The earnings before interest and tax (EBIT) margin improved by 77 basis points to 23.8% sequentially during the quarter. This was contributed by the cumulative impact of the overall productivity gains (of 109 basis points), offshore shift (of 36 basis points) and hedging gains (of 79 basis points). On the flip side, in addition to the rupee appreciation (a negative impact of 30 basis points), the incremental wage cost of 117 basis points resulting from the promotions affected the margin during the quarter. The operating profit grew by 12% qoq and 18.5% yoy to Rs1,343.9 crore.
  • The other income declined by 27.2% qoq to Rs110.5 crore, largely due to a lower foreign exchange (forex) fluctuation gain of Rs57.7 crore (compared with Rs107 crore in Q1). However, despite the higher tax rate (14% as against 11.3% in Q1FY2008) and a lower other income component, the company showed a sequential growth of 7.8% to Rs1,246.9 crore (after adjusting the Q1 earnings for the one-time write-back of Rs29.3 crore of provision made earlier). On an annual basis, the consolidated earnings have grown by 25.9%.
  • In terms of the outlook, the company doesn't give any specific growth guidance. However, it has re-iterated that the demand environment continues to be robust with no signs of any slowdown in banking, financial services and insurance (BFSI) space and the US geography. The company signed three large sized deals of over $50 million (including one in the BFSI vertical) during the quarter. It also entered into master service agreements with three other clients (a couple of them from the banking space) that can potentially generate revenues equivalent to any other large deal. The pipeline of the large orders is also healthy with around 20 deals of over $50 million each. In terms of margins, the company expects to maintain the EBIT margin at around 25% in FY2008 (in line with the same as reported in FY2007). 
  • In terms of key operational highlights, the net addition of 9,268 employees is higher than expectations. This coupled with the campus offers of 22,295 fresh graduates this season (up from around 11,500 in the last fiscal) clearly reflects the management's confidence in the growth outlook of the company. Another noticeable point is the healthy double-digit sequential growth in all the relatively new service lines (such as consulting, engineering, assurance, business process outsourcing [BPO] and enterprise solutions). Moreover, the BFSI vertical showed an 11.3% sequential growth during the quarter.
  • At the current market price, the stock trades at 20.9x FY2008 and 17.3x FY2009 estimated earnings. We maintain the Buy call on the stock with a price target of Rs1,425 (around 23x FY2009E earning per share [EPS]).

SECTOR UPDATE

Cement

Industry dispatches up 4% for September '07
For September, cement dispatches for the industry grew at a slower rate of 4.12% year on year (yoy) to 12.65 million metric tonne (MMT) as against 18% yoy in the same period last year. The two main reasons for the slower growth are lack of capacity additions in the last one year and the base effect. Amongst the cement majors, ACC reported a healthy growth of 12.3% yoy to 1.55MMT in September. On account of flooding in Gujarat, the dispatches of Ambuja Cement and UltraTech Cement were depressed during the month. Amongst the mid-caps in our coverage, Shree Cement continued to report a mammoth 80% growth yoy to 0.72MMT as it commissioned its 2-MMT grinding unit at Khushkera and its 1-MMT clinker at Bangur in the first week of September.

MUTUAL GAINS

Sharekhan's top equity fund picks

We have identified the best equity-oriented schemes available in the market today based on the following 3 parameter : the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity).

The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.

FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager

Posted by Tushar Surekha at 8:40 PM

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