| Summary of Contents STOCK UPDATE Bank of India
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs536 Q2FY2011 results: First-cut analysis Result highlights - Results below expectations: Bank of India reported a net profit growth of 90.7% year on year (YoY) to Rs617 crore, aided by the low base of the previous year. On a sequential basis however, the performance was muted with the bank recording a 15% contraction in its bottom line. Net profit for the quarter stood below our as well as Street expectations due to higher than expected provisioning.
- Strong NII growth: The net interest income (NII) was up a strong 26.1% YoY to Rs1,776.1 crore, supported by a healthy 22.6% Y-o-Y growth in the advances as well as a 24 basis points YoY improvement in the reported net interest margin (NIM) to 2.81%. On a sequential basis however, the reported NIM deteriorated by 8 basis points due to the 30 basis points sequential increase in the cost of funds.
- Lower treasury income restricts non-interest income growth: The non-interest income dropped 13.5% YoY as a result of a 76.2% Y-o-Y contraction in the treasury income. However core fee income growth remained strong, registering a rise of 21.4% YoY.
- Provisions rise 36.7% sequentially: The provisions stood at Rs527.4 crore, up 36.7% sequentially. The same stood above our expectations as the bank made certain floating provisions in order to reach the provision coverage mandate of 70% (including technical write offs).
- Asset quality improves sequentially: The asset quality of the bank improved sequentially with the rise in gross non performing assets (GNPAs) contained at 1.6% quarter on quarter (QoQ). On a relative basis, the bank saw a 7 basis points improvement in its %GNPAs to 2.64%, percentage net non performing assets (%NNPAs) also witnessed an improvement of 4 basis points sequentially to 1.14%.
- Slippages pose significant concern: Despite the improvement in the asset quality, the continued high level of slippages poses some concern. Slippages for the quarter stood at Rs818.4 crore as compared to Rs618 crore for the previous quarter. Slippages stood higher sequentially, despite the bank having booked around Rs200 crore worth of GNPAs arising under the agri debt waiver in the previous quarter.
- High slippages in restructured accounts: The bank restructured assets of around Rs346 crore during the quarter, taking the total restructured assets portfolio to around 5.5% of total advances. Of these around 20% have slipped into non performing asset (NPA) category.
- Healthy business growth: The business growth of the bank was healthy with advances growing by 22.6% YoY. Meanwhile, the deposits too registered a healthy growth of 21.3% YoY with the current account and savings account (CASA) deposits as a percentage of domestic deposits expanding by 217 basis points YoY to 33.2%.
- Adequately capitalised: The capital adequacy ratio (CAR; as per Basel II norms) as on September 30, 2010 stood at 13.04% with tier-I CAR at 8.38%.
- At the current market price of Rs536, the stock trades at 8.2x FY2012E earnings per share (EPS), 4.5x FY2012E pre-provisioning profit (PPP) per share and 1.5x FY2012E adjusted book value (ABV) per share. We will revert with a detailed analysis of the bank?s Q2FY2011 performance shortly.
Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs528
Current market price: Rs450 Results below expectations Result highlights - Performance below expectation: Wipro?s performance for Q2FY2011 has come below our expectations on the information technology (IT) services revenues and the margins front. For the quarter under review, IT services revenues were higher by 5.7% quarter on quarter (QoQ) to $1,272.8 million, but lower than our expectation of $1,287.4 million. On a sequential basis, volumes grew by 6.6% and realisation by 0.9% QoQ due to higher offshore share of revenues (up 50 basis points at 48.3%). On the other hand, IT services? earnings before interest and tax (EBIT) margins declined by 240 basis points QoQ to 22.2%, which is below our expectation of 23.6%. In rupee terms, the consolidated revenues were higher by 8.1% QoQ to Rs7,771.9 crore, which are marginally higher than our expectation of Rs7,654.2 crore, largely on the back of better than expected revenues in the product business, which was higher 28.5% QoQ to Rs1,069.3 crore. For Q3FY2011, Wipro has guided for an impressive 3.5%-5.5% sequential growth in revenues in US dollar terms to $1,317-$1,343 million.
- For the quarter under review, Wipro?s reported net profit at Rs1,284.9 crore, declined by 2.5% QoQ, lower than our expectation of Rs1,361.9 crore. Lower than expected net profit performance was largely on account of a decline in the IT services margins coupled with higher than expected loss in foreign exchange (forex) to the tune of Rs41.4 crore against a forex gain of Rs45.8 crore in the sequential quarter.
- Decent volume growth, however lower than expectations: For Q2FY2011, IT services in US dollar terms were higher by 5.7% in reported currency terms to $1,272.8 million, which is below our expectation. On a constant currency basis, revenues were higher by 4.8% QoQ to $1,261 million. Revenue growth in the IT services was largely aided by sequential blended volume growth of 6.6%, which was below our expectation of 7.6% sequential volume growth. On the other hand, realisation remained stable during the quarter, with onsite realisation up by 1.1% and offshore by 0.1%. On a blended basis realisation was down 0.9% QoQ due to higher offshore contribution.
- Margins performance disappoints: IT services? EBIT margins for the quarter were down 240 basis points QoQ to 22.2%, which is below our expectation of 23.6%. Margins were largely impacted by people related costs ie restricted stock units charge and promotions. For the quarter Wipro gave promotion to about 19,000 employees.
- Impressive growth across verticals: During the quarter, Wipro saw broadbased sequential growth across the industry verticals led by retail and transportation (10%), healthcare (9.5%), telecom (7%), energy and utilities (6.9%), financial services (5.7%), manufacturing (3.6%) and technology (2%). Revenues from communication and media providers were flat. In terms of service offerings, the sequential growth was led by product engineering (17%), package implementation (6.5%), technology infrastructure services (6.2%), testing services (5.7%), application development and maintenance (4.7%) and business process outsourcing (2.6%). In term of geographies, APAC and other emerging markets led with a 12% sequential growth. Europe grew by 10.3% and the largest contributor Americas grew by 3.2%.
- Management commentary remains optimistic: Wipro?s management indicated at a strong demand environment going forward with discretionary spending also kicking in. Also, the funnel is increasing at a steady rate quarter over quarter. During the quarter, Wipro won seven large deals on the back of a similar number of wins in the previous quarter. The growth would be led by US with demand across healthcare, retail, banking and energy and utilities segments. However, there is some slackness in the technology and telecom verticals. The company is seeing traction in system integration deals from India and the Middle East. The management expects pricing to increase next year.
- Upward tweak in estimates: For the quarter gone by, Wipro?s performance was below our expectation on the IT services volume front and the margin front. In the last one year, Wipro has languished on the volume growth front as compared to its peers as the company?s key industry verticals like technology, manufacturing and telecom are still not entirely out of the woods and are still lagging behind the strong growth witnessed in the financial services sector where Wipro has lower contribution to revenues (27%), as compared to its peers. As the demand environment becomes broader going forward, we expect Wipro to catch up on the volume front in the coming quarters. We have marginally revised our earnings estimates for FY2011E and FY2012E. However we have increased our one year target multiple to 21x from 20x earlier on a rolling price earning (PE) basis. We maintain our 12 month target price of Rs528. At the current market price of Rs450, the stock trades at 20x FY2011 and 18x FY2012 estimated earnings. We maintain our Buy recommendation on Wipro.
Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs346
Current market price: Rs298 Price target revised to Rs346 Result highlights - Revenues in line, PAT below estimates: For Q2FY2011 Ipca Laboratories (Ipca) reported an adjusted net profit of Rs65.2 crore. The adjusted net profit grew by a mere 1.1% year on year (YoY) and was below our expectation of Rs75.1 crore, largely due to a higher than expected tax rate during the quarter. The total income of the company grew by 20.5% to Rs518.3 crore, which was in line with our estimate of Rs514.3 crore, essentially due to a 29.4% Y-o-Y growth in the formulations business. The operating profit margin (OPM) contracted by 100 basis points to 22.8% on account of higher marketing and freight costs (up 170 basis points).
- Anti-malarial sales led the growth: The 29.4% Y-o-Y growth in the domestic formulation business and a pick-up in the export of formulations (up 27.1% YoY; institution tender ?up 208%; generic?up 38%) elevated the sales. This was largely contributed by a 41% YoY growth in the anti-malarial formulation sales. The emerging markets showed good traction in H1FY2011?the Latin American market grew by 117%, Asia (up by 54%), Africa (up by 18%)?and the US market grew by 73%. The company remains confident on Russia/CIS sales in H2FY2011 and a 25% growth in international branded formulations for FY2011.
- USFDA approval for Indore SEZ to act as a trigger: The USFDA is expected to inspect the plant in February-March 2011 while the UK MHRA has completed the inspection in this quarter. Ipca would start supplies to Europe from December 2010. However the new revenue channels would start once the USFDA approval is received. Ipca has increased its capital expenditure (capex) guidance to Rs220 crore from Rs150 crore earlier in FY2011. Of this, Rs90 crore will be utilised towards the Sikkim facility while the rest would be utilised for building two new API plants in Ratlam.
- Raise estimates, maintain Buy: The Q2FY2011 results are below our estimates owing to higher than expected tax rate. However the revenues were in line with our estimates owing to strong contribution from both the domestic and export formulations largely aided by the robust recovery in the anti-malarial sales. We tweak our estimates to factor in the strong growth in the domestic formulations business and the higher tax guidance by the company. Our revised earning per share (EPS) estimates stand at Rs20 for FY2011 (vs Rs18.1 earlier) and at Rs23.8 for FY2012 (vs Rs22.6 earlier). At the current market price of Rs298, Ipca is attractively valued at 14.9x FY2011E earnings and 12.5x FY2012E earnings. Based on the strong earnings visibility from the export segment and the scale-up in the US business, we maintain our Buy recommendation on the stock with a revised price target of Rs346.
Tata Consultancy Services
Cluster: Evergreen
Recommendation: Hold
Price target: Rs1,161
Current market price: Rs1,046 Price target revised to Rs1,161 Result highlights - Q2 results beat the most optimistic expectations of the Street: Tata Consultancy Services (TCS) has continued to surprise the market with its strong numbers for the past few quarters. In Q2FY2011, TCS surpassed the most optimistic expectations of the market on all fronts, with an 11.7% revenue growth in US Dollar terms to $2,004 million. The growth was aided by a phenomenal volume expansion of 11.2% quarter on quarter (QoQ). In rupee terms, TCS? revenues increased by 13% QoQ to Rs9,286.4 crore, aided by better rupee realisation during the quarter. For the quarter under review, TCS has reported a foreign exchange (forex) loss of Rs53.7 crore; as a result of this loss its net other income declined by 72% QoQ to Rs33.7 crore during the quarter. The net profit for the quarter was higher by 14.2% QoQ to Rs2,106.5 crore, around 6.7% higher than our expectations.
- Strong volume momentum continues: In Q2FY2011, TCS? consolidated revenues in US Dollar terms grew by 11.7% on reported currency basis to $2,004 million, which was 4.8% ahead of our expectations. On a constant currency basis, the revenues were higher by 11% QoQ. The volume grew by 11.2% sequentially whereas the pricing declined by 26 basis points QoQ. TCS continues to show a strong volume growth. As a matter of fact, in the previous six quarters, TCS had reported an average sequential volume growth of 6.3%. The TCS management has indicated that the growth traction across geographies and industry verticals will be strong going forward. The net addition of more than 10,000 headcounts during the second quarter clearly indicates the visibility of its volume growth for the coming quarters is strong.
- Impressive margin performance continues: The company?s earnings before interest, tax depreciation and amortisation (EBITDA) margin for the quarter under review expanded by 70 basis ponts to 30%, which was ahead of our expectations of a 10-basis-point decline QoQ. Despite facing headwinds on account of people related cost (promotions and higher variable pays), which affected its margin by 166 basis points, TCS managed to expand its margin sequentially driven by productivity improvement and selling, general and administrative (SG&A) leverage coupled with currency tailwinds that added 103 basis points to the margin. Going forward, we have factored in a stable margin performance in our estimates with an expansion of 70 basis points in FY2011 and a marginal contraction of 20 basis points in FY2012. We expect a better top line growth and productivity improvement to compensate for the currency headwinds.
- All-round growth across verticals: During the quarter under review, all the major industry verticals showed a strong growth momentum: Banking, financial services & insurance (BFSI; 10%), telecommunications (telecom; 12.6%), manufacturing (11.7%), retail and distribution (10.7%), transportation (15.3%), energies and utilities (45.6%), and life science and healthcare (9.6%). Among the geographies, the USA crossed $1 billion revenues in the quarter for the first time, growing by 9% sequentially. The Indian revenues grew by 25.7%, the Asia-Pacific revenues increased by 17.4%, the revenues from continental Europe grew by 14.2% and the revenues from the UK increased by 13.2%. The growth was across service lines with revenues from the infrastructure management services segment growing by 20.7%, the enterprise solution revenues up 17.4%, the engineering & industrial solutions revenues up 14%, the assurance services revenues up 15.2%, the business intelligence revenues up 15.8% and the business process outsourcing services revenues up 8.7%. The revenues from application development and maintenance grew by 9.1%, contributing 46.8% of the overall revenues.
- Valuation and view: The management commentary on the outlook for TCS? business is quite positive and hints at a strong deal pipeline and robust demand environment going ahead. On the other hand, the management has also indicated that the discretionary spending and pricing may pick up by the latter part of the fiscal. We have revised upward our earnings per share (EPS) estimates for FY2011 and FY2012 by 9.4% and 10.2% respectively. We have now valued both TCS and Infosys Technologies (Infosys) on 23x FY2012E as against our earlier investment thesis of valuing TCS at a 10% discount to Infosys? target price/earnings (P/E) multiple, as we believe TCS will continue to outperform Infosys in the medium term. Consequently, we have revised upward our 12-month price target to Rs1,161 from Rs920 earlier. At our price target the stock would be valued at 23x FY2012E. We maintain our Hold recommendation on the stock.
Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs300
Current market price: Rs252 Upgraded to Buy Result highlights - Q2 bottom line higher than expected: Allahabad Bank?s Q2FY2011 performance was better than our expectations. The bank?s net profit grew by 20.7% year on year (YoY) to Rs402.6 crore against our expectation of Rs385.7 crore. The profit growth was mainly driven by a strong growth in the net interest income (NII) and a robust growth in the advances during the quarter.
- NIM expands QoQ: The NII for the quarter grew by a healthy 60.7% YoY to Rs969.2 crore. The NII growth was driven by an improved credit growth. Meanwhile the reported net interest margin (NIM) increased by 24 basis points sequentially. The sequential growth in the NIM was based on a 52-basis-point sequential increase in the yield on advances.
- Robust business growth: The bank?s advances grew by a robust 38.9% YoY to Rs83,183 crore as against deposits, which grew at a relatively slower rate of 30.2% to reach Rs113,633 crore. This led to an increase in the credit-deposit ratio from 69.9% in September 2009 to 73.2% in September 2010.
- Healthy fee income: As expected, the performance on the non-interest income front was weak as the non-interest income declined by 14.8% YoY to Rs344.7 crore during the quarter. The non-interest income declined due to a 77.4% year-on-year (Y-o-Y) decline in the treasury income during the quarter. However, the fee income registered a strong growth of 17.0% YoY.
- Higher cost-income ratio: The growth in the operating expenses was higher at 48.6% YoY. Consequently, the cost-to-income ratio for the quarter stood at 40.5%, higher than the previous year?s figure.
- Depleted asset quality: The asset quality of the bank weakened on a sequential basis. The gross non-performing assets (GNPA) increased by 29.1% quarter on quarter (QoQ) to Rs1,470.3 crore and the net non-performing assets (NNPA) increased by 48% QoQ. In relative terms, the %GNPA increased to 1.77% from 1.50% in Q1FY2011. At the end of Q2FY2011 the restructured assets formed 3.6% of the advances book. The provisioning coverage ratio was at 81.02% at the end of the quarter.
- CAR @ 13.49%: The capital adequacy ratio (CAR) of the bank as at the end of Q2FY2011 stood comfortable at 13.49%, though the same was lower than the CAR of 13.62% recorded during the previous quarter. The tier-1 CAR was at 8.41% at the end of Q2FY2011.
- Outlook: At the current market price of Rs252, the stock trades at 5.8x its FY2012E earnings per share (EPS), 3x FY2012E pre-provisioning profit (PPP) per share and 1.4x FY2012E adjusted book value (ABV) per share. In view of the strong and higher than expected Q2FY2011 results, the bank?s current valuations appear reasonable. We have tweaked our earnings estimates for the bank in line with its results and upgraded our recommendation on the bank to Buy with a revised price target of Rs300.
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