Monday, May 29, 2006
Research: UBS Investment
CMP: Rs 2,927 (Face Value Rs 5)
12-Month Price Target: Rs 3,700
UBS Investment Research recommended `buy' on Infosys Technologies with a target price Rs 3,700. Based on ramp-ups expected, Infosys could have 2-3 clients with engagement size of US$100m p.a. in FY07.
Ramp-ups could be led by financial services and telecom vertical. Problem clients that dented growth in FY06 have stabilised and are back in gradual growth phase. The management views scaling-up of large relationships favourably compared to price-sensitive large contracts.
While investors had questions on cost-side issues, UBS sensed that Infosys is comfortable with stable margins in FY07 as: (a) Salary increase to be nullified by G&A leverage, (b) HR issues are blown out-of-proportion, (c) Improving profitability of subsidiaries is one of the key EBITDA margin levers in FY07.
Overall, UBS found management confidence to be strong about growth and margins in FY07. Based on the analysis, UBS expect June quarter results to be stronger than expected.
Also, consensus EPS upgrades in coming quarters from current levels of Rs119/share of FY07 (compared to FY07 guidance of Rs116). UBS came back incrementally more positive on the back of this trip. The price target is based on a DCF analysis, using a medium-term growth of 22%, terminal growth of 3% and a WACC of 13%.
CMP: Rs 1,003 (Face Value Rs 10)
CLSA put `buy' on Crompton Greaves as the net profit of the company Rs 163 crore for FY06 is in line with their estimates. All three business segments reported 20% revenue growth led by the power segment which grew by 38%.
Given the pick up in the pace of new generation capacity addition, the growth momentum will sustain and expect 30% earnings CAGR over the next two years. With the successful turnaround of Pauwels, Crompton may look to pursue new inorganic growth opportunities.
Crompton's power segment PBIT was up 63% in FY06 on the back of a strong 38% revenue growth and 137 bps improvement in PBIT margins. Industry division revenues and PBIT were up around 20%. The consumer segment, which has historically grown at 8-10%, too reported a 20% revenue growth on the back of construction boom and expansion in the product range.
Strong growth is to continue, though copper prices may hurt a bit. CLSA expects around 30% revenue growth in the power segment to continue for the next two years with the pick up in generation capacity addition and rural electrification drive (40,000 villages to be covered in FY07 versus 10,000 last year).
Industry division sales, too, are expected to grow at around 25% on the back of a pick-up in industrial capex.. However, the sharp rise in copper prices may hold back EBITDA margin expansion in FY07.
Given the good demand environment, Crompton should be able to pass on a large part of the price increase to customers but it may have to absorb some of the impact.
The company's management had earlier indicated that it would look at other acquisition opportunities, especially in the industry space, once Pauwels' turnaround is complete. The increase in the company's authorised share capital could be a precursor to that, since Crompton's normal capex can be met by internal cash generation.
Research: Enam Securities
CMP: Rs 190 (Face Value Rs 10)
12-Month Price Target: Rs 260
Enam Securities rated Federal Bank as `outperformer' with a twelve month price target of Rs 260. The bank achieved an excellent all round performance in Q4. Credit growth remained robust at 33%. Deposit growth at 18% was also commendable and NIM was sustained at 3.2%.
NII growth of 54% resulted in 70% YoY growth in net profit in Q4. Yield on credit at 9.88% was almost same as the previous quarter and previous year. Even the yield on investments at 7.45% was down only 10 bps YoY and was flat QoQ. Cost of deposits at 5.1% was also almost flat both QoQ and YoY.
Operating expenses grew 31%, led by higher staff cost which rose almost 60% YoY in Q4. Higher provisioning for pension liabilities and some one-time expenses like higher ex-gratia contributed to the rise. The bank's provisioning for standard assets is now 0.7%, which is already in compliance with new RBI guidelines for standard assets (most banks will be complying by Q1FY07).
Also post-GDR, Tier-I capital is at 9.3%. The bank has still not taken IFR (investment fluctuation reserve) in the Tier-I capital but has already followed the Basel-II norm for the market risk. Including IFR, Tier-I capital would go up to 11.3%.
The bank has also effected a 50 bps rise in its PLR effective April '06. With almost the entire portion of the loan book linked to PLR, the bank is set to gain on the yield side. With a deliverable ROE of 20%+ for the next two years, valuation at 1.1 times FY07E is very attractive.
Research: India Infoline
CMP: Rs 99 (Face Value Rs 10)
12-Month Price Target: Rs 134
India Infoline recommended a `buy' for Karnataka Bank with a year's target price of Rs 134. The bank's 27% growth in net profit for the forth quarter of FY06 was above the expectation of 20% and the upside was a result of lower operating expenses. Credit growth was in line with an expectation of 24%.
The bank is well placed in a rising rate scenario as it has ample liquidity to fund its credit growth, without having to strain deposit cost. At current valuations of a mere 0.9 times and FY07E adjusted book value, the bank is grossly undervalued.
India Infoline maintains the `buy' rating on the stock with a price target of Rs 134 implying a target price/adjusted book value of mere 1.3 times, an upside of 49%. 20.8% of net interest income growth drove home net interest margin of 2.75%, down by 7 bps. However, this was on expected lines. India Infoline expects margins to expand rapidly in FY07 and FY08 driven by stable liquidity and growing advances yield.
Employee cost was down by 47% in Q4 FY06 as the bank made lower provisions for employee benefits. As a result, operating costs reported a drop of 20.3%.
This helped the bank improve its profitability from the above-expectation of 20.1% to 26.7% Despite many of its peers reporting profit growth volatility, KTK Bank has managed to report a steady profit CAGR of 31.1% over the past five years without any dip.
The bank is expected to report an ROE of 17.5% in FY07 and 17.9% in FY08; stacking it amongst the better ROE banks in the sector. India Infoline have revised their profit estimates by 6% and 5.5% in FY07 and FY08 respectively.