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Tuesday, August 14, 2007

Andhra Bank, TCI


Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs117
Current market price: Rs85

Price target revised to Rs117

Result highlights

  • For Q1FY2008 Andhra Bank (ANDB) reported a 21.2% year-on-year (y-o-y) growth in its net profit to Rs141.1 crore, driven by a modest operating performance coming on the back of a higher non-interest income and lower provisions.
  • The net interest income (NII) was up 8% year on year (yoy) to Rs362.1 crore. The bank’s net interest margin (NIM) declined by 25 basis points on a y-o-y basis and by six basis points on a sequential basis (after adjusting for Rs25 crore of one-time income in Q4FY2007).
  • The non-interest income increased by 33.4% yoy to Rs112.5 crore due to a higher treasury income component as the fee income growth remained flat.
  • A 13.1% growth in the net income coupled with a moderate 9% y-o-y growth in the operating expenses helped the bank to report an 18.2% y-o-y growth in the operating profit to Rs223.4 crore; the core-operating profit (operating profit excluding treasury and amortisation) grew by 13.3% yoy to Rs227.5 crore.
  • Provisions and contingencies showed a decline of 68.1% yoy to Rs9.3 crore from Rs29.1 crore, mainly due the absence of a one-time hit of Rs20 crore that the bank had taken during Q1FY2007 on transfer of securities.
  • Business growth of the bank stood at 24.8% yoy with advances up 27.1% yoy and deposits up 23.3% yoy. Despite the strong growth in the advances the asset quality continues to remain among the best in the industry with the net non-performing assets (NPAs) at 0.19%.
  • The NIM is expected to stabilise going forward and lead to an improvement in the operating performance. The capital adequacy levels are comfortable at 12.5% with the Tier-I capital adequacy ratio (CAR) at around 9%, which is not a constraint for growth, and asset quality continues to remain among the best in the industry. At the current market price of Rs85, the stock is quoting at 5.8x its FY2009E earnings per share (EPS), 3.2x pre-provision profits (PPP) and 1x book value. We have introduced our FY2009E numbers in this report. The bank is available at attractive valuations, given its low price to book multiple compared with its peers and an average return on equity of 18.5%. We maintain our Buy call on the stock with a revised price target of Rs117.

Transport Corporation of India
Cluster: Cannonball
Recommendation: Hold
Price target: Rs100
Current market price:
Rs115

Put on hold

Key points

  • Transport Corporation of India (TCI) has placed 7% of its equity with Fidelity Investments International for Rs53 crore. The placement was part of the company's fund raising plans to finance its scheduled capital expenditure (capex) of Rs440 crore. The shares have been placed at Rs105.25 per share at a premium of Rs103.25 to the face value of Rs2 per share. The placement will expand TCI's equity by Rs1 crore to Rs14.5 crore, resulting in an equity dilution of 7%.
  • TCI has lined up a capex of Rs440 crore to be spent over FY2007-10; of the proposed capex it has already spent Rs100 crore in FY2007.The capex will entail the augmentation of its warehouse space, expansion of its truck fleet, acquisition of ships and setting up of wind power plants.
  • The company achieved a turnover of Rs266 crore for Q1FY2008, growing at the rate of 9% year on year (yoy). The express cargo business grew by 30% yoy whereas the supply chain management (SCM) business grew by 27% yoy. The decline in the trading revenues affected the company's top line growth.
  • The earnings before interest and tax (EBIT) grew by 16% yoy to Rs13.69 crore whereas the EBIT margin remained flat at 5% during the quarter. The SCM margin remained flat whereas the express cargo margin was lower by 100 basis points yoy. But sequentially, the express cargo margin expanded by 300 basis points whereas the SCM margin stabilised after an exceptional Q4FY2007.
  • The company's interest cost almost doubled to Rs4.08 crore on account of higher borrowings whereas the depreciation provision was higher by 51.5% on account of addition to gross block.
  • As the company's tax provision stood higher at 36.4% against 27% in the last year, the net profit witnessed a decline of 13.5% yoy to Rs5.69 crore.
  • The complete phase-out of the central sales tax (CST) will augur well for the company as more companies start following the hub-and-spoke model of distribution, leading to complete outsourcing of their logistic needs to third party players. We believe that at the end of the capex plan by FY2010, TCI will be fully equipped to benefit from the opportunities in the third-party logistic (3PL) space. We expect the company's net profit to grow at a compounded annual growth rate (CAGR) of 27% over FY2007-09.
  • As mentioned in the previous update, TCI is developing four properties, covering a total area of 12.5 acre, over the next five years. The net realisable value of these properties would be Rs200 crore which translates into a value of Rs26 per share on a diluted equity base of the company. We believe this would provide ample cushion to the company's stock price.
  • The stock has witnessed a sharp run-up in the last four months and appreciated by 86% against an 18% rise in the Sensex in the same period. The stock is currently quoting at Rs115 per share. At the current market price TCI is discounting its FY2008E earnings by 23x and its FY2009E earnings by 18x. Considering its historical valuations we believe that the stock is fully valued at the current market price and thus offers little scope for appreciation in the near term. We thus put a Hold on the stock.

VIEWPOINT

Novelis (subsidiary of Hindalco)

Overhang of fixed-price contracts
We attended the analyst meet of Novelis (the wholly owned subsidiary of Hindalco) to discuss the Q1FY2008 results. Presenting the key takeaways from the meet.


Andhra Bank, TCI