Reviews & Tips

#2
Reviews & Tips :SBI

State Bank of India
Price target: Rs2,460
Current market price: Rs2,104

Results largely inline; negative surprise on asset quality

Result highlights
For Q2FY2010 State Bank of India (SBI) reported a net profit of Rs2,490 crore, indicating a growth of 10.2% year on year (yoy). This was slightly above our estimate (Rs2,378 crore) primarily driven by a better than expected net interest income (NII) growth and a spike in treasury gains.
The NII for the quarter came in at Rs5,608.8 crore, up 2.8% yoy. This lay above our expectation of Rs5207.4 crore. The higher than expected NII was on account of a healthy growth in the advances (up 17.6% yoy) coupled with a 25-basis-point sequential expansion in the reported net interest margin (NIM) to 2.55%.
The non-interest income for the quarter jumped up by 50.4% yoy to Rs3,525.2 crore on the back of an over two-fold jump in the treasury income coupled with a healthy growth in the ?commissions, exchange and brokerage? income (up 58% yoy).
The provisions and contingencies for Q2FY2010 grew by 66.4% yoy to Rs1,016.1 crore. The jump, despite the largely stable loan loss provisions, can be traced to the significant write-back of investment depreciation in the year-ago quarter. However, due to the growth in absolute gross non-performing assets (GNPAs) outpacing the growth in the loan loss provisions on a year-on-year (y-o-y) basis, the provision coverage for the bank deteriorated by 127 basis points yoy to 42.9%.
In Q2FY2010, SBI?s advances grew by a strong 17.6% yoy to Rs580,237 crore on the back of a robust growth in car loans (up 44.45% yoy) and education loans (up 42.23% yoy). International advances and home loans too grew at a healthy pace displaying growth rates of over 20% each. The domestic deposits grew much faster (up 24.7% yoy), implying an over 450-basis-point contraction in the deployment rate though the deployment picked up sequentially.
SBI's asset quality deteriorated further on an absolute basis during the quarter. At the gross level, the non-performing assets (NPAs) increased by 46.7% yoy and by 13.4% quarter on quarter (qoq) to Rs17,375 crore and at the net level to Rs9,927.3 crore (up 18.1% qoq). On a relative basis as well the %GNPAs increased by 28 basis points qoq to 2.99% and %NNPAs (% net NPAs) increased by 18 basis points to 1.73%. During Q2FY2010, the bank restructured assets worth Rs2,832 crore, taking the total count of the restructured assets to Rs17,376 crore. Of the restructured assets, Rs285 crore slipped into the NPA category.
SBI?s capital adequacy ratio (CAR) improved to 14.11% as on September 30, 2009 with the tier-I capital adequacy at 9.84%. During the quarter, the bank raised perpetual debt instruments of Rs1,000 crore, which is reckoned as tier-I capital.
We maintain our estimates and await clarity on provisioning norms from the regulator. At the current market price of Rs2,104, the stock trades at 11.5x FY2011E earnings per share (EPS), 5.4x FY2011E pre-provisioning profit (PPP), 1.8x FY2011E stand-alone book value (BV) and 1.4x F2011E consolidated BV. We maintain our Buy recommendation and price target of Rs2,460 on the stock with increase in provisioning requirements (to 70%) as a key risk to our investment thesis.
 
#3
Hindustan Unilever
Price target: Rs298
Current market price: Rs273

Result highlights
Hindustan Unilever Ltd (HUL)?s Q2FY2010 results are ahead of expectations on account of a better than expected operating profit margin (OPM), which resulted in a 21.2% year-on-year (y-o-y) growth in the bottom line, which is ahead of our expectation. However, the top line growth of 5% year on year (yoy) is below our and the street?s expectation. The volume growth in the fast moving consumer goods (FMCG) sales tapered down to 1% yoy during the quarter.
The home and personal care (HPC) business (contributes ~75% to the top line) registered a modest growth of 5.2% yoy mainly on account of the subdued performance of the soap and detergent segment whose revenues stood flat at Rs2,003.7 crore on a y-o-y basis. The soap and detergent segment was affected by significant downtrading in the detergent category at the bottom of the pyramid. The personal products segment grew by 13.4% yoy, in line with our expectation, driven by a strong growth in the premium hair care and skin care categories.
The food business registered a growth of 12.6% yoy on the back of a price-led growth of 18.0% yoy in the beverage segment and an 8% y-o-y growth in the ice cream segment (largely driven by a good volume growth).
The OPM improved by 262 basis points yoy to 14.4% (ahead of our expectation of 13.4%) on account of a 331-basis-point y-o-y decline in the raw material cost as a percentage of sales and a 240-basis-point y-o-y decline in the other expenses as a percentage of sales. Thus, the operating profit grew by 28.2% yoy to Rs610.8 crore and the adjusted net profit grew by 21.2% yoy to Rs530.1 crore (ahead of our expectation of Rs498.1 crore) during the quarter.
The post-tax exceptional item of Rs101.6 crore (includes the profits on the sale of properties, restructuring cost and marked-to-market [MTM] charges) resulted in a 21.6% y-o-y decline in the reported net profit to Rs428.5 crore in Q2FY2010.
In the view of the lower than expected top line growth in H1FY2010 and with the volume growth remaining the key concern with regard to the company, we are revising downwards our earnings estimates for FY2010 and FY2011 by 2.4% and 1.8% respectively.
Though HUL has taken corrective measures, we believe the company was slow to react to the fact that the consumers were shifting to low-priced products (especially at the bottom of the pyramid). We believe it would take some time before the positive impact of these measures become visible on its overall performance. On the other hand, the mid-cap FMCG companies continue to deliver a strong operating performance. Also, ITC achieved a strong volume growth of ~7% in its cigarette business in Q2FY2010 (ahead of the industry growth of 5% yoy).
Thought we maintain our penchant for the mid-cap FMCG stocks on account of their strong growth potential, we like ITC better than HUL in the large cap FMCG space. At the current market price the HUL stock trades at 26.4x its FY2010E earnings per share (EPS) of Rs10.3 and at 22.9x its FY2011E EPS of Rs11.9. In line with the downward revision in our earnings estimates, our price target stands revised to Rs298. We maintain our Buy recommendation on the stock.
 
#4
Re: Reviews & Tips :Genus

Genus Power Infrastructures
Recommendation: Exit
Current market price: Rs163

One of the manufacturing plants of Genus Power Infrastructure Ltd (GPIL) has been badly damaged by the severe fire that broke out at Indian Oil?s depot in Jaipur on October 29, 2009. This GPIL plant contributes ~40% to the company?s total revenues and could lead to production losses in Q3FY2010 and beyond, thereby affecting the company?s earnings in FY2010 and in the following fiscal.
As the extent of damage is still not known and it could be substantial.
 

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