ICICI Bank : BUY

Waning Provision Expenses & Robust NII Spur PAT

ICICI Bank’s PAT grew 44% YoY, in-line with our estimates, mainly due to a decline in provision expenses (down 61% YoY) and robust net interest income growth (23% YoY). Decline in provision expenses was mainly due to improved asset quality (gross NPA declined 1.5% QoQ). Advances growth maintained its momentum (up 5% QoQ) and supported margins at 2.7% (improved 10 bps QoQ). However, improvement in NIMs is mainly due to premature withdrawal of deposits; adjusting for this, NIM would have declined by ~6 bps QoQ. Deposits grew 4% QoQ while CASA ratio improved 90 bps QoQ to 45.1%. The bank continued to re-deploy funds from lower yielding investment book towards incremental advances, which will support NIMs in ensuing quarters. Other income declined by 13% YoY; however, fee income rose 18% YoY in-line with credit growth.

Zero net addition to NPAs:  Asset quality improved as gross NPAs shrunk by 1.5% QoQ to Rs 100 bn. Moreover, ICICI has shored up its provision coverage ratio to 76% (vs. 71.8% in Dec-

10) much above the regulatory requirement. Higher coverage will provide cushion to the bank’s profit in difficult times (maintains ~Rs 4 bn of excess provisions). Going forward, we expect that the credit cost will remain low & will support profitability.

Other highlights

• Growth gaining momentum:  ICICI’s balance sheet grew by 12% YoY (highest since 4QFY08) by focusing on lower risk but profitable business opportunities. The bank has envisaged fresh policy focusing towards improving corporate share in total credit at the start of FY11 and has successfully achieved it. SME and rural portfolio grew by 20% QoQ and 37% QoQ respectively which aided total advances growth at 5% QoQ. Unsecured retail book continue to contract; however, high growth in auto loan segment supported 6% QoQ growth in retail credit. Going forward, we expect a business growth of ~19% YoY for FY12E (management guidance – 20%) with significant contribution coming from corporate and mid corporate segments.
• CASA share improves: CASA ratio inched up to 45.1% (44.2% in Dec-10), despite higher term deposits rate during the quarter. Sequentially, current account deposits grew 10% while saving deposits grew 4% QoQ. Despite improving CASA ICICI Bank share, cost of deposits increased by 30 bps QoQ, which is mainly due to increase in term deposits rate.
• Re-pricing benefit to cushion NIM: In FY12E, ~75% of term deposits will be repriced likely at a higher rate against ~70% of total advances. This, coupled with falling share of international business, would likely to support margins in FY12E at current levels of ~2.6%.  Moreover, in 1HFY12, we expect NIMs to  contract marginally due to high disbursement towards agriculture sector in 4QFY11 (to meet priority sector lending norms). 
• Healthy fee income growth, treasury losses drag other income:  Other income declined by 13% YoY and 6% QoQ mainly due to treasury loss of Rs 1.9 bn. ICICI has booked ~Rs 1 bn of MTM losses in security receipts during the quarter. The bank  has  also  booked  some  MTM  losses  on  its  equity  and  G-Sec  portfolios  during the quarter (of ~Rs 0.9 bn). However, fees income growth at 18% YoY was in-line with the credit growth, mainly supported by revenues from corporate and SME advances. Going forward, we expect fees income growth to remain in-line with the credit growth.
• Higher staff expenses: Staff expenses grew by 47% YoY to Rs 8.5 bn mainly due to the bonuses paid and consideration of entire employee expenses of erstwhile BoR. This, along with decline in other income, led to an increase in cost to income ratio (up 216 bps QoQ) to 44.5% 
• Healthy CAR: The bank maintains a total CAR at 19.5% and Tier-I ratio at 13.1%. We expect return ratios to improve further, driven  by  robust  profit  growth  and increasing coverage. Management expects its credit cost at ~1% in the long term.

Insurance highlights: 

• Life insurance business remained under strain as reported APE declined by 26% YoY to Rs 39.8 bn. NBAP margins also continued to decline (~15.6% for 4QFY11 and 17.9% for full year), which was in-line with our estimates. Going forward, we have build in NBAP margins at ~15% for FY12E, and assumed 15% YoY APE growth.  
• ICICI Lombard General Insurance was required to provide ~Rs 2.7 bn towards  reserve for IMTPP (Indian Motor Third Party Pool) losses at 153% against 122-127% earlier (retrospectively from March-08). This has led to an impact of Rs 2.7 bn  in ICICI Lombard’s PAT. Due to this, the general insurance subsidiary reported a loss of Rs 800 mn in FY11. 

Valuations

Improving business momentum, robust asset quality, healthy margins, consistent fees income growth are the key highlights of ICICI’s 4Q result. NIMs, though improved 10 bps QoQ, likely to moderate in 1HFY12E (due to rising cost of deposits) and will be maintained at current levels in FY12E (due to re-pricing benefits and rising domestic advances share). ICICI has improved its coverage ratio to 76%, thereby creating cushion for future slippages. We expect calibrated business growth, lower credit cost and stable NIM for FY12E, will provide sufficient traction to

PAT growth (~17% YoY) – resulting in better return ratios. We reiterate our BUY rating with a target price of Rs 1,324 [2.5 x FY12E Adj. BV (adjusting for value and cost of investment) + Rs 331 value of investments]

JSW Energy : HOLD

FY11: Hit by Higher Fuel Costs & Execution Delays

JSW’s key FY11 highlights include: (a) sharp rise in imported spot coal prices (up from ~USD 75 to 110/tone); (b) stable merchant realizations at ~Rs 5/kWh; (c) issues with coal supply from

Indonesian fixed-priced contracts (resulting in higher dependence on spot market to ~85% from ~60% anticipated earlier); (d) execution delays in Ratnagiri (1,200 MW) & Barmer (1,080 MW) plants; (e) “under-review” status of the ~USD 400 mn bid to acquire CIC, due to regulatory hassles; and (f) worrisome rise in receivables to 65 days vs.avg. of 30 days for gencos.

Key Analyst meets takeaways

• Fuel: Blended fuel cost for FY11 stood at ~Rs 2.6/ unit (vs. Rs 1.9/ unit in FY10) and the mgmt expects it to remain in the range of Rs 2.6-2.8/ unit in FY12. During FY11, JSW sourced ~90% of its requirements from spot markets. To ensure stability in fuel sourcing, JSW is also looking to enter LT contracts with Indonesian suppliers for ~50% of its requirements. It expects price range of ~USD 50 (~4,000 GCV) to ~USD 90 (~5,500 GCV) for the same. The supplies from captive lignite mines in Rajasthan to commence from Q1FY12, thus reducing its dependence on imported coal requirements.
• Realizations:  For Q4, merchant was at Rs 4.71/unit while for FY11 it was at Rs 4.95/unit. Mgmt guided for moderation in merchant tariff and expects it to be in the range of Rs 4.5-4.75/ unit in FY12.
• Execution: At Ratnagiri (4x300 MW) project, the bottleneck in transmission has now been resolved and the mgmt expects commissioning of Unit 3&4 by Q1 and Q2FY12 resp. Further, at Rajasthan (8x135MW), the key bottleneck in captive lignite mines is also resolved & expects full commissioning progressively by end FY12. For captive-mine based Chhattisgarh (1,320 MW) and W. B. (300 MW) projects, mgmt expect construction to start by H2FY12.

HOLD with a Target price of Rs 74

We are concerned on the increased volatility in coal prices, as ~85% of coal requirement is from spot mkt. JSW is scouting for smaller mines (50-100 MMT) in Indonesia and currently has ~USD 225 mn cash. A successful acquisition would lead to re-rating of the stock.

LIC Housing Finance : BUY

Impressive Performance

LICHF reported a strong set of numbers with net profit rising 47% YoY. Healthy net interest income (up 61% YoY) was driven by improvement in margins (up 15 bps YoY to 3.45%) and aboveindustry loan growth of 34% YoY. Non interest income included Rs 0.3 bn of profit on investment in Realty fund. Operating cost structure saw improvement, with cost-to-income ratio improving to 13.5% (down 414 bps YoY). Asset quality improved with absolute Gross NPAs falling sequentially by 23%.

Key highlights

• Biz momentum was maintained with sanctions rising 25% and disbursements rising 34% YoY, driven primarily by ‘Individuals’ biz segment (which saw 37% YoY growth in sanctions and 71% YoY rise in disbursements). 
• Lending towards non-individual segment slowed down in Dec’10; however, mgmt maintains that this segment will resume its normal growth trajectory going forward. 
• LICHF has guided for NIM of ~2.7% (vs. 3.45% in Q4FY11 which are not sustainable) & Advances growth of ~25% in FY12E which we believe are achievable. LICHF will look to raise equity capital in H2FY12. We have built in Rs15 bn of equity dilution in FY12E at a price of Rs 225 in our estimates.

Maintain BUY with a revised TP of Rs 270

LICHF has been able to demonstrate strong growth in core operational performance along with substantial improvement in asset quality (despite stiff competition in the housing loan space).

While rising rates & increasing real estate prices pose risk to housing demand, the mgmt is confident of maintaining above industry growth rates & healthy asset quality. However, margins will be under pressure going forward. We have revised our EPS est upwards by 4% in FY12E to factor in improving biz performance and equity dilution, resulting in 24% rise in FY12E BV. We recommend a BUY rating on the stock, with a target price of Rs 270 (2.2x FY12E ABV + Rs 2 as value of investments) – upside of 20%

Patni Computers : SELL

Twin Challenges of Growth & Integration 

Q1CY11 results of Patni Computers depict the following – Positives: 1) four new wins of USD 25-30 mn total contract value each. Negatives: 1) slow ramp-ups in key accounts; Top 10 clients de-grew ~3% QoQ leading to lower utz. rates excluding trainees at 74.5% (QoQ decline of 150 bps), & 2) near-term challenges indicated by the mgmt. Patni reported revenues of Rs 8.5 bn (3.4% QoQ &  9.4% YoY), EBITDA of Rs 1.7 bn (2.5% QoQ & 11.2% YoY) & Adj. PAT of Rs 1.2 bn (17.4% QoQ &  21.2% YoY) in Q1CY11.  

Key highlights

• Sales:  Constant currency growth in revenues was at ~3.6% largely led by volumes and stable pricing. Telecom vertical grew ~29% QoQ 
• EBITDA:  Impacted by lower utz. (blended utz. excl trainees down 150 bps QoQ). Integration exp. impacted EBITDA margins by ~70 bps.      
• PAT: Higher effective tax rate at 28% (vs.  ~18% in Q4FY10) led to ~17% QoQ decline in PAT.  New deals signings healthy; challenges include key a/c rampups:  Q1CY11 saw decent signings of four deals with multiple service offerings of USD 25-30 mn total contract value each.
• However, concerns persist on: (1) slow ramp-up in key accounts (Top 5/ Top 10 clients de-grew by ~3% QoQ), & (2) integration with iGate which may impact employee additions (Q4 saw net additions of 97) and attrition rates (~25% in Q4 on LTM basis ex. BPO). Additionally, absorption of salary hikes (offshore: 9-10%; onsite: 2-4%) would impact margins in the near-term. Higher tax rates would further lead to lower NPMs.   

Valuation

We forecast ~14% YoY growth in topline for CY11 but 28% tax rates would lead to ~7% YoY decline in PAT. Our target price of Rs 385 (at Core P/E of 9x CY11E EPS + 80% of Cash per share of ~Rs 126) implies a downside of 10% from CMP. Maintain SELL.

2nd May, 2011

The markets opened on a flat note and traded in a tight range throughout rage in the morning session. Moving sideways in the afternoon session the markets traded in the red and slipped further in the last hour to end on a weak note. Among the Sectoral indices Capital Goods, Realty and Bankex lost the most while FMCG gained. Among the Sensex stocks HUL (2.24%)&  Maruti (1.27%) were amongst the gainers while L&T (3.87%), Jindal Steel (3.57%) and ONGC(2.79%) were among the losers. The Sensex lost 157 points or 0.81% to close at 19,136 while Nifty lost 36 points or 0.62% to close at 5,750.

Total traded turnover stood at Rs 1,17,476 cr. In equities both FIIs & DIIs were net sellers of (Rs 690 cr) & DIIs (Rs 61 cr) respectively. On the derivatives side, FIIs were net sellers in Index Futures (Rs 1241 cr), Stock Futures (Rs 353 cr) and Stock Options (Rs 41 cr) while they were net buyers in Index Options (Rs 2332 cr).

The US markets ended positive led by gains in industrial stocks and strong results declared by Caterpillar offsetting weak economic data. The Dow Jones gained 47 points or 0.37% to close at 12,763 while NASDAQ closed flat at 2,874.

While most of the Asian markets are shut on account of holiday, Nikkei is trading higher by 0.97%.

The markets moved sideways throughout and closed on a weak note. The declines far outnumbered the advances. The market may open on a flat to positive note. The expectations on RBIs monetary policy review tomorrow will affect the market sentiment.

The trend deciding level for the day is 5800, If NIFTY trades above this level then we may witness a further rally up to 5840-5875-5905 levels. However, if NIFTY spot trades below 5800 levels then we may see some profit booking to initiate in market, it may correct up to 5715-5680-5650.

Stocks to focus for intraday long: Glaxo, Educomp

Stocks to focus for positional long: Glaxo (Buy 2257-2240 TGT 2310 SL 2212) – 1 Week