South Indian Bank : BUY

Strong Business; Asset Quality Comforting

South Indian Bank’s (SIB) Q4FY11 PAT grew 112% YoY to Rs 818 mn, above our estimates, led by higher NII and lower-thanestimated provision expenses. Core income rose 181% YoY, which appears optically large because of higher interest expenses booked in 4QFY10 (due to a system error wherein SIB had to absorb full year impact of cost of a special deposit scheme). Margins impressed with ~35 bps QoQ improvement backed by strong low-cost deposit franchise. Asset quality improved with 9% QoQ decline in gross NPAs and 19% QoQ decline in net NPAs. Coverage ratio has increased to 74% (from 71% in Dec-10).

Key highlights

• Loan growth (up 29% YoY) was led by SME and Agri advances which increased 41% and 44% resp. Overall lowcost deposits (incl. NRI deposits) recorded robust 45% YoY growth and now stand at 34% of overall deposits (vs. ~30% in Mar-10).
• Yield on advances rose by 21 bps QoQ to 10.9% while cost of funds increased by 17 bps QoQ to 6.6%.
• Staff cost rose 129% YoY to Rs 758 mn as it includes Rs 251 mn for pension (2nd option) towards retired staff and Rs 270 mn for 1/5th pension (2nd option) towards existing staff.

Maintain BUY with TP of Rs 30

SIB’s overall biz momentum was maintained with advances & deposits growing in tandem at ~29% YoY each, along with improvement in asset quality. As expected, margins were well supported by adequate CASA and low-cost NRI deposits. SIB plans to start gold loan NBFC and to raise capital of Rs ~10 bn to fund future growth. At CMP of Rs 22, the stock is trading at 1.2x FY12E ABV of Rs 18 and 1.1x FY13E ABV of Rs 21. We have a BUY rating on the stock with a TP of Rs 30 (10x FY12E EPS and 1.7x FY12E ABV) – upside of 30% from CMP.

5th May, 2011

The markets opened on a weak note and though negative continued to trade sideways for most of the session. The markets temporarily edged up into the positive territory but could not sustain the gains and ended the day with marginal losses. Among the Sectoral indices Auto & IT ended in the red while Oil & Gas ended with gains of more than 1%. Among the Sensex stocks ONGC (4.78%) HDFC Bank (1.35%) & SBI (1.33%) were amongst the gainers while Bajaj Auto (4.82%), Hero Honda (3.63%) and HDFC (2.89%) were among the losers. The Sensex lost 65 points or 0.35% to close at 18,469 while Nifty lost 28 points or 0.50% to close at 5,537.

Total traded turnover stood at Rs 1,34,769 cr. In equities FIIs were net sellers of (Rs 992 cr) while DIIs were net buyers (Rs 914 cr). On the derivatives side, FIIs were net sellers in Index Futures (Rs 611 cr), Stock Futures (Rs 172 cr) while they were net buyers in Index Options (Rs 520 cr) and Stock Options (Rs 13 cr).

The US markets ended lower led by correction in energy and Industrial stocks and investors remained cautious on weak economic data. The Dow Jones lost 84 points or 0.66% to close at 12,724 while NASDAQ dropped 13 points or 0.47% to close at 2,828.

The Asian markets are trading marginally lower. Hang Seng is trading lower by 0.12% while Nikkei is shut for trading today.

The markets closed lower for the eighth consecutive session. FIIs continued to sell while DIIs supported by buying in the cash segment. The markets may open on a soft note tracking weak global cues. Maintain a stock specific approach.

The trend deciding level for the day is 5540,If NIFTY trades above this level then we may witness a further rally up to 5570‐5615‐5640 levels. However, if NIFTY spot trades below 5540 levels then we may see some profit booking to initiate in market, it may correct up to 5500‐ 5468‐5445.

Indian Metals & Ferro Alloys : HOLD

Q4FY11: Dismal set of numbers

IMFA posted a disappointing Q4FY11 results which were way below our expectations due to increase in Raw material cost mainly the increase in procurement of coal from e-auction/imports. IMFA posted a sales of Rs 289 Cr (Up by 68% (YoY)), an EBIDTA of Rs 60 Cr (YoY growth by 31%) and PAT of Rs 24 Cr (growth of 28% (YoY)). The EBIDTA margins corrected by 588 bps on annual basis.  

Charge Chrome Segment:  In this quarter, IMFA produced ~51500 tn (38435 tn for Q4FY10) of Charge chrome and sold ~51000 tn (35744 tn for Q4FY10). Realizations for the Charge chrome corrected by ~5% on sequential basis. Going forward, the realizations are expected to firm up as the S African Ferro Chrome producers (who are price setters in the Fe Cr industry) are expected to raise the price to pass on the incremental cost. It must be remembered that ESKOM- the public utility company in SA has a mandate to raise the power prices by 25% (approx.) every year starting CY2010 till CY2012. The Chinese spot prices are seen strengthening to 110 USc/lb against 95 USc/lb last year.

Power:  IMFA generated 20.5 Cr power units and consumed them captively. IMFA is adding up 30 MW of dual fired power plant which will be using captive flue gases and coal for generating power. The new power plant (30 MW) was expected to be commissioned by Q3FY11, but has been delayed further and is expected to be operational by Q1FY12. In addition, the company is erecting a 120 MW coal fired merchant power plant at a capex of Rs 595 Cr which is expectedto be commissioned by FY13.

Valuations & Outlook

Robust demand and expected rise in price of S African Fe Cr is expected to keep the European benchmark prices at current levels and upward bias in the Chinese spot prices. IMFA, which supplies to international players like POSCO and Glencore has its sales pegged to the benchmark prices but also linked to spot. Although, the realizations are expected to strengthen, the sharp rise in the cost of production (CoP) due to rise in coke and domestic coal prices is expected to affect the margins. We had already priced  in  rise  in  coke price but the further rise in domestic coal cost (due to drop in availability of linkage coal) has led to increase in power cost which for the last quarter has inflated to Rs 4.19/unit as against the  historical cost of generation of Rs 2.3/unit. IMFA is struggling to get supply of linkage coal as MCL has discontinued the coal supply citing the tapering linkage policy while the coal block alloted is yet to be operationalised and as per management, is expected to yield coal not before Q4FY12E.Despite the robust Fe Cr prices expected in the coming quarters, IMFA would not be in position to defend its margins due to inflating power bill. We have hence further toned down our topline and bottomline estimates by 4% and 37% respectively for FY12. 

Taking into account these developments, we recommend a Hold with reduced price target of Rs 589 (which is drop of 28% from our earlier target of Rs 822).

Marico Ltd : HOLD

Price Hikes & Lower RM Costs to Improve Margins

Marico Ltd reported consolidated net revenues of Rs 7.5 bn (up 24% YoY), EBITDA of Rs 0.8 bn (dn 7%  YoY)  and  Adj  PAT  of  Rs  276  mn (dn 51 % YoY) in Q4FY11. Results were below our expectations due to higher RM costs, depreciation & interest expense (related to the ICP acquisition).

Key highlights

• Healthy volume growth of 12% YoY in FY11, may not sustain: Parachute rigid pack up 10 % YoY, Saffola up16 % YoY and hair care up 24% YoY. Growth in Parachute was impacted by a cumulative price hike of 32%, which led to a modest 5% volume growth in H2FY11. Given the inflationary environment and price hikes effected, we expect volume growth in FY12E to lag FY11.
• Rising Copra prices (~40% of RM) impacted margins:  FY11 Gross profit margin contracted by 430 bps to 48.3% due to 82% YoY increase in copra prices. The full impact of the price hikes will only be seen in Q1FY12E. We believe given the impact of price hikes and likely softening of Copra prices in FY12E, margins will improve going ahead. We forecast operating margins of 13.6% and 13.9% for FY12E & FY13E respectively vs.13.4% in FY11.
• Kaya (India): Losses stood at Rs 141 mn (excl Derma) for FY11. However, business fundamentals are improving as same-clinic growth has increased to 8% in H2FY11 vs. a de-growth in H1FY11.  We expect Kaya India to break-even in FY12E.
• International business: Growth was 27% in constant currency terms which was led by 17% volume growth in FY11. Sales (of ~Rs 200 mn) in the MENA region were impacted by the political unrest during Q4. While the situation in Egypt is improving, the outlook in some parts of the region is still uncertain.  We have reduced our growth outlook (organic) to 19% vs. 24% earlier for FY12E, for the Int’l biz (ex-Vietnam) to account for the loss of sales due to political unrest in the region.
• Extraordinary expenses in Q4FY11: This qtr saw many exceptional items and one-offs. The three major items include: (1) sales proceeds from the divestment of Sweekar (Rs 500 mn); (2) reversal of provision for excise duty (Rs 293 mn) which is now accounted for in contingent liabilities (this reversal is as per accounting standards); & (3) Revenue recognition for Kaya (Rs 313 mn) for services not yet rendered. Other items relate to impairment of intangible assets (Kaya & International Biz), accelerated depreciation (Kaya) and amortization of intangible assets (Kaya & International Biz).

Valuation

We have downgraded our EPS by 2% for FY12E mainly due to higher interest costs. FY13E estimates are largely unchanged. The stock is trading at 25x 1-yr fwd EPS, higher than its 5-yr upper quartile range of 23.6x.  Our 1-yr target price of Rs 127 is based on 23x FY12E EPS. Maintain HOLD rating on the stock.

Cholamandalam Investment : BUY

Robust Operating Performance

CIFC* reported robust 4QFY11 performance with strong operating profit growth (of 83%YoY). Biz gained traction with disbursement growth of 31% YoY while asset quality improved. CIFC reported PAT of Rs 135 mn in 4QFY11 (vs. 67 mn in 3QFY11) with strong NII & improving operating efficiency. PAT includes extraordinary expenses of Rs 268 mn arising from impairment prov on inv made in subs (Rs 240 mn) and prov for standard assets (Rs 28 mn). Asset quality improved with Gross NPA ratio improving to 2.61% from 5.5 % in FY10.

Key highlights

• Sanitization process over:  CIFC, which was till recently suffering from credit losses arising from the personal loan (PL) segment, has now completely cleaned up its PL book (now constitute 1% of AUM), while making 100% provisions. Going forward, we expect credit cost to reduce which will provide traction to profits. We expect credit cost of ~0.7% in FY12E improving from the current levels of ~1.5%.
• Strong biz growth: Disbursement growth was robust at 31% YoY and 14% QoQ to Rs 16.8 bn mainly supported by higher disbursement in vehicle finance (47% YoY growth). Total AUM grew  21%  YoY  to  Rs  104  bn  with  on-book  AUM  growing  62% YoY. Securitized portfolio contracted further to 19.8% in FY11 from 40% a year ago.
• Expect strong profits:  In FY11, CIFC has booked Rs 1.7 bn of loan losses towards the PL segment which will not be there in FY12. With lower credit costs and better spreads, we expect ROA to improve to ~1.9x in FY12E from current 0.7x.

BUY rating with a TP of Rs 214 (34% upside from CMP)

The co. is marching ahead towards robust profitability in ensuing years as it has clipped the entire risk arising from its PL portfolio. We believe the valuation differential from its peer group to narrow down as CIFC is witnessing reasonable growth and profit nos. We maintain our BUY rating with a TP of Rs 214 (2.2x FY12E ABV) – implying 34% upside.