Stock Idea - Tata Motors

Recommendation: Buy
CMP = Rs 743 (as of Friday)
Price target: Rs 1,075

Result highlights
  • Tata Motors' Q4FY2007 results are slightly below our expectations, primarily on the margin front. The Q4FY2007 net sales (excluding the foreign exchange [forex] gain) of the company grew by 20.0% to Rs 8,206.8 crore, driven by a volume growth of 16.2% and a realisation growth of 3.3%.
  • Excluding the effect of the forex gain/loss, the operating profit margin has fallen by 160 basis points year on year (yoy) and by 130 basis points sequentially to 11.0%.
  • This was mainly on the back of a higher raw material cost and a sequential drop in the realisation due to a change in the product mix. Consequently, the operating profit grew by just 5.1% to Rs906 crore.
  • The other income was higher at Rs60.4 crore against Rs4.4 crore last year. Further, lower interest cost and taxes, and stable depreciation aided the company to record a 25.9% growth in its profit to Rs576.7 crore.
  • For the full year, the net revenues grew by 33% to Rs 27,404.8 crore against Rs 20,672 crore last year, while the net profit grew by 25% to Rs 1,913.5 crore.
  • Looking at the consolidated results, the consolidated sales for the quarter grew by 24% to Rs 9,759.2 crore while the net profit grew by 31% to Rs682.3 crore.
  • I maintain Buy call on this scrip with a target of Rs 1,075.

Stock Idea - Canara Bank

Recommendation: Buy
CMP = Rs 251 (as of Friday)

Price target: Rs 268

Result highlights
  • Canara Bank's results have been much above our and market expectations with the profit after tax (PAT) reporting a growth of 2.3% to Rs505 crore compared with our estimate of a 10% year-on-year (y-o-y) decline to Rs 444 crore.
  • The profit growth was higher than expected mainly due to a substantial jump in the non-interest income driven by a higher treasury income and cash recoveries.
  • The net interest income (NII) was up by 11.3% year on year (yoy) and 5.5% quarter on quarter (qoq) to Rs1,014 crore compared with our estimate of Rs 1,030 crore.
  • The non-interest income zoomed by 58% yoy and 120% qoq to Rs 626.2 crore, primarily driven by a 172% y-o-y and 186% sequential growth in the trading income to Rs 92 crore.
  • The miscellaneous income, which increased by 57% yoy and 247% qoq to Rs343 crore, also contributed to the growth in the non-interest income.
  • The operating expenses grew by a marginal 1% yoy to Rs633 crore. The operating profit was up by 48% yoy and 65% qoq to Rs1,007 crore, driven primarily by the higher non-interest income.
  • A higher standard asset provisioning requirement also kept the provisions elevated as the non-performing asset (NPA) provisions declined by 67% yoy to Rs102 crore from Rs306 crore in Q4FY2006. Although the operating profit increased by 48% yoy, yet the higher provisions restricted the overall profit growth to 2.3%.
  • Higher cash recoveries to the tune of Rs1,025 crore during the year as against Rs972 crore during the previous financial year helped the bank to bring down its gross NPAs. In absolute terms, the gross NPAs have reported a sequential decline of Rs 380 crore while the net NPA ratio has declined sequentially from 0.96% to 0.94%.
  • The margins may remain under slight pressure, however the business growth is likely to boost the NII. The bank has also reduced the interest rate risk on its book by bringing down the duration of its "available-for-sale" category to 2.48 years from 3.76 years earlier and stated that the duration is expected to further come down below two years.
  • At the current market price of Rs 251, the stock is quoting at 6.6x its FY2008E earnings per share, 3.3x pre-provisioning profits and 1.1x FY2008E book value.
  • I maintain Buy recommendation on the stock with a price target of Rs 268.

Stock Idea - State Bank of India

Recommendation: Buy
CMP = Rs 1,227 (as of Tues)
Price target: Rs 1,325

Result highlights
  • State Bank of India's (SBI) results have been far ahead of expectations with the profit after tax (PAT) growing by 75% to Rs 1,493 crore compared to our estimate of Rs 1,260 crore.
  • The higher than expected growth in the PAT was driven mainly by a Rs 950-crore write-back of the provisions on the bond portfolio.
  • The reported net interest income (NII) increased by 21.5% to Rs 4,320 crore, however adjusted for the one-time items the NII was up 23.9% year on year (yoy).
  • My calculations suggest that the net interest margin (NIM) improved by 17 basis points on a sequential basis and by 29 basis points yoy to 3.24%, driven by better yields and controlled costs.
  • The reported non-interest income grew by 22.6% yoy to Rs 2,894.3 crore. However there was a Rs950-crore of write-back due to excess provisions on its books.
  • The operating expenses were up 9.9% yoy, in line with expectations; the reported operating profits were up 34% yoy and the core operating profits (excluding treasury, others & amortisation/write-back) were higher by 40.1% yoy. However, the adjusted operating profits were up by 20.7% yoy.
  • The provisions went up by 38% yoy mainly due to higher non-performing asset (NPA) provisions and standard asset provisions.
  • The asset quality of the bank has shown some deterioration, the gross NPA declined by 4% sequentially to Rs 9,998 crore whereas the net NPA increased by 17% on a sequential basis to Rs 5,258 crore despite higher provisions.
  • The results have been a mixed bag. While improvement was seen in the core operating performance driven by the NII and fee income growth, higher provisions restricted the overall profit growth.
  • But it's mainly the one-off write-back of Rs 950 crore that resulted in a higher than expected growth in the profits. I have downgraded FY2008E PAT by 2.6% to Rs 5,377.9 crore mainly due to the adjustment made for the higher dividend income received by SBI in FY2007 (the bank would have normally received the same in FY2008) and slightly higher NPA provisions which I feel should be factored in due to the uptick in the credit cycle.
  • At the current market price of Rs 1,226, the stock is quoting at 13x its FY2008E stand-alone earnings per share (EPS), 1.7x FY2008E stand-alone book value and 1.3x FY2008E consolidated book value.
  • I maintain our Buy recommendation on the stock with a price target of Rs 1,325.

Stock Idea - Bharti Airtel

Recommendation: Buy
CMP = Rs 825 (as of April 30)
Price target: Rs 900
Result highlights
  • Bharti Airtel has announced a robust revenue growth of 9.8% quarter on quarter (qoq) and 58.1% year on year (yoy) to Rs5,393 crore for Q4FY2007.
  • The sequential revenue growth was driven by a 12.9% rise in the mobile revenues whereas the non-mobile businesses grew at relatively lower rate of 5.6% sequentially to Rs1,871 crore.
  • The operating profit margin (OPM) at 41.5% is the highest reported in any quarter. The sequential improvement of 70 basis points came as a positive surprise and was driven by a 160-basis-point sequential improvement in the OPM of the mobile business.
  • The ability to boost margins in spite of the adverse impact of the reduction in the roaming charges (adverse impact of Rs50-60 crore) is quite commendable. Consequently, the operating profit grew by 11.8% qoq and 419.4% yoy to Rs2,241 crore.
  • The profit before tax (PBT) grew by 4.5% qoq to Rs1,507 crore and was in line with expectations. However, the decline in the effective tax rate to 9% (as compared with 14.8% in Q3) resulted in a higher than expected net profit of Rs1,353 crore (up by 11.4% qoq and 98.3% yoy).
  • For the full year, the consolidated revenues and earnings grew by 58.8% to Rs18,520 crore and 88.6% to Rs4,257 crore. The OPM improved by 320 basis points to 40.2% (contributed by a 160-basis-point improvement in the OPM of the mobile business and a 320-basis-point uptick in the margin of the non-mobile business).
  • The total subscriber base grew by 86.4% to over 39 million in FY2007 (including 37.14 million mobile subscriber base, which grew by 89.7% during the year).
  • In terms of key highlights, there were a number of regulatory changes introduced during the quarter. The reduction in the roaming charges was negative whereas the introduction of revised access deficit charge (ADC) regime and reduction in the port charges payable to state-owned telecom operators would have a positive impact on the earnings.
  • In terms of business environment, the government announced the increase in the limit for foreign direct investment (FDI) from 49% to 74% and steps are being taken to implement the same. Another key development was the entry of Vodafone as a competitor through the acquisition of a controlling stake in Hutch Essar.
  • To factor in the better than expected performance, I have revised upwards our earnings estimates by 2.8% for FY2008 and introduced our FY2009 estimates. At the current market price the stock trades at 25.8x FY2008 and 20.2x FY2009 estimated earnings.
  • I maintain our Buy call on the stock with a revised one-year price target of Rs900.

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