Category: Economy, Markets and Macro Views

Axis Bank’s net profits increased 60%yoy, 17% ahead of expectations. Operationally, the results were strong too with pre-provisioning profits up an impressive 85%yoy. The bank continued strong growth, momentum in fees, strong asset quality and high profitability; though profits were boosted by new capital and bond gains.

AXBK’s loan growth remained strong, ahead of expectations at 53%yoy, despite a lacklustre 22% industry growth and a relatively modest 27% increase in retail loans. Continued fee momentum also surprised on the upside with a 59%yoy growth.

Axis Bank’s overall asset quality remained comfortable as NPL ratio declined to 1.1% of loans from 1.5% in 2Q07. Axis Bank is expected to report an EPS of Rs 30.02, 36.96 and 47.95 for FY08, 09 and 10 respectively. Citi maintains a hold though the stock is already trading above its target price of Rs 675.

IDFC:
IDFC’s 2Q08 net profits rose 25%yoy in-line with expectations. Key positives were improvement in NIMs, strong loan growth and fee momentum. Asset management returns and fund raising plans are also ahead of expectations and could provide valuation upsides.

IDFC’s NIMs increased to 320bps (+40bps qoq) driven by a favorable interest rate environment and helped by additional capital raising during the quarter.

Unrealized gains have increased to Rs3.24bn and provide earnings comfort. Management indicates that IRRs on its first PE fund are over 45%; expects contributions to performance fees from 3Q08 and plans a new fund launch in early FY09E – ahead of expectations and could drive valuation upsides.

IDFC is expected to report a fully diluted EPS of Rs 5.32, 6.36 and 7.88 for FY08, 09, 10 respectively. Citi maintains a BUY/medium Risk recommendation on the stock with a price target of Rs 140 [which the stock has already crossed].

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Macquarie Research just a while ago upgraded the stock of Reliance Industries Ltd with a new target price of Rs 3,100. 20.8% Potential upside from current levels.

RIL plans to build one of the world’s largest cracker and petrochemicals complexes at Jamnagar. The proposed facility, with 2mtpa capacity, will be built at a capital cost of US$3bn and is expected to come on-stream by FY3/11.RIL has 4.4bn boe of 2P hydrocarbon reserves which are twice of that provided by partner in KGD6, Niko resources and compares with 1.5bn boe of 1P reserves stated in recently released annual report.

Sum of Parts Valuation of the company by Macquarie,

Core Business Rs 1161
IPCL Rs 70
Fuel Retailing Rs 85
E&P Business Rs 263
75% stake in Reliance Petroleum – Rs 386
Treasury Stock Rs 359
CBM-Sohagpur and NEC 25 Gas – Rs 198
Other E&P (D9, D3 and GS-01) Rs 119
Organised retail venture – Rs 165
2mtpa Ethylene Cracker – Rs 295

This is still very cheap as they have not factored in the vast Land Banks the company has been accumulating for its SEZ and Retail venture.

Coverage of Reliance Industries by Goldman Sachs, CLSA, Deutsche Bank

Hanung Toys & Textiles:
It’s already India’s largest manufacturer of soft toys. Now Hanung Toys plans a fairy tale-like foray into home furnishing. The order book of the Rs 275-crore soft toys and bed linen export is crammed. Within the last three weeks, Hanung has signed deals worth over $265 million (Rs 1,060 crore).

In next few years, Hanung will work on expanding its footprint across the country. It is already present in over 3,000 stores, which includes like Archies, Lifestyle, Shoppers’ Stop and Pantaloons. Hanung has invested Rs 160 crore in a new plant in Uttaranchal, which will boost its capacity from six million metres to 39 million metres. As with toys, the new plant will also help Hanung grow its domestic business.

On the valuation front, the CMP of Rs 173.85 discounts its FY07 earning by 15.75x. But with the management confident of its 50 per cent growth the counter seems to be a good buy.

Dhanlakshmi Bank:
Dhanalakshmi Bank is a Kerala based bank, with about 180 branches and 26 extension counters spread. The bank has deposits of about Rs 3200 crore, advances of about Rs 2000 crore, investments of about Rs 700 crore and capital adequacy of about 9.87 per cent.

Recently the RBI did not allow the bank to come out with right issue as promoter holding is higher than 10 per cent. But recently the promoters have brought down their holding to 9.68 per cent by selling stake in the open market. So, now the company can go for right issue which will increase its networth beyond Rs 300 crore, which will also help the bank to take its
branch network beyond 200.

Warburg Schweiz, Deutsche Bank and FIIs like Lotus Global Investments, Rhodus Diversified Fund and Somerset Emerging Opportunities Fund have bought stake in the bank. The counter would be a good takeover candidate in the long run.

The bank may post an EPS of Rs 8 plus for FY08 and the right issue may likely to be in the ratio of 1:1 with the price not exceeding Rs 50 per share; close to its present book value. This, would be perceived positively by the market.

India’s premier infrastructure lending company – IDFC was upgraded by Morgan Stanley research. They have set a new price target of Rs 200 on the stock. Here is Citi’s exclusive coverage on IDFC.

IDFC is entering a phase where all parts of revenue are doing well – loan growth is strong, spreads are improving and fees are very strong. For F2005-F2007, IDFC has delivered the best core earnings progression among Indian private banks and financial institutions at a 55% CAGR. This trend will continue, resulting in outperformance.

IDFC has launched the first tranche of its proposed US$2 bn project equity fund along with Citi. This will result in a doubling of assets under management in 1-2 months. Moreover, its investments in NSE is performing strongly. SSKI is two-third owned by IDFC is also performing well.

Based on earnings adjusted for recent capital issuance and new fund raising in project equity, consensus is expecting 4% YoY earnings growth in the rest of F2008. The actual numbers are likely to be higher and hence raise F2008 earnings estimates by 5%.

The stock is trading at 24.8x F2009E earnings – in line with private banks. However, private equity (PE) and proprietary investments are not contributing significantly to earnings but provide almost 30% of value. Hence, core valuations are lower at 19x (cheaper than private banks, with better earnings profile) and could rise, given strong earnings growth expectations.

In a separate development, Reliance Capital has launched an exclusive Consumer Finance Loan subsidiary.

Lehman Brothers have just released an equity research report initiating coverage on Indian IT stocks. Here is the overview before we get into the details. The report assumes USD pricing of Rs 36 and is Negative on the IT sector.

• Infosys Technologies [Equal Weight] – 12 Month DCF price Target of Rs 1,793.
• TCS [Underweight] – 12 Month DCF price Target of Rs 914.
• Wipro [Underweight] – 12 Month DCF price Target of Rs 422
• Satyam Computers – [Underweight] – 12 Month DCF price Target of Rs 287

Infosys Technologies:
The macro environment is likely to remain unfavourable due to the appreciating rupee and a possible slowdown in the banking and financial services (BFS) vertical. Lehman estimates a 15.7% EPS CAGR for the next three years (FY07-FY10E) compared with 43.5% in the past three years. Volume growth and price hikes may be impacted negatively due to a cut in discretionary IT spend. The demand environment continues to be good; US dollar revenue CAGR of 35% for the next three years.

Tata Consultancy Services:
A 14% EPS CAGR for the next three years (FY07-FY10E) compared to 35.8% for the past three years. Volume growth and price hikes may be impacted negatively due to cuts in discretionary IT spending. The demand environment continues to be good, because US dollar revenue CAGR of 30.8% for the next three years.

Wipro:
Wipro continues to be hit by relatively slow growth in Telecom equipment manufacturing (TEM) and BPO segments. Lehman projects a 30.6% US dollar revenue CAGR for the company’s Global IT Services and Products business on an organic basis for the next three years compared with 35% for Infosys Technologies (INFY, 2-Equalweight) during the same period. Should result in an EPS CAGR of 15.6% for Wipro in FY07-FY10E.

Wipro has underperformed the most among tier-1 Indian IT stocks in the past five years. This will continue because margins to fall by more than 300bp for the next three years.

Satyam Computers:
Given the deteriorating environment, robust QoQ volume growth as witnessed in the past five quarters and price hikes could be pressured in FY09, in our view. Despite strong volume growth, we estimate an EPS CAGR of 13.4% for the next three years given our expectation of falling margins.

Insance Foreign Institutional Investors are pouring money into Dalal Street as if their is no tomorrow. The Indian Indices BSE SENSEX and NSE Nifty have hit a record high. Currently the SENSEX is up whopping 800 points at 18,293.

It took 8 trading sessions for the Sensex to reach 18,000 from 17,000 after it had first hit 17,000 on 26 September 2007. It had taken just 5 trading sessions to reach 17,000 from 16,000

In a separate development, Ansal Properties & Infrastructure has successfully diversified in the new business of power by establishing & commissioning wind mills with a capacity of 12 MW, at Kutch, Gujarat.