Share Market Update on Federal Bank for 1QFY2012

Share Market Update on FederalBank for 1QFY2012 with a Buy recommendation and a Target Price of `478 (12 months).

For 1QFY2012, Federal Bank recorded net profit growth of 10.8% yoy (down 14.9% qoq), below our estimates, mostly due to higher provisioning expenses than built in by us. Management has attributed the rise in NPAs (slippages at `323cr) during the quarter to one-off employee-related issues, which led to a spurt in slippages in the retail book. Fee income according to management also suffered due to this one-off event. We recommend a Buy rating on the stock.

CASA ratio improves; however, asset-quality woes continue: For 1QFY2011, advances grew by 0.1% qoq to `31,972cr, while deposits declined by 0.2% qoq to `42,936cr. Although total deposits declined during the quarter, the bank was able to sequentially grow its savings and current account deposits by 3.5% and 4.2%, respectively, leading to a 96bp increase in CASA ratio to 27.2%.  Including NRE deposits, total low-cost deposits constituted 32.8% of total deposits. Cost of deposits increased by 103bp qoq, leading to a 13bp qoq decline in reported NIM to 3.9%. Slippages for 1QFY2012 stood at `343cr (annualised 4.0%), driven by higher slippages on the retail (~`140cr) and SME (~`140cr) front. Management has attributed the increase in slippages on the retail side to one-off employee-related issues that cropped up during the quarter, leading to slackness on the recovery front. During 1QFY2012, non-interest income declined by 17.2% qoq (up 6.4% yoy), mainly due to sluggishness in fee-related initiatives and recoveries on the retail side (recoveries were down by 42.6% qoq), as per management.

Outlook and valuation: Post the recent correction, the stock is trading at 1.1x FY2013E ABV. While lower leverage is leading to low RoE at present, the bank’s core RoA is relatively high and should improve further as asset-quality pressures start moderating. We recommend Buy on the stock with a target price of `478.

Stock Market Update on Exide Industries for 1QFY2012

Stock Market Update on Exide Industries for 1QFY2012 with a Neutral recommendation.

Exide Industries (Exide) reported a weak performance in 1QFY2012, missing our top-line and bottom-line estimates, largely due to lower-than-estimated growth in automotive replacement battery volumes and lower demand for inverter batteries. Further, slowdown in demand growth restricted Exide’s ability to completely pass on raw-material cost increases, thus negatively affecting its operating margin. We maintain our long-term positive outlook on the battery industry; however, considering the lower-than-expected 1QFY2012 results and subdued guidance for the next couple of quarters going ahead, we revise our revenue and earnings estimates downwards. We recommend Neutral on the stock.

Lower automotive and industrial battery demand and raw-material cost pressures led to weak quarterly performance: For 1QFY2012, Exide reported modest 8% yoy growth (1.4% qoq) in its total revenue to `1,244cr, led by a ~5% increase in sales realisation. Revenue growth was restricted on account of muted volume growth due to 1) slower growth in the automotive vehicle segment, resulting in lower OE demand for automotive batteries and 2) pleasant weather conditions in north Indian markets, leading to a 25.7% decline in inverter battery volumes. EBITDA margin declined substantially by 498bp yoy (88bp qoq) to 17.9%, impacted by lack of buoyancy in industrial and automotive batteries demand and increased lead prices. Lead prices jumped by 31% yoy, leading to a 400bp yoy increase in raw-material costs – which accounted for 63.6% of sales. However, higher other income of `31cr and lower tax outgo restricted the fall in net profit to a large extent. Thus, the bottom line reported a marginal 1.3% yoy decline (0.3% qoq) to `163cr.

Outlook and valuation: We expect Exide to post a ~15% revenue CAGR over FY2011–13E, leading to a 12% CAGR in net profit. At `155, Exide is fairly valued at 16.6x FY2013E earnings. We recommend Neutral on the stock. Our fair value for Exide works to `161. We value Exide’s core operations at 16x its FY2013E earnings at `149 and its stake in ING Vysya Life Insurance at `12/share on FY2013E NBAP.

Stock Market Update on FAG Bearings for 2QCY2011

Stock Market Update on FAG Bearings for 2QCY2011 with a Neutral recommendation

For 2QCY2011, FAG Bearings’ (FAG) results were in-line with our expectations on the top-line front and ahead on the net profit front, led by better-than-expected operating margin. Bottom-line growth was also supported by a substantial increase in other income. We revise our earnings estimates upwards to factor in better-than-expected quarterly results. We believe the recent run-up in the stock price factors in the expected earnings growth and, considering the rich valuations, we maintain our Neutral view on the stock.

Strong operating performance: FAG registered strong 17.1% yoy (3.1% qoq) net sales growth to `319.3cr, in-line with our expectation of `324.4cr. Revenue performance was largely in-line with the automotive industry’s growth. EBITDA margin improved by healthy 120bp yoy (down marginally by 13bp qoq) to 20.3% vs. our estimate of 19.5%. This was primarily due to a ~370bp decline in costs related to purchase of traded goods at 24.7% against 28.3% of sales. As a result, operating profit jumped by 24.5% yoy (2.3% qoq) to `64.9cr. Net profit posted a strong 32.2% yoy (4.3% qoq) increase to `44.7cr. Further, a substantial jump in other income (up 77.2% yoy) helped FAG report strong earnings growth.

Outlook and valuation: We believe healthy demand in the auto and industrial segments will aid FAG in registering a CAGR of ~16% in net sales and ~20% in net profit over CY2010–12E. At `1,344, the stock is trading at 13.7x and 12.6x CY2011E and CY2012E earnings, respectively. We believe the recent run-up in the stock price factors in the expected earnings growth and, considering the rich valuations, we maintain our Neutral view on the stock.