Research Notes – November 10, 2010

Reiterate ‘buy’ on IDFC – TP hiked to Rs.230 from Rs.210

 Buy call on IDFC is reiterated with an increased target price of Rs.230 over one year as against the earlier projection of Rs.210.

 Company has reported robust loan growth of 56% y-y and 19% q-q with net interest income at 2.4%. It seems that the company’s intention to grow at 35% CAGR over the next three years is easily achievable.

 A well capitalized balance sheet now allows IDFC to participate a s a lead financier in infrastructure projects and the company targets a balance sheet size of Rs.1 trillion by FY 13 -14.

 Company is looking to tap external funding sources more actively in the next few quarters and the net interest spread is expected to be maintained in the 2.3 -2.4% range.

 Non- interest income has beaten estimates due to higher loan processing fee and strong i–banking broking fee.

 Net NPL (non performing loans) down by 12 bps. This coupled with lower operating expenses helped the company to beat earnings projections. RoE at 18.4% and RoA at 3.2%.

 Loan growth is expected at 45% for FY11 and 35% for FY12 and the net interest spread is assumed at a conservative 2.3%.

 Cost to income ratio is expected to be lower at 22% as against the management’s view of less than 25%.

 On the back of robust growth prospects, buy call on the stock is reiterated with a one year target price of Rs.230.

Hold on SBI – TP Rs.3350

 2QFY11 numbers are not in line with market expectations. Reported PAT is about 15% lower than the street estimates.

 Weak performance is mainly due to higher than expected NPL provisions.

 Net interest income grew by 11% q-q backed by 4.2% loan growth q-q and sequential net interest margin looks 12 bps higher at 3.30%. CASA grew by 28% and retail deposit increased by 7.5% while bulk term deposits declined by 32%.

 Cost of deposits at 5.25% and yield on advances at 9.5%.

 However, NPL provision advanced by 25% q-q and 117% y-y due to increased slippages from agriculture loans and restructured loans. Total slippages on restructured loans are 14.5% for the second quarter. Management has envisaged further slippage of Rs.500 cr – 600 cr and more NPL pressure in the next two quarters.

 Maintain ‘hold’ recommendation on the stock with a one year target price of Rs.3350, as against the current price in the range of Rs.3270.

 One may also consider booking gains in the stock as the upside potential from the current level looks limited and the NPL pressures ahead.

Sector Watch – Steel

 Steel prices are expected to bottom out soon and a moderate recovery in steel prices is expected by end of 2010. The sector has been an underperformer in the recent past due to concerns of cooling economic growth in China.

 It seems that significant increase in steel prices is likely in 2H2011 because of increasing demand on the one side, rising raw material cost and lean inventories on the other.

 JSW Steel continues to be our top pick in the sector due to its higher growth visibility and multiple triggers. The target price for the stock is Rs.1662 over one year. The stock is currently traded at Rs. 1335 range.

 Tata Steel is the next preferred counter. Buy is recommended in this stock with a one year target price of Rs.773. Current price is in the range of Rs.640.

 The outlook on SAIL remains neutral as it seems that the stock is almost fully priced at the current level of Rs. 200 range. The target price on this stock is Rs.210 over one year.

Source : Geojit

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