>CANARA BANK: Focus remains on Non-Performing Asset (NPA) Recovery (KJMC Insitutional Research)

■ Loan book to grow by 20% CAGR during FY11-13E: CBK has a very strong track record of loan book growing above industry standards by 24% CAGR FY09‐11 while deposits grew by 25.4% CAGR FY09‐11. We believe loan book to grow moderately by 20% CAGR FY11 – 13E given the global scenario looking bleak. CBK will continue to maintain higher than industry growth rates supported by strong sanction pipeline in infrastructure segment.


■ Stress on asset quality to remain; expecting strong recoveries: CBKs asset quality has been stable and best in its peer group. With bank moving to system based NPA recognition, Gross and Net NPA increased to 1.7% and 1.4% respectively which is still better as compared to its peers. We believe stress on asset quality will continue to remain in next two quarters given the fact of higher interest cost and slowdown in the world economy.


■ Pressure on NIMs to ease in FY13E: In H1 FY12 NIMs of the bank were under pressure due to high interest rates. We expect pressure to ease out in FY13E once inflation will come down giving room for RBI to cut repo rate. We expect NIMs to fall by 27bps to 2.4% in FY12E and improve in FY13E to 2.5%


■ Bank delivering consistent return ratios: CBK has been consistent in delivering strong return ratios RoANW and RoAA above 20% and 1% respectively in last two years. In FY11, RoANW and RoAA stood at 23.2% and 1.3% respectively reflecting its strong performance in the bottom line. However, we expect decline in both RoANW and RoAA in FY12E to 17.3% and 1.0% respectively due to higher interest cost impacting bottom line which will improve back in FY13E to 21.2% and 1.2% respectively.

RISH TRADER

>SINTEX INDUSTRIES LIMITED: Will significantly cut capex and slow down execution of its working-capital-intensive monolithic business.

Looking to improve the balance sheet profile, but at a cost of lower growth; cut PT to Rs115

■ Looking to improve its balance sheet profile as the operating environment becomes more challenging: We expect SINT to significantly cut its capex over the next two years, while slowing down the execution of its monolithic projects to preserve working capital, as payments from the government have slowed considerably over past 1-2 quarters.


■ Monolithic business likely to slow down sharply: Execution for the monolithic business is slowing down, as payments from the government are being delayed, and delays in government clearances and site handovers are adding to the slowdown. We reduce our monolithic business growth estimates for FY12/13 from 30% to 5%.


■ Receivables cycle getting stretched, but cash flows to improve: We believe that while working capital in FY12 is likely to deteriorate at the margin on account of the delay in government payments, free cash generation should improve aided by slower growth of the working-capitalintensive monolithic business and lower capital expenditure.


■ Comfortable on FCCB repayment: Management is comfortable on the FCCB maturing in Mar 2013. The repayment of US$278MM will be partly met through US$170MM of US$-denominated cash deposits. The remaining US$110MM will likely be refinanced through a US$-denominated ECB.


■ We reduce our PT to Rs115: We cut our FY12-FY14 EPS estimates by 14%-20% to incorporate lower growth for the monolithic business. We also reduce our Sep-12 PT to Rs115 based on 7x FY13E P/E (from Rs208 based on 10x FY13E P/E). We cut our target multiple from 10x to 7x to factor in the lower growth outlook; our target multiple is in line with the domestic peer group average. Key risks include deteriorating working capital, nonrelated ventures, and a further slowdown in the European business.


RISH TRADER

>PERSISTENT SYSTEMS: Macro uncertainty, no upside triggers

• Persistent continues with it’s focus on growing business through partnerships/’sell with’ (~10% of revenues currently) which per company comes at better than co margins as well
• Aligning sales force accordingly as company targets to improve mining within existing client base for traditional OPD basis along with the thrust on new business areas
• FY12 guidance lowered to US$ 205-210 mn (V/s US$ 220 mn earlier) as expected. EPS outlook revised to Rs 31.3-33
• We lower US$ rev estimates, however lower currency resets limit FY13E EPS cuts to ~3% to Rs 33.3. Valuations at ~9x FY12/13 remain inexpensive but we see no positive catalysts

■ Continuing to focus on new technologies, ‘sell with’ business
Persistent management reiterated it’s key focus in the areas of cloud computing, Enterprise Collaboration, Mobility and Analytics. It continues to align it’s sales force along the revised strategy of targeting growth through the ‘sell with’ business through partnerships with global technology players like Cisco, Salesforce.com amongst others. The company remains confident of gaining further traction with the partnership approach as it helps it to gain entry into several marquee names as well as provides better than co wide margins. Within the core OPD business, Persistent intends to mine the existing client base effectively and grow the top accounts. (we note that Persistent’s revenues from top 5 clients have grown by ~40% CAGR V/s 15% for company over FY09-11, refer table below)


■ Revenue guidance cut as expected, PAT outlook lowered to Rs 1250-1350 mn
As expected, Persistent lowered it’s FY12 revenue guidance to US$ 205-210 mn (V/s ‘atleast US$ 220 mn ‘earlier) citing consolidation in some top accounts and delays led by macro uncertainty. Profit outlook has been revised lower to Rs 1,250-1,350 mn (implying EPS of Rs 31.3-33) V/s flat profits despite lower currency aid. We believe a volatile and weak spending environment impacts players like Persistent much more given the nature of work. In this context, we highlight that Persistent intends to go slow on hiring indicating cautiousness on client spending ahead


■ Another cut in earnings, retain HOLD
We moderate our US$ revenue estimates further, however lower currency resets (we reset our US$/INR assumptions for FY13 to Rs 49.5/$ V/s Rs 48/$ as per our economist’s revised currency estimates) limit cut in FY13E earnings to <3% to Rs 33.3. Valuations at ~9x FY13/14E earnings remain inexpensive; however we see no catalysts for any upsides. HOLD, TP Rs 320 (V/s Rs 310 earlier)
RISH TRADER

>INDIA STRATEGY: Not the bottom yet (CLSA)

Despite the underperformance, MSCI India still trades at 15% premium to MSCI Asia leaving room for downside. On the positive, at 11.9xFY13CL earnings, Indian market now trades at 10% away from the Mar’09 lows which should limit downside, implying a range bound market. Our recent field trips make us more cautious on consumer discretionary demand outlook and we remove 3 ppts from our model portfolio. We also reduce 2.5ppts and 1 ppt each from banks and industrials to maintain UWT stance and add it to IT services to close the UWT there, primarily attributable to weaker INR outlook.


India premium has come down, but still a premium
■ Indian stock market (Sensex) is now trading at 11.9xFY13CL earnings or 27% discount to the last five year average and 17% discount to the 10 year average.
■ Over the last five years, Indian markets have traded at a 25% premium over Asian peers – which also stands corrected to 17% now. Indian market has traded at lower premium only during the GFC, when India traded at a discount.
■ While the GFC type of situation cannot be ruled out now, India is only 10% away with Mar-09 low multiples and valuation support should restrict the downside.


Governance a drag but several negatives now built-in
■ With a near roll back of FDI in retail, the Government inaction is once again in the forefront. The possibilities of agitation by Mr Anna Hazare, on the ‘Lokpal bill’ remains an outstanding issue. But the ‘Government paralysis’ is not really new.
■ Many of the government facing industries viz. infrastructure /property stocks have already corrected by c.50% over the last one year and earnings lowered by 20- 50%. While more damage can happen but we believe downside is limited.
■ 33% of stocks (30% of mcap) of stocks under CLSA India coverage universe are already trading below Mar-09 PE multiples.


Consumer demand slowing
■ Our recent field trips to the Northern state of Punjab and channel check by On The Road confirm signs of a consumer slowdown spreading. We temper our enthusiasm on consumer discretionary by slashing a 1 ppt each from Mahindra, Bajaj and Jet.
■ We do see downside risks to some expensive staples names viz. HUL, Nestle, Colgate etc owing to the triple impact of a small slowdown in demand growth, margin pressure due to the INR depreciation and high valuations. Our key picks here include ITC, Godrej Consumer and Jubilant.
■ We add 1 ppt to ITC by taking away 1 ppt from United Spirits to take into account the impact of higher ENA prices and a steep duty hike in West Bengal. 


Weights lowered in discretionary and banks; added to IT services
■ Underperformance by the banking sector has reduced our UWT to only 2ppts. We reinstate our 4.5ppts UWT on banks by removing SBI (-1.5ppts) and 1 ppt from ICICI Bank. We continue to be worried about the growth slowdown and asset quality concerns for the sector. Similarly, we also take out 1 ppt from Jaiprakash to maintain our small UWT on industrials. The near term risk to our UWT on banks would be a potential rate cut by the RBI in January’12.
■ We add these 6.5ppts to IT services sector to close our UWT position in the sector. While the companies will likely disappoint on US$ growth numbers, the reported performance, due to weaker INR, will drive street upgrades to earnings.
■ Our portfolio now has a 57% active bet reflecting our view that bottom-up stock picking would be crucial for outperformance.
■ Our top picks for the market are ITC, Dr Reddy’s, M&M and ICICI Bank. ITC and Dr Reddy’s appear good on earnings visibility. M&M’s volume sales have been robust so far and we expect similar trend to continue. Core auto business now trades at 10x. ICICI at 1.2x in line with PSU banks and already builds in asset quality risks.




To read the full report: INDIA STRATEGY
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