Thursday, November 5, 2009


Operating earnings in line; asset quality disappoints
SBI’s 2QFY10 earnings at Rs24.9bn, up 10.2% yoy, were about 3-4% below estimates owing to slightly weak (2% yoy) topline. The bigger disappointment was the 3-fold jump qoq in NPL formation (~Rs50bn). Operationally, margins were up 25bps qoq, CASA rose to 41% and loan growth was at 16.4% yoy. Further, SBI has made the necessary wage provisions. Hence, it appears well positioned to show strong operational growth in ensuing quarters; NPL is the key challenge. Maintain Buy and PO of Rs2575 given core RoE of 19% and our SOTP at Rs693.

NPL formation up 3x qoq; but likely to have peaked
SBI’s 2QFY10 topline was weak owing to the sustained flow of deposits (up 25% yoy) despite rate cuts. LDR has begun to rise now due to infra and mortgage loans. Fee growth strong at +50%, driven partly due to surge in forex. NPL accretion due to overseas (15% of new NPLs) due to FDIC norms, rural (drought) and SME. SBI, however, confident that NPL formation has peaked and gross NPL’s to be greater than 3% of loans by year end (3% as of Sep’09).

Earnings cut by 4-5%; to still grow +14-15%; RoE at 16-17%
We have cut our earnings by 4-5% to capture weaker topline and higher credit costs. Still foresee earnings growth of 14% in FY10 and +22% in FY11. RoEs est. at 18% in FY11. We are building in NPL formation at Rs135bn (Rs67bn in H1) and gross NPL’s at 3.2% of loans; net at 1.7%. Maintain value of SOTP (assoc. banks, life insurance and asset mgmt) at Rs693/shr. Upside to SOTP, as assoc. banks have done better than est. and life ins. also showing better profitability.

To read the full report: SBI

>QE Sep 09 Earnings: A New Earnings Cycle to Begin Next Quarter

Here are our key takeaways from the recently concluded September 2009 quarterly earnings season:

•Corporate India (represented by an MS sample of 99 companies) reported its fastest growth since Jun-07 – 35% growth in net earnings for the quarter ended September 2009 compared to a trailing five-year quarterly average growth rate of 22%.

•Excluding the Energy sector, profits fell 2% YoY compared with a trailing five-year average growth rate of 19% – earnings are down YoY for the fourth consecutive quarter.

•Earnings growth for our coverage universe was in line with our MS analysts’ expectations. MS analysts’ were expecting profits to grow 38% for our coverage universe (fall of 4% ex-Energy).

•F2010 earnings were revised up for five out of 10 sectors and by 0.5% for market aggregate at the end of the earnings season. Upward revisions outstripped downward revisions 2:1 at the end of the season versus where earnings were at the start of the season. Telecom sector seems to have surprised the consensus negatively. The revisions were a bit more broad based for F2011 earnings. This indicates an element of positive surprise in the quarterly earnings, but not by a big margin.

•The Sensex constituents reported a rise of 1% YoY on an aggregate basis, ahead of MS analysts’ forecasts (of 5% fall). This is the first quarter in 12 months that Sensex earnings growth is in positive territory, albeit marginally.

•At the sector level, seven out of 10 sectors reported a rise in profits The best performances came from Energy and Healthcare. The laggards versus the aggregate numbers were Materials and Telecom.

• Compared to MS expectations, the biggest positive surprises came in Healthcare and the key negative surprise came in Materials.

• Excluding the volatile energy sector, revenues for our sample rose 4% YoY while for the aggregate revenues fell 9% YoY.

•EBITDA margins rose 535bp YoY and 43bp YoY excluding the Energy sector. Seven out of 10 sectors saw margin expansion with Energy leading the list while Materials was at the bottom. Rising capital costs offset the improvement in EBITDA margins, causing net profit growth to lag EBITDA growth.

•Broad market earnings (sample of 1,061 companies) outperformed the narrow market for the second consecutive quarter. The earnings for the broad market companies are up 27% YoY (ex-Energy, up 5%).

To read the full report: INDIA STRATEGY


Strong loan growth to continue: Dewan Housing Finance (DHFL) has been among the fastest growing housing finance companies in the past five years. Its loan book and disbursements registered a CAGR of 39% and 37%, respectively (well above peers) over FY04-09. In 1HFY10, loans and disbursements grew 50% and 78% YoY respectively. With the capital in place (raised Rs3b in 1QFY10, leading to CAR of 22%), we expect disbursements and loan book to register a CAGR of 46% and 42%, respectively over FY09-11.

Poised for the next leap in a niche business: DHFL is a niche player in the housing finance business with a focus on middle and low income customers (not a key target segment for other HFCs and banks) in tier-II and tier-III cities. Its average loan size was Rs0.46m in 1HFY10 compared with ~Rs1.3m for LIC Housing Finance.

Superior margins can be sustained: DHFL's core competence of lending to low and middle income customers gives it better pricing power and superior margins (~3%). Despite liquidity crunch in FY09, DHFL sustained its margins at 2.93%. In the near term, margins could improve, as the benefit of capital raising will continue and comfortable liquidity will keep wholesale funding costs low. In 1HFY10, NIM was 3.06%.

Commendable performance on asset quality: Despite exposure to high-risk low-income customers, DHFL's GNPAs were greater than 1.8% over FY03-09. Net NPAs were 1.07% as of 1HFY10. The management's expertise in handling this customer segment and its cardinal principle of lending only to "end users" enables it to sustain asset quality.

Fee income to drive earnings: DHFL is focusing on growing fee income through insurance distribution, project marketing and by providing technical services to developers. It aims to earn fees to cover its operating expenses fully.

Valuation and view: DHFL offers a strong combination of value and growth with a strong CAR of over 20%. We expect earnings CAGR of ~54% over FY09-11, RoA to improve from 1.6% to 2% and RoE to improve from 21% in FY09 to 23% by FY11 despite capital raising in 1QFY10. Adjusting for the value of key investments after 20% discount (Rs19/share), the stock trades at 1.2x FY11E BV and 5.9x FY11E EPS. We maintain Buy, with an SOTPbased target price of Rs241.

To read the full report: DEWAN HOUSING FINANCE


Exceptional items lift PAT to INR 4.7 bn (up 60.1% Y-o-Y) in Q2FY10
Cairn India’s (CIL) top line, at INR 2,298 mn, was down 28.2% Y-o-Y (on lower crude prices and production) and up 12.1% Q-o-Q (on higher crude prices) in Q2FY10. The company’s net hydrocarbon production (includes Rajasthan production, revenues on which were not booked), at 18,638 boepd, increased 8.9% Y-o-Y and 17.1% Q-o-Q. Crude realisation of USD 69.1/bbl was up 14.8% Q-o-Q, down 40.6% Y-o-Y, and gas realisation was lower at USD 3.9/mmscf. Higher total expenses (production and employee) resulted in an EBITDA of INR 1,333 mn (down 41.5% Y-o-Y and up 0.9% Q-o-Q). However, CIL’s results benefited from several exceptional items like foreign exchange fluctuation gain of INR 661.8 mn (included in other income), reversal of deferred tax liability of INR 2647.9 mn (considering field like as stipulated in PSC against useful economic life), and gain of INR 1637.1 mn on reversal of provision in the ONGC carry case (group has won its appeal in Malaysian Court). Hence, CIL’s PAT, at INR 4695 mn, increased 60.1% Y-o-Y and was almost 10x Q-o-Q.

Exceptional items/gains boost profit

Mangala production starts; Train 2 targeted by early CY10
Crude production at the Mangala field commenced on August 20, 2009. Train 1 was commissioned and production has begun. First cargo of crude was delivered to MRPL on October 9, 2009. Train 2 (50 kbpd capacity) completion will be delayed from end CY09 to early CY10 and train 3 (50 kbpd capacity) by H1CY10. With this, Mangala plateau production of 125,000 bpd is targeted by H1CY10. GoI has agreed for CIL to be able to sell to private refiners. Further, management also indicated little impediment to exports. Aishwarya FDP has yet to be approved. CIL estimates the implied price realisation is ~10-15% discount to brent (based on six month ending Sept 2009 average prices).

Outlook and valuations: Rich; maintain ‘HOLD’
We have revised our PAT estimates down 10.3% for FY10 (lowered our production outlook) and up 26.1% for FY11 (higher crude prices). CIL has commenced production from the Rajasthan block in August 2009, in line with its guidance during the 2006 IPO. In addition to the ramp-up of Rajasthan production, the company has 25 discoveries, development of which could positively impact production. We have now moved to a March 2011 SOTP, in addition to increasing our long-term average crude price from USD 72/bbl to USD 80/bbl. We estimate an SOTP of INR 290.1/share, offering 9.4% upsides from current levels. At INR 265, CIL is trading at 10.7x FY11E EPS. We maintain our ‘HOLD’ recommendation on the stock. On relative return basis,
the stock is rated ‘Sector Outperformer’.

To read the full report: CAIRN INDIA