Mahindra & Mahindra
BUY at CMP: Rs727
MCAP: Rs453 bn
– Play on buoyant rural economy and pro agri. government initiatives like rising MSPs, NREGA scheme, among others, with domestic tractor business expected to grow at 11-13% CAGR over FY11‐13E.
– Strong sales momentum from Scorpio and Bolero and incremental volumes from new and recent launches of Maximo & Gio truck/passenger variant, Genio cab truck, resulting in strengthening of leadership position in Uvs and LCV space.
– Market leadership in least competitive auto segments like UVs and tractors, with pricing power, has aided in maintaining healthy profitability.
– Market share gains likely in both Auto and FES, led by strong product pipeline.
– Gearing at 0.2x as on June 2011 provides balance sheet comfort.
– Strong performance from subsidiaries and joint ventures; Ssangyong volume ramp up on, with investment in R&D and product development to be internally funded (not to put pressure on MM balance sheet)
– Valuation: Valuation at 12.1x FY12E and 10.5x FY13E (adjusted for subsidiary valuation). Recommend BUY and target price of Rs814, led by leadership position in two of the least competitive auto segments, strong performance from most subsidiaries and favourable risk reward. MM is our preferred pick in the auto space and a safer bet in this uncertain macro environment.
BUY at CMP: Rs846
MCAP: Rs436 bn
– Macro concerns on JLR volumes being impacted by slow down in developed markets like Europe and US overdone. We believe that slow down in these markets will be more than compensated by strong traction from geographies like China, Russia, Brazil, other
emerging markets and strong response to the soon-to-be-launched Evoque, which has already received ~20k pre-bookings.
– Maintaining healthy pace in the CV space, despite moderating macro environment on continued strong momentum in the LCV space (especially sub-1 tonne segment, with Ace and its variants) and moderate growth in MHCV space (strong franchisee).
– Expected volume decline in cars segment (weak franchisee and lack of new launches), which has <10% impact of revenue and even lower impact on profitability.
- Valuation: Valuation at 7.1x FY12E and 6.1x FY13E consolidated earnings is attractive. We believe that most concerns on macro environment and cash flow generation and priced in and recommend BUY on the stock with price target of Rs1,133.
MCAP: Rs1,094 bn
Growing cautiously – Improving return ratios
– Stable balance sheet growth: Advances stood at Rs2,207 bn as on Q1FY12. Loan book consists of 24% of large corporate, 5% of SME, 38% of retail.
– Management is not going very aggressive in the asset book expansion as it is visible by there leverage ratio of 7.3 times. We believe with improvement in the macro economic environment and increase in leverage, RoE will improve. However, the management has given a guidance of 18% growth in overall loan book for FY12E.
– Margins likely to be maintained at current levels: Overall margins stood at 2.6% in Q1FY12. Domestic margins stood at ~3% while overseas margins stood at 90bps. Overseas margins are expected to increase by 20-30bps; however that would be negated by a fall in domestic margins due to pressure on cost of funds.
– Incremental slippages peaked out: Incremental slippages were around Rs2 bn in the last quarter due to MFI exposure. Total MFI exposure stood at ~Rs10 bn. GNPA Ratio has declined by 11bps to 4.4% and NNPA ratio by 3bps to 0.91% in the last quarter. Provision coverage ratio stood at 77%.
– Restructured book remained flat at Rs19.7 bn sequentially. The stress assets portfolio (GNPA + Restructured assets) declined to 5.4% of the total loan book from 5.6% in Q4FY11. We believe slippages have peaked out for ICICI Bank.
– Valuation: On a standalone basis the stock is currently trading at 1.9x on our FY13E BV. ICICI Bank has changed structurally in last couple of years and seems back on growth path now. We believe that RoE will improve to ~12.5% in FY12E. However, as the ROE will remain lower than that of its peers, the bank will not be able to attract superior valuations. We estimate that due to the improvement in core banking business, the bank will trade at 2.2x its FY13E BV of Rs437. Further, we value life insurance subsidiary at Rs123.7 per share due to headwinds on regulation and shrinking NBAP margins.
-We have also reduced our other subsidiary values due to subdued performance in Q1FY12 and sluggish economic outlook. Hence, we value the subsidiaries at Rs243 per share. Our SOTP based target price stands at Rs1,189/share. ACCUMULATE.
Bank of Baroda
BUY CMP: Rs840
MCAP: Rs325 bn
Bank of Baroda (BoB) is the third largest public sector bank in India in terms of asset size and the fifth largest bank in terms of branches.
It has shown a tremendous growth in business from FY06 onwards. While its total business posted a CAGR of 27% during FY07-FY11, its share of overseas advances to total advances increased from 16% to 26% during FY06-FY11 period.
– Margins expected to remain at current level: Domestic margins stood at 3.4% and overseas margins remained at 1.4% in the last quarter. Going ahead, we believe that domestic margin will remain at 3.1-3.2% and overseas margins will remain at current levels.
– Strong Balance sheet: Advances grew by 25% YoY to Rs2,323.4 bn in Q1FY12. Within domestic loans, wholesale portfolio stood at 42%, SME stood at 17%, agriculture stood 14% and retail stood at 18%.
– No system overhang: As the bank has already shifted to system based NPA recognition method, delinquencies in this quarter stood at Rs5.8 bn in Q1FY12, which is amongst the lowest compared to peers in the industry. Going ahead, since all the loans are covered under system generation process, we believe that negative surprise in terms of NPAs will not come. GNPA ratio has stood at 1.46% and NNPA ratio remained at 0.44%. Provision coverage ratio remained healthy at 82.5%.
– Valuation: The bank will continue to post strong operating performance in the coming quarters due to its stable margins and better NPA profile then peers, we believe. BoB has traded at its average one year forward multiple of 1.6x and is currently trading at 1.2x on our FY13E BV with an attractive RoE of 22% estimated in FY13E. We value the bank at 1.6x FY13E BV of Rs712 with a price target of Rs1,140.
Tata Consultancy Services
BUY CMP: Rs978
MCAP: Rs1,866 bn
-Best bet in IT sector: TCS’s “Must Own” status is justifiable largely on account of superior top-line performance and healthy improvement in margins in the past few quarters over its peers such as Infosys and Wipro. The management has reasonable
visibility on demand which makes them comfortable for 20% plus dollar growth in revenues for FY12E on the base of 29% in FY11.
– The management commentary is fairly robust on discretionary spend and expects uniform growth unlike Infosys and Wipro (high reliance on back-ended growth). Though, pricing is still under pressure as seen from dip in the current quarter.
– Margin commentary has improved post Q1FY12 result: TCS now believes that it can achieve EBIT margin of over 27% for FY12 compared to 27% expected at the time of Q4FY11 results.
– Post S&P’s downgrade on US rating (from AAA to AA+), Indian IT stocks were hammered severely largely with the underlying assumption of US is heading towards slow down/recession. We believe that tier-I companies such as TCS and Infosys are better placed in this uncertain environment due to attractive valuations and flight to safety, however, our preference still remains on TCS over Infosys.
Valuation: At CMP of Rs978, the stock is trading at 18.5x FY12E and 16.0x FY13E earnings which is much lower than its fair value of Rs1,342. We recommend BUY with the potential upside of 37% from current levels.
Other stocks in the Model Portfolio:
V-Guard Industries Ltd
TATA Power Company Ltd
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