Dead Presidents! - India Equity Research: May 1, 2007

ICICI Bank's Q4FY2007 results have been below expectations. Its profit after tax has grown by 4% year on year (yoy) and declined by 9% quarter on quarter (qoq) to Rs825 crore compared with our estimate of Rs1,004 crore. The numbers are lower mainly on account of a lower than expected non-interest income.

We had expected a much higher non-interest income due to the National Stock Exchange (NSE) stake sale that was likely to fetch around Rs500 crore and a sustained robust fee income growth witnessed during the previous quarters. However, despite the NSE stake sale the total treasury income stood at Rs446 crore adjusted for the marked-to-market loss on the corporate bond portfolio. This implies an insignificant contribution from any other treasury income source. The core fee income was also lower with a sequential growth of only 6% compared with 18% and 15% sequential growth witnessed in the previous two quarters.

The core operations were in line with expectations. The net interest income was up by 36% yoy and 10% qoq to Rs1,875 crore compared with our estimate of Rs1,848 crore. The net interest margin (NIM) for Q4FY2007 stood at 2.66% compared with 2.6% in Q3FY2007 and 2.79% in Q4FY2006. However, excluding the one-time cash reserve ratio interest, we feel there would be a sequential decline of five basis points in the NIM.

The operating profit was up by 39% yoy and 4% qoq to Rs2,054 crore. However, the core operating profit increased by 34% yoy but declined by 3% qoq. Provisions showed an increase of 91% yoy and 28% qoq to Rs1,142 crore mainly due to a one-time higher provision (Rs310 crore) on standard assets on account of an increase in the provisioning requirements by the Reserve Bank of India from 1% to 2% on certain categories of standard assets.

The business of the bank showed some moderation, deposits increased by 40% yoy and 17% qoq to Rs230,510 crore. Advances increased by 34% to Rs195,866 crore. Retail advances were up 39% yoy and 8% qoq to Rs127,689 crore.

The asset quality although at comfortable levels has continued to deteriorate with the gross non-performing assets (NPAs) up by Rs500 crore to Rs4,850 crore on a sequential basis. However, the net NPAs declined to 0.98% from 1.07% on a sequential basis.

The capital adequacy ratio (CAR) stood at 11.7%, with the Tier-I CAR at 7.4%. The bank plans to come out with a follow-on public offer (FPO) in the domestic and international markets by June 2007 to raise Rs20,000 crore. The bank's management has indicated that the pace of growth in the economy and that of the bank is unprecedented and the FPO tries to address the increased capital requirements of the bank for the next three years.

The lower than expected numbers coupled with the unexpected announcement of a Rs20,000-crore FPO had significant impact on the stock price as the same declined by 7% from its previous close of Rs934. At the current market price of Rs866 , the stock is quoting at 19.5x its FY2008E earnings and 2.8x FY2008E book value. We maintain our Buy recommendation on the stock.

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs370

Q1 results marginally below expectations

Result highlights

Ranbaxy Laboratories (Ranbaxy) reported a 78.7% year-on-year (y-o-y) growth in its earnings to Rs127.60 crore for the first quarter ended March 2007. The same was marginally below our expectations of Rs131.52 crore.

But the revenues, which were up by 23% to Rs1,553.50 crore, were better than our expectation of Rs1,437.16 crore. The revenue growth was largely driven by the consolidation of Terapia which resulted in a 78% jump in the European business. The CIS countries showed a 61% growth whereas the Asia Pacific and Middle Eastern markets witnessed a 34% growth. The point worth noting is that the domestic business reported a 26% growth which was way ahead of the industry growth of about 9-10% during the quarter.

The OPM witnessed a 150-basis-point expansion to 10.4% over the corresponding previous quarter but was down by 60 basis points sequentially. The pricing issues in the USA and EU continued to hit the margin during the quarter. However, the company reported a 43.3% growth in the operating profit to Rs162.2 crore

During the quarter, the depreciation cost was up by 30% and the tax incidence increased to 21.6% from 15.8%. Thanks to a forex gain of Rs55 crore, the net profit grew by 78.7% to Rs127.60 crore in Q1CY2007.

Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs325

Price target revised to Rs375

Result highlights

The Q4FY2007 results of Indo Tech Transformers Ltd (ITTL) are above our expectations.

The company has reported strong numbers for the fourth quarter. Revenues for the quarter grew by 80% to Rs56.7 crore against our expectations of Rs50 crore on the back of a 26% volume growth and better realisation. The realisation was up an impressive 43% as the realisation per mega voltage ampere (MVA) in Q4 was Rs7.68 lakh against Rs5.38 lakh in Q4FY2006. The net profit grew by a whopping 170% to Rs10.3 crore against our expectations of Rs7.8 crore.

The operating profit margin (OPM) for the quarter improved by 1,360 basis points to 27.1% as against 13.5% in Q3FY2006, as a result of lower raw material cost and other operational efficiencies. The raw material cost as a percentage of sales declined to 63.3% as compared to 71.5% on a year-on-year (y-o-y) basis.

The interest expense for the quarter stood at Rs0.32 crore, higher by 3.2% on a y-o-y basis, and the depreciation cost for the quarter stood at Rs1.16 crore, higher by 31.8% on a y-o-y basis.

The order backlog at the end of this quarter stood at Rs148 crore.

For the full year ended March 2007, the net sales grew by 68% to Rs155.6 crore and the net profit grew by 117% to Rs25.4 crore.

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs374
Current market price: Rs318

Q4FY2007 results—first-cut analysis

Result highlights

Corporation Bank's Q4FY2007 results are in line with our expectations; the bank's profit after tax grew by 18.2% year on year (yoy) but declined 19.1% quarter on quarter (qoq) to Rs118.5 crore compared with our estimate of Rs116.1crore.

The net interest income was up by 29.6% yoy and 20.9% qoq to Rs403 crore. The FY2007 net interest margin stood at 3.24% compared with 3.15% in M9FY2007 which implies that the bank witnessed a margin expansion during Q4FY2007. However, excluding the one-time interest on the cash reserve ratio balances, the margin appears to have remained stable.

The non-interest income increased by 21.7% yoy and 1.6% qoq to Rs161.9 crore. The other income excluding treasury was up 23.8% yoy and 25.4% qoq.

With the net income up 27.2% yoy and the operating expenses up only 11.3% yoy, the operating profit was up by 40.2% yoy to Rs343.2 crore.

The total business of the bank increased by 27.2% to Rs72,306 crore while the deposits increased by 28.8% to Rs42,357 crore and the advances increased by 25% to Rs29,950 crore. Retail advances were up 17.9% yoy.

The asset quality of the bank continues to be healthy with stable gross non-performing assets (NPA) at Rs624 crore and net NPA in percentage terms at 0.47%. The capital adequacy remains at a comfortable 12.7%.

At the current market price of Rs318, the stock is quoting at 7.2x its FY2008E earnings and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs374.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs310
Current market price: Rs236

Q4FY2007 results—first-cut analysis

Result highlights

Bank of Baroda's Q4FY2007 results are marginally below expectations; the profit after tax grew by 17.6% year on year (yoy) but declined 25.4% quarter on quarter (qoq) to Rs245.7crore compared with our estimate of Rs256.7crore.

The net interest income was up by 27.5% yoy and 15% qoq to Rs1,104 crore and was better than our estimate of Rs1,002 crore. For FY2007 the reported net interest margin (NIM) stood at 3.23% compared with 3.21% for the nine months ended December 2006. This implies that the bank witnessed a marginal expansion in its NIM during Q4FY2007. However excluding the one-time interest on the cash reserve ratio balances, the margin appears to decline by four basis points to 3.19% in FY2007 which reflects that the NIM has remained under pressure.

The non-interest income declined by 35.4% yoy and 28% qoq to Rs240.3 crore mainly due to a lower treasury income, core fee income grew by 36.4% yoy and 13.9% qoq.

The operating profit was up 2.5% yoy but down by 10.7% qoq. However the core operating profit (operating profit excluding treasury) grew by 11.8% yoy and 12.1% qoq.

The total business of the bank increased by 35.8% to Rs20,8537 crore. While the deposits increased by 33% to Rs12,4916 crore the advances increased by 40% to Rs83,621 crore of which retail credit was up 46.4%. The bank's overseas operation saw a phenomenal 72% year-on-year jump in the business.

The asset quality of the bank continues to be healthy with the gross non-performing asset (NPA) at Rs2,092 crore, reporting a sequential decline of Rs300 crore, and the net NPA in percentage terms standing at 0.6%, down sequentially from 0.67%. The capital adequacy ratio remains at a comfortable 11.8% with Tier-I capital at 8.74%.

At the current market price of Rs236, the stock is quoting at 6.6x its FY2008E earnings and 0.9x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs310.

Sharekhan Investor's Eye dated April 30, 2007

Motilal Oswal - Glaxo, Cadila, HCC, Nicholas Piramal, Pantaloon, Ranbaxy

Glaxo

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HCC

Nicholas Piramal

Pantaloon

Ranbaxy

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