Weekly Recommendations - Sep 13 2010

Axis Bank

* Current market price (CMP): Rs 1,380/ target price (TP): Rs 1,688/ Upside: 22%
* Rationale: The Bank has expanded its network at 33% CAGR since FY2005, doubling its CASA market share to 4.0% by FY2010 (20bp yoy increase in FY2010). Angel Broking expects the bank to continue market share gains of 30-50bp every year driven by strong branch expansion. Fee income contribution across a spectrum of services has been a meaningful 2% of assets (almost twice the level in PSBs) over FY2007-10. The bank`s high credit growth was backed by strong low-cost deposit growth, rather than chasing risky loans using high-cost deposits. Moreover, with the improving economic outlook and reducing corporate leverage, NPA concerns are receding and could provide upside to our earnings estimates (which still factor NPA provisions at 0.5% of assets in FY2011E vs. an average of 0.4% over FY2006-10). The stock is trading at attractive valuations of 2.6x FY2012E P/ABV. Hence, it maintains a `Buy` on the stock with a target price of Rs1,688 (at 3.2x FY2012E P/ABV).



ICICI Bank

* CMP: Rs 1,000/ TP: Rs 1,211/ Upside: 21%
* Rationale: The bank is well-positioned to gain market share on the back of substantial branch expansion from 955 in 3QFY2008 to 2016 in 1QFY2011 as well as strong capital adequacy at 20.2% (Tier-I at 14.0%). Net interest margins of the bank are expected to sustain on the back of increase in CASA ratio to 42.1% in 1QFY2011 from 29% in FY2009. On the back of an improving economic environment, NPA losses are expected to start declining. The bank has also done lower restructuring of loans than PSU banks (7% of Net Worth v/s 40%+ for most PSU Banks). As a result, broking firm expects NPA provisions /assets to decline sharply to 0.5% by FY2012E (from 1.2% in FY2010). The stock is trading at attractivevaluations of 1.9x FY2012E P/ABV. Hence, it maintains a `Buy` on the stock with a target price of Rs1,211 valuing the core bank at 2.5x FY2012E P/ABV and assigning a value of Rs260 for its subsidiaries.

Maruti Suzuki

* CMP: Rs 1,272/ TP: Rs 1,394/ Upside: 10%
* Rationale: Given India`s low car penetration (12 per 1,000 v/s 21 per 1,000 in China) and with PPP-based per capita estimated to approach the empirically-observed inflection point for car demand of USD 5,000 over the next 4-5 years, Angel expects 15.2% CAGR in domestic volumes over FY2010-12E. Maruti has a sizeable competitive advantage over foreign entrants due to its widespread distribution network (2,767 service and 681 sales outlets). Moreover, with Suzuki Japan making Maruti a manufacturing hub for small cars, to cater to increasing global demand caused by rising fuel prices and stricter emission standards, we estimate 7.2% CAGR in export volumes over FY2010-12E. The company, through de-bottlenecking, would be able to manufacture around 1.1 lakh units per month from 2HFY2011E thereby reducing the uncertainty of capacity constraints to a certain extent. Further, we believe that, the recent hike in royalty payment would be passed by the company to certain extent with a price hike. At the CMP, the stock is trading at attractive valuation (13.1x FY2012E earnings). At its target price of Rs 1,394, Maruti would trade at 14.4x FY2012E (15% discount to our Sensex target multiple).



Reliance Industries (RIL)

* CMP: Rs.926/ TP: Rs.1,260/ Upside: 36%
* Rationale: RIL`s stock price has borne the brunt of negative news flows on account of slower ramp-up of KG Basin gas, subdued refining and petrochemical margins and concerns over the redeployment of the cash flows. However, Angel believes that the current price has discounted the worst case scenario and there is potential upside for the stock from the current levels. It expects RIL`s profitability to register 34% CAGR over FY2010-12E driven by improvement in refining margins coupled with ramp up of oil and gas production at the KG Basin. Moreover, increase in the share of E&P in the profit matrix will in turn reduce exposure to cyclical segments. It expects the company`s foray in the newer ventures (such as shale gas, broadband and power) along with discovery and monetization of its upstream portfolio to keep it on high-growth orbit going ahead. Moreover, the same is also likely to resolve the concerns over the redeployment of the cash flows. On the valuation front, the stock is relatively under-valued trading at 1.6x FY2012E P/BV. Hence, it maintains a Buy on RIL, with a target price of Rs1,260, translating into an upside of 36.1% from current levels.

Tech Mahindra

* CMP: Rs 700/ TP: Rs 950/ Upside: 36%
* Rationale: The company is currently seeing strong traction and pursuing some large transformational deals in North America (average size of these deals range from USD 25 million-75 million for a period of five years). Thus, Angel believes the company`s growth will be led by strong volume ramp ups, with key deals in the pipeline despite the price cut taken in the BT deal for assured volumes. Sustained volume traction from non-BT clients (CQGR of 7.5% in last eight quarters) continues to provide revenue growth momentum, margin improvement, geographical diversification and reduced client concentration to the company. Positive news flow from Satyam in the form of client retention, new deal wins and favorable settlement with Unpaid provides comfort on future business prospects. It has valued Tech Mahindra on an SOTP basis, valuing Tech Mahindra (excluding Satyam) at 13x, at a 40% discount to Infosys target multiple of 21x and valued Satyam`s stake at Rs 259 a share based on a market cap basis by applying a 30% holding company discount to arrive at a target price of Rs950. Thus we continue to maintain its `Buy` recommendation on the stock.