UTI Bank, Axis Bank, Sanghvi Movers

UTI Bank, Axis Bank, Sanghvi Movers

Axis Bank: Pricey, yet promising

Axis Bank(formerly UTI Bank) is a good investment candidate in the private banking space. This stock now trades at around Rs 590, which is a multiple of 29 times its FY-07 earnings and five times its book value. The stock has generated average annual returns of around 45 per cent since the company’s IPO in 1998.

Future returns may not match that of the past eight-nine years. But this banking stock could be a core long-term investment on account of the solid underlying financial performance of the company and good prospects of such performance being sustained, the niche positioning it is trying to achieve in the overall market and a strategically-driven management, all of which appear to have laid the foundation for long-term growth.

At these levels, the stock does appear a little pricey. But if one considers the company’s track record and the relative performance of the stock vis-À-vis its private sector peers, it would seem that the valuations are catching up only now.

The bank appears well-placed in many respects — the present levels of capital and recognition in both the domestic and overseas markets which will help in raising funds as and when necessary. The bank also has good distribution reach, created through a network of some 550 branches, with continued emphasis on the physical branch network as well as alternative delivery channels such as the Internet/off-site ATMs to drive business growth.
Resilient fundamentals

Axis Bank stands apart from its private sector competitors — ICICI Bank and HDFC Bank — in one crucial respect. While the other two banks have envisaged retail banking as a key area of strategic emphasis — with the share of the retail business (both on the funding and asset sides) growing strongly year after year— the share of retail business, particularly retail assets, has actually come down quite sharply in the case of Axis Bank.

The numbers here are quite interesting. For ICICI Bank, retail loans now (as of June 2007) account for as much as 70 per cent of the bank’s total loan book of Rs 2,00,000 crore. For HDFC Bank, retail assets are around 57 per cent (Rs 28,000 crore) of the total loans as of March 2007.

In the case of Axis Bank, retail loans have declined from 30 per cent of the total loan book of Rs 25,800 crore in June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of June 2007). Even over a longer period, while the overall asset growth for Axis Bank has been quite high and has matched that of the other banks, retail exposures grew at a slower pace.

If the sharp decline in the retail asset book in the past year in the case of Axis Bank is part of a deliberate business strategy, this could have significant implications (not necessarily negative) for the overall future profitability of the business.

Despite the relatively slower growth of the retail book over a period of time and the outright decline seen in the past year, the bank’s fundamentals are quite resilient. With the high level of mid-corporate and wholesale corporate lending the bank has been doing, one would have expected the net interest margins to have been under greater pressure. The bank, though, appears to have insulated such pressures. Interest margins, while they have declined from the 3.15 per cent seen in 2003-04, are still hovering close to the 3 per cent mark. (The comparable margins for ICICI Bank and HDFC Bank are around 2.60 per cent and 4 per cent respectively. The margins for ICICI Bank are lower despite its much larger share of the higher margin retail business, since funding costs also are higher).
Risk and earnings perspective

Such strong emphasis and focus on wholesale corporate lending also does not appear to have had any deleterious impact on the overall asset quality. The bank’s non-performing loans are even now, after five years of extremely rapid asset build-up, below 1 per cent of its total loans.

From a medium-term perspective, it appears that Axis Bank could be charting out a niche for itself in the private bank space. It appears to be following a business strategy quite different from the high-volume and commodity-style approach of ICICI Bank and HDFC Bank. That strategy also has its pluses in terms of the relatively higher margins in some segments of the retail business and the in-built credit risk diversification (and mitigation) achieved through a widely dispersed retail credit portfolio. But, as indicated above, Axis Bank has been to able to maintain the quality of its loan portfolio despite the concentrated nature of wholesale corporate lending.

The key to the bank’s continued strength will be maintaining all the above metrics of performance — strong business growth on both the asset and liability sides, rigorous credit appraisals and monitoring, the ability to leverage on the wide and expanding branch network and a steady build-up of the retail banking franchise.

UTI Bank, TCS, Zensar

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs725
Current market price: Rs645

Price target revised to Rs725

Result highlights

• UTI Bank's Q1FY2008 profit after tax (PAT) was slightly lower than our expectations of Rs188 crore at Rs175 crore, up 45.2% year on year (yoy). The PAT was lower than expected due to higher than expected operating expenses during the quarter.
• The net interest income (NII) was up by 38.8% to Rs446.8 crore compared with our estimate of Rs471 crore. UTI Bank's reported net interest margin (NIM) expanded by four basis points yoy but declined by 34 basis points quarter on quarter (qoq). A sequential fall in the NIM was expected as the bank had invested in low yielding priority sector securities. However, the sequential increase in the cost of funds has been sharp which has resulted in a lower than expected NII.
• The bank has again reported a robust growth, with assets up by 49% yoy and 8% qoq, driven by a strong advances growth of 60% yoy and 12% qoq. The deposits have grown by 45% yoy and 3.9% qoq with an improvement in the current and savings account (CASA) ratio on a year-on-year (y-o-y) basis.
• The non-interest income was up 70.8% yoy and 13.7% qoq to Rs342.3 crore, much above the expectations of Rs273 crore mainly driven by a higher trading income of Rs70 crore, which grew by 346% yoy and 64% qoq. The core fee income was up 67.6% yoy.
• The operating expenses were up by 76% yoy to Rs421.2 crore mainly driven by higher staff expenses, which reported an 85.6% y-o-y and 66.3% sequential growth.
• Although UTI Bank has grown at a robust pace in the last couple of years, yet there are no alarming signs of any deterioration in its asset quality. The net non-performing asset (NPA) level (as a percentage of its net customer assets) improved to 0.59% from 0.61% in Q4FY2007.
• UTI Bank has announced its plan to come out with a follow-on public offer (FPO) for 7.43 crore equity shares (26.3% of its existing equity base) to raise around $1 billion. We have assumed the FPO price to be Rs600 per share, up from Rs550 assumed earlier (as the minimum or floor price for the FPO has been decided at Rs575 per share). This would help the bank to raise around Rs4,459 crore.
• The NIM normally dips for the bank in the first quarter and then gradually picks up. The fee income, business growth and asset quality remain healthy, hence there is no major concern for the bank on the operational side. The capital raising would allow the bank to grow for the next three years without any further dilution. We feel UTI Bank has excellent growth potential which coupled with its strong management and earnings quality should allow it to trade at a slightly higher than its historical book value (BV) valuation band of 2.5-2.7x, as all the parameters that decide the valuations have improved considerably. At the current market price of Rs645 the stock is quoting at 20x its FY2009E earnings per share (EPS), 8.9x its FY2009E pre-provisioning profits (PPP) and 2.4x its FY2009E BV. We maintain our Buy recommendation on the stock with a revised price target of Rs725 at which level it will trade at 2.74x FY2009E BV.

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,128

Price target revised to Rs1,425

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 1.1% quarter on quarter (qoq) and 25.5% year on year (yoy) in its consolidated revenues to Rs5,202.8 crore during Q1FY2008. The sequential revenue growth was largely driven by a 7.6% volume growth in the international business and a 2.2% improvement in the billing rates and employee productivity. On the other hand, the appreciation in the rupee adversely affected the revenue growth by 6.4% on a sequential basis.
• The earnings before interest and tax (EBIT) margin declined by 250 basis points to 23.1% sequentially, largely due to the adverse impact of the rupee's appreciation (an impact of 258 basis points) and wage hikes (an impact of 208 basis points). On the other hand, the improvement of 220 basis points in the billing rates and productivity gains limited the decline in the margins. The operating profit declined by 9% qoq to Rs1,199.9 crore.
• The other income jumped by 68.9% qoq and 129.8% yoy to Rs151.6 crore. If the one-time income of Rs66.3 crore from the stake sale in SITEL is excluded from the other income of Q4FY2007, the other income has leapfrogged by 545.5% on a sequential basis. The jump in the other income component was aided by the gain of Rs107 crore on the foreign exchange (forex) cover during the quarter.
• The high other income and lower tax rate (due to a write-back of Rs29.3 crore of provision made earlier) enabled the company to report a 3.5% quarter-on-quarter (q-o-q) and a 34% year-on-year (y-o-y) growth in its consolidated earnings (adjusted for one-time items) to Rs1,156.2 crore.
• In terms of the outlook, the company doesn't give any specific growth guidance. However, it re-iterated that the demand environment continues to be robust and the gross employee addition would be higher than 32,462 reported in FY2007 (11,000 gross additions in Q2). The TCS management also expects to maintain the net margins on a full year basis, in spite of the steep appreciation in the rupee and the aggressive salary hikes in FY2008 (12-15% for the offshore employees and around 3% for the onsite employees). The loss at the operating level due to the pressure on the margins is expected to be offset by a higher other income resulting from the gains on the forex cover.
• The key operational highlights of Q1 are: (1) an addition of 54 clients; (2) a healthy mining of the existing client base in terms of a robust jump in the number of clients in all categories over the annual revenue run rate of $1 million; (3) a sequential growth of 4.3% in the revenues from the Top 10 clients (in spite of the adverse impact of the rupee appreciation); (4) the attrition rate in the information technology (IT) service business at a comfortable level of 11%; and (5) the closure of one large deal worth over $100 million and three deals of over $20 million each. On the flip side, there has been a slowdown in the sequential growth of revenues from the manufacturing industry vertical and global consulting practice.
• To factor in the exchange rate assumption of Rs40 for FY2008 and FY2009, we have revised down the FY2008 and FY2009 earnings estimates by 2.5% and 3% respectively. We maintain the Buy call on the stock with a revised price target of Rs1,425 (around 23x FY2009 earning per share [EPS]).
  

Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs330

Q1FY2008 results: First-cut analysis

Result highlights

• Zensar Technologies has announced a 9.7% quarter-on-quarter and 36.4% year-on-year growth in its consolidated Q1FY2008 revenue to Rs187.9 crore. The same is slightly lower than our estimates.
• However, the performance was disappointing on the margin front. The operating profit margin (OPM) plummeted by over 450 basis points to 9.7% on a sequential basis. The gross profit margin (GPM) declined by around 300 basis points due to the negative impact of wage hikes and appreciation of the rupee. The sequential increase of 19.8% in the selling, general and administration expenses to Rs34.5 crore further added to the 150-basis-point decline in the margin at the operating level. We suspect that the company could have also been affected by a one-time item related to the integration of the recently acquired ThoughtDigital or the setting up of a development centre in Poland during the quarter. Consequently, the operating profit declined by 25.3% quarter on quarter (qoq) and 8.9% year on year (yoy) to Rs18.2 crore.
• In line with the operating profit, the consolidated earnings also declined by 22% qoq and 8.6% yoy to Rs13.4 crore, which is much lower than our expectations of Rs15.8 crore for the quarter.
• At the current market price the stock trades at 10.1x FY2008 and 7.8x FY2009 earning estimates. We maintain our Buy call on the stock and would come out with a detailed update after the investor conference call tomorrow.

Allahabad Bank, UTI Bank

Allahabad Bank, UTI Bank

UTI Bank - July 16 2007

UTI Bank - July 16 2007

UTI Bank, HDFC Bank, Bajaj Auto, Infosys Technologies

UTI Bank, HDFC Bank, Bajaj Auto, Infosys Technologies

UTI Bank, Bajaj Auto

UTI Bank, Bajaj Auto

Bajaj Auto, UTI Bank, Infosys Technologies

Bajaj Auto, UTI Bank, Infosys Technologies

India Textiles, UTI Bank

India Textiles, UTI Bank

Bajaj Auto, UTI Bank

Bajaj Auto, UTI Bank

BHEL, UTI Bank, HDIL, Satyam Computers, Bajaj Auto, Suzlon Energy, BEL, MTNL, IOC, Kirloskar Brothers, Hindustan Zinc

BHEL

UTI Bank

HDIL

Satyam Computers

Bajaj Auto

Suzlon Energy

BEL

MTNL

IOC

Kirloskar Brothers

Hindustan Zinc

Kotak - Tata Tea, Dish TV, Reliance Industries, Idea Cellular, UTI Bank, Torrent Pharma, Automobiles, Economy

Kotak on Tata Tea

Tata Tea reported 14.7% growth in revenues at Rs2.51 bn (we expected 12.2% growth) and 34% increase in EBITDA to Rs150 mn (we estimated Rs243 mn) during 4QFY07. While domestic branded tea sales continue to do well (9% volumes growth and 12% value growth for branded tea in domestic portfolio), higher wage expenses (wage increases and new accounting standards) resulted in lower EBITDA. Tetley continues to post marketshare gains in key markets. However, stagnant black tea market in UK remains a concern. Tata Tea has agreed for conditional sale of its stake in Energy Brands Inc (EBI) to Coca Cola. Tata group had earlier acquired 30% stake in EBI (25% held by Tata Tea and 5% by Tata Sons) for US$677 mn, in a bid to add a high growth beverage portfolio in the world's largest beverage market. With the sale of 30% stake to Coca Cola for US$1.2 bn, Tata Tea will need to redraw its plans for improving its growth profile. Tata Tea has reiterated its thrust on three verticals—Tea, Coffee and Water, and has announced the acquisition of a controlling stake in Mount Everest Mineral Water Limited (MEMW). We believe that given the robust macro environment in rural as well as urban India, domestic tea business will continue to do well. However, we have concerns on the Tetley business and need to watch out for Tata Tea's strategy to drive growth. We retain In Line rating on the company. Our revised target price of Rs992/share includes Rs91/share from investments in group companies (valued at 50% discount to market price). Our target price implies a P/E of 21.5X and 16.9X on FY2008E and FY2009E respectively.

Kotak on DishTV

We have downgraded Dish TV to IL from OP noting the fact that the stock is trading above our 12-month DCF-based target price of Rs125 and the stock's strong outperformance over the past few weeks. We continue to like Dish TV as a good play on India's emerging distribution opportunity. Indeed, we are most favorably disposed to the distribution portion of the media chain versus broadcasting and content given distribution's ownership of the last-mile, its more loyal audience and hence more predictable cash flows. We would wait for more visibility on the pace of adoption of DTH service in India, Dish's execution versus others and pricing strategy of new entrants. However, we model rapid uptake of DTH service in India given problems with the cable industry. Thus, Dish's current valuations leave limited scope for execution and macro-environment-related disappointments. We retain our earnings estimates.

Kotak on Reliance Industries

According to an article in Petrowatch (31st May 2007), Reliance's gas and oil production from KG D-6 block may be delayed by a few months. We do not expect a delay, if any, to have a material impact on valuations although it may be a modest negative for sentiment. We anyway use valuations based on FY2010E EPS discounted back to set our 12-month fair valuation for Reliance stock (see Exhibit 1). We have made some minor changes to our model—(1) exchange rate (Rs43/US Dollar for FY2008E-FY2010E versus US$44/US Dollar previously) and (2) use of gas for internal refining process for RIL refinery also; we already model this for RPL refinery. Our consolidated FY2008E, FY2009E and FY2010E EPS are Rs71.5, Rs98.5 and Rs153.5, respectively versus Rs73.2, Rs95.6 and Rs150.1, respectively, previously. Key upside risks to our 12-month target price of Rs1,400 (Rs1,375 previously) stem from continued high liquidity in the Indian market and new E&P discoveries.

Kotak on IDEA Cellular

Several newspaper articles over the past few days have reported discussions between Idea Cellular and Spice Telecom regarding a potential merger or acquisition of Spice by Idea. The managements of the respective companies have not confirmed the news. In our view, the reported merger is unlikely to change the competitive landscape in India. The merger will give Idea a presence in two new circles'Punjab and Karnataka'but would not address key issues including (a) lack of pan-Indian presence, (b) likely weak position in unaddressed and certain existing circles and (c) high risk to operating metrics from emerging price competition. We believe ongoing deterioration in pricing is the real issue and note that Idea is the most vulnerable in the emerging environment. We maintain our U rating on Idea stock with a 12-month forward DCF based target price of Rs100. Key upside risk is higher-than-expected profitability.

Kotak on UTI Bank

On Friday, the UTI Bank shareholders approved the change of bank’s name to 'Axis Bank Ltd' from 'UTI Bank Ltd' and appointment of Dr. P.J Nayak as whole-time Chairman of the bank. The later is subject to the approval of RBI. Simultaneously at its board meeting the UTI Bank board finalized its plan to raise US$1bn of capital to meet the bank’s growth plan through a preferential issue to existing promoters and a equity/GDR issue. We believe that amongst private banks UTI Bank has strong growth potential, is well run and has delivered strong financials. A large part of this credit goes to Dr. Nayak, who has been with the bank for the last seven years. Even assuming that RBI clears Dr Nayak’s appointment it still leaves two long-term crucial issues unresolved - i.e long-term succession plan and potential sell down of stake to a public sector. We believe that the issuance was an opportune time to reduce holding of the government owned organization, which it appears, is unlikely at this stage. The current valuations of 19.5XPER and 4.0X PBR FY2008 therefore appear rich and reduce the margin of safety for investors and we retain our Underperform rating.

Kotak on Torrent Pharma

We recently met the Torrent management. Outlook continues to be robust, with strong revenue growth and margin expansion. For FY2008, we have modeled revenue growth of 18%, 130bps margin expansion (10.8% EBITDA) and 36% growth in net profit. We estimate an EPS of Rs15 and Rs17.4 for FY2008 and FY2009 (versus Rs13.2 and Rs16.1 earlier). Amongst key markets, India, Brazil and CIS are doing very well, a trend, which is likely to continue. Company expects sharp margin expansion in the Brazil market, which will equal investments/loss in Mexico (for product filings). Investment/losses in the US market will continue this year too (for product filings), as revenues are expected to begin from next year. Germany continues to be a dark spot (Rs230 mn loss in FY2007). We have rolled over our DCF to March 2009 and our revised price target is Rs260 (Rs200 earlier), or 15x FY2009 earnings. Key risks include inability to improve profitability of international operations, mainly Germany

Kotak on Auto Sales

May saw a weak sales growth across all segments of the auto industry. CV sales declined impacted by high interest rates. The 2W industry witnessed a decline in volume growth across all players thus raising concerns of a slowdown in demand. Hero Honda along with its peers reported a 6% yoy decline in May. Maruti continued with its growth backed by the launch of the Sx4 sedan and the success of Swift and Zen Estilo while Mahindra- Renault's Logan had a decent launch with 2,786 vehicles being sold in May. Tata Motors reported a 17% yoy drop in volumes of M&HCVs for May. LCV sales however grew at 10% for the month resulting in a 6% yoy decline for domestic CV sales. Car sales for Tata Motors, too, declined 7.6% in May.

Kotak on India Economy

India’s merchandise trade deficit expanded sharply to US$ 7 bn in April 2007 from US$3.9 bn in April 2006 (Exhibit 1). This reflects strong non-oil import demand suggestive of sustained economic activity (abetted by a stronger Rupee). Robust capital goods imports (32.4% during April 2006 ‘ January 2007 vs 39.9% last year), in particular, point to sustained investment. In any case, imports pick up in 1Q of the FY (Exhibit 2). We nevertheless continue to expect non-oil import demand to moderate with a slowdown in real GDP growth (8.2% in FY2008E from 9.4% in FY2007). Although still robust, we also expect some slow down in exports in FY2008E (US$148 bn lower than the commerce ministry’s bullish US$ 160 bn projection) on account of the IMF’s estimate of slower world GDP growth (4.9% 2007E from 5.4% 2006) and a somewhat higher Rupee (Rs43/USD in FY2008E up from Rs45.1/USD in FY2007). The current account deficit is now forecast at a pretty doable 1.4% of GDP in FY2008E, assuming stable oil prices (US$65/bbl Dated Brent). Every US dollar increase in the India basket barrel price hits the current account deficit by about US $ 500-600 mn.

IDBI Capital Result Reports

ABB

Ashok Leyland

Balrampur Chini

Bajaj Hindustan Ltd

Biocon

Ceat Ltd

FAG Bearings

Grasim Industries

Rolta Ltd

Maruti Udyog Ltd

Bank of India

UTI Bank

Kirloskar Oil Engines

Sona Koyo Steering

Garware Offshore

Indian Overseas Bank

Nicholas Piramal

Voltamp Transformers

Merrill Lynch - UTI Bank, Indiabulls Fin, Matrix Labs, Infotech Enterprises

Merrill Lynch - Infotech Enterprises

Merrill Lynch - Indiabulls Financial

Merrill Lynch - Matrix Labs

Merrill Lynch - UTI Bank

JP Morgan - HCL Technologies, UTI Bank, Economy

HCL Technologies

UTI Bank

Economy

Motilal Oswal - Results Reports - Apr 2007

Aventis

Banking

Dishman Pharma

Infosys Technologies

HCL Technologies

Tata Consultancy

UTI Bank

Kotak - Indian Bank, HCL Tech, UTI Bank, Tata Steel, Telecom

Kotak Reports

Indian Bank

HCL Tech

UTI Bank

Tata Steel

Telecom

ENAM - UTI Bank, HCL Tech, Tata Steel

ENAM Reports

UTI Bank

HCL Tech

Tata Steel

Sharekhan Investor's Eye dated April 17, 2007

SHAREKHAN SPECIAL

Q4FY2007 Capital Goods earnings preview

The Working Group on Power for the 11th Five-Year Plan has envisaged an addition of around 69,000 megawatt (MW) of power generation capacity during the plan period (FY2007-12) and an additional capacity of 86,500MW during the 12th Five-Year Plan. Looking at the current status of the 10th Five-Year Plan’s (FY2002-07) capacity addition programme, these targets looks quite aggressive since the government had planned a capacity addition of 41,110MW during the 10th Plan period whereas the actual achievement is likely to be around 25,000MW (only 61% of the target). Out of this about 17,995MW of capacity had already been commissioned till December 31, 2006. However the fact that a total of 31,345MW of capacity is already under construction gives the panel's plan a lot of credibility.

Looking at the huge power generation capacity addition programme of the government (totaling to around 155,000MW in the next ten years), the order flow momentum for the capital goods companies engaged in the power sector, such as Bharat Heavy Electricals Ltd (BHEL), Crompton Greaves, Bharat Bijlee, Indo Tech Transformers, KEI Industries and Genus Overseas, is expected to be robust. Going by the recently announced provisional results of BHEL, wherein its order flow for the full year ended March 2007 registered an increase of 88% to Rs35,633 crore and the order backlog stood at an all-time high of Rs55,000 crore, the time ahead for power ancillary companies appears even more promising.

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STOCK UPDATE

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,508
Current market price: Rs1,250

Disappointing performance

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 5.9% quarter on quarter (qoq) and 38.2% year on year (yoy) in its consolidated revenues to Rs5,146.4 crore during Q4FY2007. The sequential revenue growth was largely driven by a 6.42% growth in the volumes and a cummulative growth of 1.33% in the billing rates (0.89%) and employee productivity (0.44%). On the other hand, the appreciation of the rupee adversely affected the revenue growth by 1.87% sequentially.
• The earnings before interest and tax (EBIT) margin declined by 47 basis points to 25.6% sequentially, largely due to the adverse impact of the rupee's appreciation.
• The other income stood at Rs89.8 crore and included a one-time extraordinary income of Rs66.3 crore from the sale of the stake in Sitel. Excluding the one-time income (adjusted for tax), the consolidated earnings have grown at a disappointing rate of 1.1% qoq to Rs1,116.8 crore, which is much lower than the consensus estimate of around Rs1,185 crore.
• In terms of the outlook, the company doesn't give any specific growth guidance. However, it has indicated that the demand environment continues to be robust and the gross employee addition would be higher than 32,462 reported in FY2007 (12,000 campus offers have been made). The TCS management also expects to maintain the margins around the level of 25% reported in FY2007, in spite of the aggressive salary hikes in FY2008 (13-15% for the offshore employees and 3-5% for the onsite employees).
• The key operational highlights for Q4 are: an addition of 43 clients; a healthy sequential growth of 9.3% in revenues from the Top 10 clients; the attrition rate in the information technology service sector at a comfortable level of 10.6%; closure of two large deals worth over $50 million each and one deal of $35 million; and a healthy pipeline of large deals. On the flip side, there has been a slowdown in the sequential growth of revenues from the banking, financial services and insurance (BFSI) and manufacturing industry verticals.
• Given the lower than expected performance and the steep appreciation in the rupee, we have revised down our FY2008 earnings estimate by 0.5% and have also introduced the FY2009 estimates. We maintain the Buy call on the stock with a price target of Rs1,508 (around 23x FY2009 earnings per share).

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs575
Current market price: Rs465

Robust growth continues

Result highlights

• UTI Bank’s Q4FY2007 profit after tax (PAT) was better than our expectations at Rs211.9 crore, up 39.6% year on year (yoy) compared to our estimate of Rs186.2 crore mainly due to a higher than expected net income and lower operating expenses during the quarter.
• The net interest income (NII) was up by 48.4% to Rs464.2 crore compared to our estimate of Rs435.9 crore. UTI Bank's reported net interest margins (NIMs) expanded by 10 basis points yoy and by 6 basis points quarter on quarter (qoq). However the same included a one-time cash reserve ratio (CRR) interest of around Rs22 crore received during the quarter otherwise the NIMs would have had a downward bias on a quarter-on-quarter (q-o-q) basis.
• The non-interest income was up 32% yoy and 8% qoq to Rs301.1 crore and the fee income growth remained robust at 58.8% yoy and 29% qoq. However the treasury income declined by 34.3% yoy and 46% qoq.
• The operating expenses grew in line with the overall business growth; however the provisions were up 56.3% yoy and 40% qoq mainly due to the increased provisioning requirement on the standard assets for Rs68.1 crore, which is a one-off item.
• Although UTI Bank has grown at a robust pace in the last couple of years there are no visible signs in the deterioration of its asset quality yet. The net non-performing asset (NPA) level (as a percentage of its net customer assets) improved to 0.61% from 0.68% in Q3FY2007.
• Currently the bank’s capital adequacy ratio (CAR) is at 11.57% with Tier-I at 6.42%. The bank has also aggressively raised its hybrid capital and has left itself very little headroom to grow its balance sheet. The bank plans to come out with a follow-on offer in FY2008 to boost its CAR. We have factored in an equity dilution of 3.6 crore shares (12.8%) of the pre-issue equity capital at an issue price of Rs500 per share.
• The bank opened 80 new branches during the quarter. Its deposits grew by 46.5% to Rs58,785.6 crore of which savings and current deposits grew by 50.3% and 41.8% respectively. The current and savings account (CASA) ratio remained stable on a year-on-year (y-o-y) basis but improved on a q-o-q basis to 40% from 37.1% reported in Q3FY2007 mainly due to an increase in the current account deposits, which as a proportion of deposits increased from 16.6% in Q3FY2007 to 19.2% in Q4FY2007. Advances reported a strong growth of 65.3% to Rs36,876 crore of which the retail advances were up by 37.6% to Rs8,928 crore. However on a q-o-q basis the retail advances have declined by 2.7% mainly due to a sell down in the personal loan portfolio.
• The actual PAT for FY2007 was 4% above our estimates at Rs659 crore and we have upgraded our FY2008 numbers by 4.8% to Rs851.1 crore mainly on account of lower operating expenses estimated for FY2008. At the current market price of Rs465 the stock is quoting at 17.4x its FY2008E earnings per share (EPS), 8.5x its FY2008E pre-provisioning profits (PPP) and 2.5x its FY2008E book value (BV). We feel the dilution would be book value accretive and maintain our Buy recommendation on the stock with a price target of Rs575.

HCL Technologies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs410
Current market price: Rs301

Q3FY2007—first cut analysis

Result highlights

• HCL Technologies has reported a revenue growth of 7.6% quarter on quarter (qoq) and 39% year on year (yoy) to Rs1,577.1 crore for the third quarter ended March 2007. This is the third consecutive quarter of close to double-digit sequential growth in the revenues (in dollar terms) and far ahead of the street expectations. The sequential growth was contributed by a 16.4% growth in the business process outsourcing (BPO) revenues. On the other hand, the infrastructure management service (IMS) and software services businesses grew at a relatively lower rate of 6.4% and 6.5% respectively, on a sequential basis.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) margins improved by 115 basis points to 23.3% on a sequential basis, despite the adverse impact of the steep appreciation of the rupee (1.6% appreciation in the average realised exchange rate against the US dollar). The sequential improvement in the margins was largely aided by the cumulative impact of better realisations (including non-effort-based gains from the output-based priced projects), higher utilisation (especially in the BPO business) and a 70-basis-point saving in the selling, general and administration (SG&A) cost as a percentage of sales.
• In terms of the segments, the EBITDA margins of all the three business lines improved on a sequential basis. The BPO business reported a second consecutive quarter of robust improvement in its margins, up by 360 basis points to 26.5%. The software services and IMS businesses reported an 85-basis-point and a 13-basis-point improvement respectively.
• The earnings grew at a robust rate of 15.9% qoq and 72.1% yoy to Rs331.8 crore (ahead of our expectations of Rs290 crore and the consensus estimates of a flat or negative growth sequentially, especially after the higher base resulting from the robust performance in the previous two quarters). The growth in the earnings was also aided by the foreign exchange (forex) gains of Rs41.8 crore on the open forward contracts, up from Rs34.7 crore reported in Q2FY2007.
• In terms of the operational highlights, the ramp-up in the large deals is beginning to make a material impact on the overall performance. Moreover, the company continues to bag new multi-million, multi-year, multi-services deals and has announced six new deals in Q3--five in the range of $25-50 million each and one over $50 million.
• Given the company's higher-than-expected performance for the past three consecutive quarters and the continued traction in the intake of large deals, we would upgrade our estimates for FY2007 and FY2008 and introduce FY2009 estimates in the detailed result analysis report. At the current market price the stock trades at 18x FY2007 and 14.5x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs410.

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MUTUAL FUND: INDUSTRY UPDATE

Equity AUMs rise in line with market movement

The AUM for equity funds rose by 1.3% to Rs139,147 crore in March 2007. The rise in the AUM was more or less in line with the market movement of 1%.

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Sharekhan Investor's Eye dated April 17, 2007