Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs101
Current market price: Rs82.4
Stable performance
Result highlights
- For Q4FY2007 Andhra Bank reported a stable year-on-year (y-o-y) growth in its net profit to Rs138.8 crore. The same is better than our profit after tax (PAT) expectation of Rs123 crore. The PAT growth was driven by a lower than expected operating expenditure.
- During the quarter, the bank’s net interest income (NII) grew by 18.4% year on year (yoy) to Rs362.2 crore. However there was some sequential pressure on the net interest margin (NIM) as the bank’s cost of funds increased at a much faster pace than its asset yields. Also, its low cost deposit base declined sequentially.
- The non-interest income increased by 9% yoy to Rs138.4 crore despite a 40.4% y-o-y decline in the treasury income. The non-interest income excluding treasury was up 20.3% yoy.
- A 15.7% growth in the net income coupled with a 7.3% y-o-y decline in the operating expenses helped the bank to report a 46.7% y-o-y growth in the operating profit to Rs270 crore. The core operating profit (operating profit excluding treasury) reported further improvement of 59.6% yoy to Rs256 crore.
- Provisions and contingencies showed a decline of 23% yoy to Rs81 crore but increased 25.7% quarter on quarter (qoq) mainly due to higher non-performing assets (NPA) and standard asset provisions charged during the quarter.
- The PAT growth was marginal although the profit before tax (PBT) grew by 158.7% yoy. This was mainly due to a Rs76 crore of tax charge in Q4FY2007 compared to a tax write-back in Q4FY2006.
- Its full year tax provision has gone up significantly by 208% to Rs247 crore compared to Rs80 crore. The higher tax incidence is due to a 32.5% jump in the operating profit coupled with the absence of the investment provision amount (which reduces a bank’s tax liability) in FY2007.
- We had witnessed a jump in the net NPAs during Q3FY2007. The bank made higher NPA provisions during the fourth quarter and the asset quality, already at healthy levels, showed further improvement during the quarter. The net NPAs improved to 0.17% from 0.44% on a sequential basis.
- The bank has shown an improvement in its operating performance, its capital adequacy ratio (CAR) is comfortable at 11.3% with the Tier-I CAR at 9.98% and its asset quality continues to remain among the best in the industry. At the current market price of Rs82.4, the stock is quoting at 6.5x its FY2008E earnings per share (EPS), 3.6x pre-provision profit (PPP) and 1.1x book value. The bank is available at attractive valuations, given its low price to book multiple compared with its peers, and an average return on equity of 18.1%. We maintain our Buy call on the stock with a price target of Rs101.
Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs195
Good sales growth but disappointing margins
Result highlights
- The Q1CY2007 net profit of Hindustan Lever Ltd (HLL) grew by 13.6% year on year (yoy) to Rs333.9 crore, which is slightly below our expectations.
- The net revenues grew by 13.8% yoy on the back of an 8.73% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses. The lower growth in the personal product range is disappointing but is expected to pick up in the coming quarters.
- The profit before interest and tax (PBIT) margin showed a contraction of 70 basis points to 13.6%. The contraction in the PBIT margin is attributable to the lower growth in the personal care segment.
- The soap and detergent business has shown a growth of 9.6% whereas the personal care product business has reported a lower growth of 7.4%. Adjusting for the disposal of the Nihar brand, personal products grew by 10.5%.
- The beverage business has shown a growth of 16.6% yoy whereas the processed food business has grown by 26% yoy.
- The operating profit margin (OPM) of HLL contracted by 44 basis points to 11.37% on a y-o-y basis due to a higher raw material cost. The selling and administrative expenses as a percentage of sales increased by 35 basis points which led to further erosion in the margin.
- The soap and detergent segment was able to maintain its earnings before interest and tax (EBIT) margin at 12.1% yoy whereas the EBIT margin in the personal care product range recorded an improvement of 30 basis points to 24.7%.
- At the current market price of Rs195, the stock is quoting at 22.8x its CY2007E earnings per share (EPS) of Rs8.5 and 20x its CY2008E EPS of Rs9.6. We maintain our Buy recommendation on the stock with a price target of Rs280.
VIEWPOINT
TV Today Network
Missing growth drivers
While Aaj Tak has been the leader in the Hindi news genre and has sustained its market share at about 22% (source: TAM Media Research), the other channels of the group haven't been able to garner significant share in their respective genres (Headlines Today—10.7%, Tez—4.6%). Though we believe that these channels had a low investment and incremental operating expenditure (as they leveraged the existing infrastructure of Aaj Tak) and the management claims them to be incrementally profitable, these small initiatives, in our view, do not lay down a foundation for strong growth. Also, competition to its channels has been heating up with the launch of newer channels and the decreasing differentiation of content that has led to pressure on the market share of the existing channels.
The company had about Rs100 crore cash on books at the end of FY2006, which should increase to around Rs150 crore by the end of FY2007. But it hasn't been able to find ways of deploying this cash in any new initiatives (several other players in the industry have actually raised funds for expansion).