HDFC Bank to buy CBoP in all-stock deal

HDFC Bank, India’s third largest bank, is all set to buy Centurion Bank of Punjab in an all-stock deal.

The boards of both the banks will meet on Saturday to finalise the contours of the deal, which will be the biggest banking merger in India.

The banks’ top brass have been involved in marathon meetings in the past two days to work out the details of the proposed merger.

The swap ratio will be decided later. Initial calculations suggest that a Centurion shareholder will get one share of HDFC Bank for every 20 shares, according to sources familiar with the development.

However, the exact ratio will be arrived at after a consensus, said an HDFC executive. Post the deal, HDFC Bank will get around 400 branches and thus surpass ICICI Bank in terms of branch presence.

More importantly, the bank’s presence in the north and south will receive a boost. Centurion has nearly 170 branches in the north and around 140 branches in the south, whereas HDFC Bank has 250 branches in the north and 150 in southern India.

“We will also acquire a strong small and medium enterprises portfolio from Centurion,” the executive added. HDFC Bank has almost 10 million customers compared with Centurion’s 2.5 million.

The proposed merger has been spearheaded by Housing and Development Finance Corporation chairman Deepak Parekh, Centurion Bank of Punjab chairman Rana Talwar and Ambit CEO Ashok Wadhwa, said a senior HDFC Bank executive.

The shares of Centurion, which rose sharply yesterday due to the merger buzz, declined today by 1.14 per cent to end at Rs 56.40 on the Bombay Stock Exchange. The HDFC Bank scrip closed lower by 4.40 per cent to Rs 1474.95

Via Business Standard

CBoP, HDFC Bank, HCC, IPCA Labs

CBoP, HDFC Bank, HCC, IPCA Labs

India Strategy, HDFC Bank, Idea Cellular, Satyam, Centurion Bank of Punjab, ONGC, Glenmark, PFC

India Strategy, HDFC Bank, Idea Cellular, Satyam, Centurion Bank of Punjab, ONGC, Glenmark, PFC

CBoP, Corporation Bank, Educomp, Glenmark, India Banks, Infoedge, Moser Baer, ONGC, Purvankara, Ships, Unitech

CBoP, Corporation Bank, Educomp, Glenmark, India Banks, Infoedge, Moser Baer, ONGC, Purvankara, Ships, Unitech

Centurion Bank of Punjab

Centurion Bank of Punjab

Centurion Bank of Punjab: Buy

Among mid-size private sector banks, Centurion Bank of Punjab (CboP) presents a good investment opportunity for investors with both short and long holding time horizons.

The stock is currently quoting around Rs 45 (face value of Re 1) and at these levels, the valuation is out of tune with multiples for banks in this or other categories.

The latest per share earnings, for instance, is around 85 paise and the book value per share is around Rs 8.

Therefore, the valuation multiples (price-earnings multiple of 60 and price-book value of 6) based on historic earnings are stiff indeed.

But by entering the stock now, investors could be well placed to reap the rewards of all the efforts of the past four years in first stabilising the bank’s business and then rendering it fit for growth.

After the almost headlong rush into impaired assets in the second half of the 1990s and consequently the stabilisation/recapitalisation in the first years of the new decade,

CBoP appears quite well positioned now to capitalise on the large and rapidly growing business opportunities.

Vote of confidence

The fact that the Reserve Bank of India has approved the merger of the loss-making (but well-networked in a particular region) Lord Krishna Bank with CBoP can be taken as a strong vote of confidence in the strength and growth prospects of CBoP’s underlying business.

It is proof that the bank’s balance sheet is now strong enough to absorb a loss-making bank and also that its business model is robust enough to make good use of the merging bank’s branch network for further expanding geographical and business reach.

Lord Krishna Bank will add about 120 branches with more than 80 per cent of them in Kerala/other southern states where business prospects traditionally have been good.

The earlier merger of Bank of Punjab with Centurion Bank in October 2005 also appears to have been successful, if the growth in key parameters such as deposits, advances in the past two years is any indication. Long-term investment prospects, therefore, look good.

The strong foundation, the return to sustainable profitability and the scalable business model also mean that a bank such as Centurion could be a key takeover target when the banking sector is opened up for more foreign participation in 2009.

Investors in the Centurion Bank stock may benefit from such a development, even in the short/medium term.

Business operations

The bank seems to have developed a niche in retail lending/distribution of financial products and at the same time has substantially stepped up corporate lending. This overall balancing could stand it in good stead as it seeks to scale up business.

Retail loans (two-wheeler loans, commercial vehicle financing, personal loans, housing loans, etc), which formed as much as 90 per cent of total advances in 2005, have declined to around 70 per cent currently. Corporate loans have increased their share of total advances from 8 per cent to around 30 per cent in the same period.

While the wholesale/corporate/SME relationships provide stability to the revenue stream though margins could be lower, some retail segments generate higher margins.

The bank has a relatively high net interest margin of around 4.6 per cent. The non-lending activities — distribution of financial products such as mutual funds, insurance — provide a platform for capturing income flows from high growth financial services activities.

Non-interest income accounts for around 25 per cent of the bank’s total income, which is high for a bank of Centurion’s size. It is notable that only ICICI Bank, with its much bigger scale of operations, has such a high share of non-interest income.

While such high non-interest income is welcome in one sense, it could also add volatility to the overall earnings in a business downturn.

Also, such fee-generating activities imply a higher operating leverage generally for banks — evidenced by higher employee costs.

Centurion’s employee costs, for instance, are relatively much higher at 16 per cent of total expenses against around 10 per cent for comparable banks.

Business growth, Risks

Advances have grown at an annual average rate of 125 per cent in the past two years. Deposits also have largely kept pace growing at around 105 per cent.

The bank appears to have contained growth in NPAs despite such rapid asset build up with net NPAs at around 1.3 per cent in March 2007 down from 2.5 per cent in March 2005.

Provisioning coverage for NPAs has come down from 65 per cent in March 2005 to 55 per cent in March 2007.

The increased focus on corporate lending has probably helped in lowering net NPAs despite lower provisioning coverage.

Nevertheless, net NPAs remaining above 1 per cent is a cause for concern. A higher CASA share in total deposits (around 30 per cent now) also would provide more comfort.

Centurion Bank

Centurion Bank

Centurion Bank of Punjab

Centurion Bank of Punjab

Nestle, Indraprastha Gas, IOC, CBoP, Gokaldas

ENAM recommends OUTPERFORMER on Nestle

We believe Nestlé India has a significant intrinsic value (~Rs 2056 per share) and value unlocking will unfold in stages on successful introduction of brands / products from its parent¿s global portfolio and an improvement in its existing portfolio¿s reach and affordability in the rural markets. At CMP (Rs.1143) Nestlé India is currently trading at P/E of 24x CY08E and EV/EBITDA of 14x CY08E, close to its long-term one-year forward valuations. Given the growth momentum and EBITDA margin (pre provisions) expansion in Q1CY07, we believe the company has the potential to positively surprise consensus growth expectations in the interim term. We maintain sector Outperformer rating on the stock.


ISEC recommends BUY on Indraprastha Gas

IGL reported impressive 35% YoY growth in Q4FY07 recurring net income to Rs401mn, the best ever quarterly performance. Recurring net income was 11% higher than our estimates on the back of higherthan- expected volumes and margins. The company's growth prospects are bright based on accelerated conversion of private vehicles to CNG and incremental demand of 1,000 CNG buses due to Commonwealth Games in '10. Valuations are attractive as the stock has fallen 14.1% YoY and has underperformed the BSE-200 45% in the past one year. Maintain BUY.

ISEC on Indian Oil Corporation

Indian Oil (IOC) reported recurring net income of Rs29bn in Q4FY07 as against Rs8bn in Q4FY06. The impressive 262.5% YoY growth was post pro-rata adjustment of oil bonds worth Rs65.7bn issued to IOC in Q4FY06 for full FY06. However, reported net income at Rs16.1bn was down 60.1% YoY. Overall, fall in crude prices reduced gross underrecoveries, which, along with the surprise increase in subsidy relief through upstream sharing and oil boosted IOC¿s performance. Further, the healthy outlook on refining margins and expected reforms on cooking fuel subsidies is a key positive for IOC. Added drivers include the impact of the company¿s petrochemicals business (paraxylene, PTA) and the upside from oil & gas finds from IOC¿s E&P assets. The stock rose 13.2% QoQ, outperforming the Sensex 7.7% QoQ based on the benign subsidy sharing scheme implemented by the Government. The stock is currently trading at FY07 P/E of 8.3x.

ENAM on Centurion Bank of Punjab

Our FY08 numbers take into account the LKB merger, Bank of Muscat preferential allotment and a part of warrants conversion by Sabre Capital. This will keep the reported ROE low, but the ROA will likely be maintained at 0.8%. Given that valuations at 3.6x FY09E are rich, the stock may underperform in the short term. However, along with the strong growth prospects and high execution capability, the bank is also a strong takeover candidate post 2009. Hence, valuations are
likely to remain high in the coming years. Maintaining our sector Outperformer rating on the stock.

ENAM on Indraprastha Gas

In our view, market is largely ignoring IGL¿s business franchise, itsability to manage the costs and seems to be concerned on the impactregulations. However, at current valuations (9.8x FY08E EPS), theconcerns seem to be overdone, making it one of the mostinexpensive stock in oil & gas universe. We maintain our sectorOutperformer rating on the stock.

Merrill Lynch on Gokaldas Exports

Valuations at 10x FY08E PER, look undemanding, being at the lowest end of thehistoric PE band (12-15x). However, with expectations of an earnings slowdown inFY08, these multiples may just about be right, for now. We note that impendinglabor reforms and the big domestic opportunity remain as key long term growthdrivers for Gokaldas. However, in the absence of any near term triggers and theoverhanging concern on Re appreciation, we maintain our Neutral rating

JP Morgan - Torrent Pharma, Centurion Bank of Punjab

Torrent Pharmaceuticals Ltd, Overweight

Torrent has delivered 63% profit growth in FY07 and will double profits over next two years on the back of strong domestic and Brazilian branded business. We reiterate that this leverage will continue to drive growth even beyond FY09, as besides these markets, Torrent will drive growth even from other markets.

We increase our FY08 and FY09 estimates 8% and 5% respectively and set a new Mar-08 target price of Rs330, based on 15x FY09E EPS. The key risk to our call is if Heumann or domestic operations perform worse than our expectations.

Centurion Bank of Punjab, Overweight

Provisions more than doubled sequentially to Rs 563 mn .About Rs 132 mn was due to one time catch up impact of RBI's requirement for additional standard provisioning on certain categories of loans which pulled down pre-tax profit growth to 74% yoy. High effective tax rate of 40% resulted in 8% yoy growth in net profit.

Near term catalyst for the stock is lower foreign holding after RBI approves the LKB merger.

We are reviewing our numbers.


Consumer
India Consumer: Off the Shelf
Key highlights of our fourth edition of the consumer fortnightly:

Domestic : 1) HLL extends its premium soap brand 'Dove' into hair care segment with the launch of shampoos, conditioners and treatments under this brand to counter rising competition from L'Oreal in premium segment, 2) Godrej Consumer is planning to enter the shampoo segment with the launch of a mass market brand in near future. This is likely to intensify competition in this space which is currently dominated by HLL and Procter & Gamble, and 3) Diageo-Radico JV launches Masterstroke whisky targeting mid-premium segment in Maharashtra.

Key commodity trends: Palm oil prices continued their uptrend rising almost 5% over the fortnight. Expected tightness in soyabean (closest substitute) supply and increased demand for bio-diesel is leading to new highs for palm oil (now at over M$2500/tonne). On the other hand prices for wheat softened by 2% over the past fortnight on the back of steady crop arrivals.

International: 1) Luxury brand Christian Dior Couture is planning to set up its subsidiary in India and expand its operations, reflecting confidence of foreign luxury brands in India's fast growing luxury retailing market (35-40% growth p.a.), 2) UK based Cobra beer has announced plans to set up two Greenfield breweries in India.

Ramakrishna Forgings, EKC, Centurion Bank of Punjab, BPCL, Offshore Service Providers

Man Financial says Ramakrishna Forgings's topline is higher than
expectations, but faced pressures in the bottom line due to higher
depreciation and tax provisioning. They maintain a BUY with a target of
197

ICICIDirect recommends a BOOK PROFITS on EKC. At the current price of Rs
1063, the stock is richly valued at 20.79x its FY09E earnings per share of Rs 51.12. They believe that investors should book profits.

SSKI recommends OUTPERFORMER on Centurion Bank of Punjab

CBoP has reported Rs280m net profit (9% yoy growth) for Q4FY07 in line with our expectation of Rs282m. Higher standard asset provisioning led by one time hit of Rs198m (as expected) largely offset the benefits of the continued momentum in core income streams . Given its inherent duration mismatch, the bank was vulnerable to rising deposit rates leading to pressure on margins. CASA ratio also declined to 31% (decline of 300 bps QoQ ) considering the rapid balance growth . A latent significant operating leverage continues to be the key attractions of the bank. We have marginally downgraded numbers by 2.5% and 1% in FY08 and FY09 to reflect the higher provisioning. Going forward, we expect 46% CAGR in CBoP's earnings over FY07-09E. Though valuations of 4.2x FY08E and 3.8FY09E Adj P/BV appear expensive, they do not price in the high RoE generating capacity of the retail focused business model and low market cap/assets vis-à-vis peers . Maintain Outperformer.

SSKI Recommends OUTPERFORMER on BPCL

Bharat Petroleum Corporation's (BPCL) Q4FY07 results ¿ net profit of Rs 6.7 bn ¿were in line with our estimates of Rs 6bn. During the quarter, BPCL received Rs 9 bn in the form of oil bonds and Rs 11.84bn as upstream share that more than compensated for the negative impact of total under recoveries of ~Rs18.5bn. We upgrade the stock to Outperformer to factor in an expected improvement in fuel marketing margins driven by lower crude prices. Reiterate outperformer with a price target of Rs431.

Emkay recommends investing in Offshore Service Providers

We believe that fundamentals for offshore service providers remain extremely strong. Adding icing on the cake is the long term nature of contracts, which we believe provides unprecedented visibility of future earnings. We believe that the Indian offshore oil field services are very attractively valued with the group trading at an average two year forward P/E multiple of 8X. We believe a confluence of strong fundamentals, high earnings visibility, attractive valuation and strong possibility of re-rating should ensure superior stock performances by the entire pack of Indian offshore oilfield service providers. We initiate coverage on the sector with a positive view and BUY ratings on all the companies under coverage. Our top picks in the sector remain Aban, Great Offshore and Garware Offshore.


Sharekhan Recommends Aurobhindo Pharma

At the current market price of Rs684, Aurobindo is trading at 14.9x its FY2008E and 12.0x its FY2009E earnings. We initiate coverage on Aurobindo with a Buy recommendation and a one-year price target of Rs914 (an upside of 34% from the current levels). The price target discounts the FY2009E earnings by 16x.

Kotak - BPCL, Centurion Bank of Punjab

Kotak - BPCL, Centurion Bank of Punjab

Deutsche - Centurion Bank of Punjab ,Deutsche - Development Credit Bank (DCB), HSBC - TCS

Deutsche - Development Credit Bank (DCB)

Deutsche - Centurion Bank of Punjab

HSBC - TCS

IDBI Capital - Centurion Bank of Punjan & Ballarpur (BILT)

Download here

Centurion Bank of Punjab

Outperformer - Download here

Various Reports

Adlab Films - ICICI

ARO Granite Industries

Centurion Bank of Punjab

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Thanks Akash