Union Bank of India -Cheap can remain cheap : Macquarie Research

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Union Bank of India
Cheap can remain cheap
Event
 Downgrade to Underperform: We expect Union Bank’s ROE to witness
severe pressure and fall from the 18-20% seen in FY08-11 to 12-13% by
FY14E given slower growth and asset quality issues. Downgrade to
Underperform with a revised TP of Rs185.

HDFC Bank- Good things in life rarely come cheap : Macquarie Research

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HDFC Bank
Good things in life rarely come cheap
Event
 Our top pick and the only Outperform in the banking space: HDFC Bank
is our top pick in the banking space. We reiterate our Outperform with a
revised TP of Rs625.
Impact
 Asset quality expected to remain exceptionally good: HDFC Bank’s
experience on loss rates in various retail product categories continues to be
even better than what it had budgeted. Current credit costs of 1% are likely to
stabilise more around 120bps over the longer term, according to
management. It continues to judiciously make floating provisions which help it
create a countercyclical buffer. The NPL coverage ratio, including floating
provisions, is at ~125%+ – by far the best in the sector. It has largely avoided
stressed sectors, exposure to infrastructure is largely in the form of working
capital loans and is lower than its peers, and in the CV segment it isn’t
exposed much to the mining belts like Karnataka, Orissa etc. Overall we don’t
expect that credit costs will spike up, but will be around 120bps.
 Liquidity and capital position – pretty comfortable: Loan growth has
broadly matched deposit growth and moreover HDFC doesn’t have a large
dependence on wholesale funding. The current Tier-1 ratio at 11.4% is very
comfortable and its internal Basel-III analysis submitted to RBI also shows
that the impact on capital ratios is minimal. It doesn’t have any hybrids in Tier-
I and other issues like investment in subsidiaries, intangibles etc. are not
there. So we don’t envisage any risk of equity dilution in the next 12-18
months.
 Growth continues to surprise us: HDFC Bank for the past several years
has grown at least 500bps faster than the system. Loan growth of 22% YoY in
3Q12 was much higher than system loan growth of 17%. Growth so far has
been predominantly driven by retail assets. It is surprising that HDFC Bank
continues to grow its retail portfolio like CVs, 2-Wheelers, personal loans and
credit cards at impressive growth rates whereas other banks continue to
struggle in these segments.
Earnings and target price revision
 We have reduced EPS by 3% and 6% for FY13E and FY14E on account of
slightly lower margins and higher opex. TP is marginally adjusted upwards by
2% owing to cost of equity changes.
Price catalyst
 12-month price target: Rs625.00 based on a Gordon growth methodology.
 Catalyst: Strong earnings growth and return ratios
Action and recommendation
 Expensive valuations to stay: HDFC Bank’s expensive valuations are
unlikely to come down owing to its strong fundamentals relative to its peers.
We reiterate as our top pick with a TP of Rs625.

Accumulate Madras Cement : Motilal Oswal

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We recommend to Accumulate Madras Cement Ltd (MCL) with
one year price target of `203 - 7xFY13E EV/Ebitda multiple.
INVESTMENT ARGUMENTS:
􀂄 South India based player enjoying good prices & Ebitda/ton
􀂄 Operational efficiency gives best EBITDA of Rs.1200/ton
􀂄 Free cash flow of Rs.700crs in FY13 as large capex is behind
GROWTH DRIVERS
South India based player, enjoying handsome prices & Ebitda/
ton : Madras Cement is a pure south India based cement player with
50% of sales from Tamil Nadu, 25% from Kerela, 13% from Andhra
Pradesh and 7% from Karnataka. South India is plagued with massive
overcapacity coupled with negative demand growth. Hence logically,
cement prices should be lowest. However, cement prices in south are
highest in the country. Hence, the argument that South is weakest
region in India considering demand-supply-price dynamics falls flat.
Ebitda/ton @best in the industry due to operational efficiency:
Due to better operating efficiencies, Madras Cement emerged as the
most cost efficient player in India with the best-in-the-country Ebitda/
ton. On a 5-year basis, MCL generated an average ebitda per ton of
Rs.1190 as compared to `881 for ACC, `1000 for Ambuja Cement,
`913 for Ultratech and `880 of India Cements. Superior profitability
has been due to combination of several factors such as higher realization
in south, better operating efficiencies and Capitive Power Plants.
Healthy FCF will make Madras Cement a cash machine: MCL
will have strong Free Cash Flow generation in years to come. Installed
capacity of 13MTPA and dispatches less than 8MTPA (66% capacity
utilization) leave sufficient room for growth without additional capex.
80% of capex for another 2MTPA plant has already been expended
thus taking its total capacity to 15MTPA tons in FY14. Madras Cement
will be generating FCF in excess of `5bn in FY12 and `7bn in FY13
with potential to achieve a debt-free status over the next 3 years
Valuations & View: At the current market price, Madras Cement is
quoting at an EV/Ebitda of 5.7x on FY13e earnings. Barring crisis
year of 2009, Madras cement is available at its lowest ever EV/Ebitda
multiple over the last 10 years. Over the last 3 months, southern India
has witnessed double digit growth in dispatches thus making pure south
based players more appealing. We value Madras Cement at EV/Ebitda
multiple of 7x thus resulting in an EV of `67bn, market capitalization
of `48bn and a market price of `203/share. We believe current price
offers reasonable upside potential for investors.

State Bank of India Size doesn’t matter : Macquarie Research

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State Bank of India
Size doesn’t matter
Event
 Maintain Underperform with TP of Rs1,700: We remain bearish on SBI
mainly due to asset quality issues which are unlikely to abate in the near
future. Maintain Underperform.

Oriental Bank of Commerce - Risk reward favorable; upgrade to Buy; company update; upgrade to Buy; : Edelweiss PDF link

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Oriental Bank of Commerce (OBC IN, INR 255, upgrade to Buy)

We had downgraded our recommendation on Oriental Bank of Commerce (OBC) to ‘REDUCE’ in August 2011 (refer our note ‘Banking - Macro challenges getting serious’ dated August 29, ‘11) fearing earnings downgrade due to its vulnerability to asset quality risk (chunky power exposure to SEBs) and margin pressure (short term/wholesale dependant borrowing profile). Since then, consensus has revised earnings down 25% and the stock has also underperformed Bankex by 26%. At 0.7x FY13E adjusted book, we believe the risk-reward has turned favorable—given our view that wholesale rates will settle at lower levels in FY13 and slippages are close to peaking out (higher credit cost already built into consensus estimate). Hence, we upgrade our recommendation to ‘BUY’ with a TP of INR 337 (0.9x FY13 ABV).

Jagran Prakashan -Acquires Nai Dunia in an all-cash deal; Maintain BUY :Religare research

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Jagran Prakashan
Acquires Nai Dunia in an all-cash deal; Maintain BUY
JAGP, which owns India’s largest read daily Dainik Jagran, has acquired Nai Dunia
(ND) – the country’s ninth largest Hindi newspaper. This acquisition gives JAGP a
much-awaited entry into the underpenetrated and fast-growing markets of Madhya
Pradesh (MP) and Chhattisgarh (CG), and brings consolidation in the print media
industry. Financial highlights of the deal: (a) JAGP has valued ND at an enterprise
value of Rs 2.25bn (incl. ~Rs 250mn debt), or ~2x EV/sales; (b) JAGP is entitled to
tax benefits of ~Rs 800mn owing to ND’s accumulated losses of Rs 2bn-2.5bn.
While the valuation is on the higher side given ND’s negative EBITDA, we feel this
acquisition is a good strategic fit for JAGP on account of: (a) its geographical
expansion in Hindi-speaking states, (b) reduction in gestation period for expansion in
new territories and (c) cost and revenue synergies. Maintain BUY with TP of Rs 135.
v Underpenetrated MP and CG markets offer good growth: Literacy rates of MP
and CG are lower than the national average, and so is newspaper penetration, with
sole readership at a mere 15%. With rise in disposable incomes owing to increased
GDP growth rates (~6.5% for MP, 9.5% for CG), these markets offer good growth
potential.
v JAGP’s ongoing litigation in MP necessitates inorganic route: We note that
JAGP has wanted to enter MP and CG since 2005. However, it couldn’t use its
flagship brand Dainik Jagran due to family litigation and hence, had to either
introduce a new brand or acquire an established player like ND.
v ND – a good fit: Nai Dunia is published in the Hindi heartland states of MP and CG
with a circulation of 0.5mn copies and a readership base of ~2mn, which has more
than tripled over the last five years. While ND’s current readership share is 23%, its
advertisement market share is ~15%. Its FY11 revenues were at Rs 1bn (FY12E:
Rs 1.1bn) with 70‒75% generated from advertising (mostly local). The company
incurred an EBITDA loss of Rs 250mn in FY12.
v Turnaround to be quick, aided by synergies: On the revenue side, JAGP expects
to increase the contribution from national advertising to ND’s revenues from <25%
now to closer to its own 40% levels. On the cost side, JAGP will benefit from
reduced newsprint and manpower costs.
v Deal financial summary: The deal was closed for an all-cash consideration of
~Rs 2.25bn (including debt). However, JAGP stands to gain tax benefits to the tune
of Rs 0.8bn owing to ND’s accumulated losses. Post the deal, JAGP has Rs 1bn of
net cash on its books.
v Maintain BUY with a TP of Rs 135: We believe that this acquisition is another step
in the direction of consolidation in the print media space, wherein smaller regional
players will be acquired by larger national players like JAGP, owing to both revenue
and cost synergies. We continue to like the print media space because of: (a) healthy
ROEs (25% +), (b) good dividend payouts (45‒50%) and (c) attractive valuations
(currently 12.7x FY14E). Maintain BUY with a TP of Rs 135 (17x FY14E).

ICICI Bank Where is the upside? Downgrade to Neutral : Macquarie Research

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ICICI Bank
Where is the upside? Downgrade to
Neutral
Event
 Downgrade to Neutral on valuations, TP unchanged: After the sharp rally
recently, valuations look stretched. Downgrade to Neutral from Outperform.
Impact
 Restructuring to pick up, negative surprises can’t be ruled out: Going
ahead, the quantum of restructured assets is expected to pick up. We don’t
expect asset quality to deteriorate to the extent seen in the previous cycle.
However there is stress in certain mid-corporate and power sector exposures
that ICICI has put on its books and are likely to be restructured over the course
of the next few years.
 Aggressive guidance on credit costs: Management guidance on FY13E
credit costs (provisions on NPLs as a percentage of advances) to be around
75bps marginally higher than FY12E is aggressive in our view. If ICICI
manages to deliver these credit cost numbers on the back of higher
restructuring, we believe the market is not going to take it well. We have
conservatively built in 110bps of credit costs into our numbers. If we build in
75bps into our model, our earnings estimates would be roughly 11% higher for
FY13E.
 Growth remains a worry: Management continues to be a bit cautious on
growth. Performance with respect to the retail segment has been very
unsatisfactory and much of the growth in the past two years has come from the
corporate segment, particularly infrastructure. The bank has been struggling to
grow its retail book compared to some of its peers who have done very well.
 Risk of equity dilution is less: The proposed Basel-III norm is unlikely to
result in equity dilution for ICICI, at least in the early years of implementation as
ICICI is sufficiently capitalised. That isn’t the case with most of its peers who
would come to the market over the course of next two years to raise capital.
Hence the risk of equity dilution is also pretty low over the next two years in our
view. By that time we believe there could be some repatriation of capital from
the Canada business further giving some cushion. Management has guided
that, according to their internal calculations, they don’t need to raise any equity
capital for the next three years.
Earnings and target price revision
 We marginally increase FY13E and FY14E EPS by 3% and 1 % due to slightly
lower credit costs. No change in TP.
Price catalyst
 12-month price target: Rs855.00 based on a Sum of Parts methodology.
 Catalyst: Increase in restructured assets quantum
Action and recommendation
 See limited upside from current levels: ICICI Bank now trades at 1.5x FY13E
P/BV which is inline with its historic averages. Neutral.