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*Investor's Eye*
[August 13, 2010]
*Share <http://www.sharekhan.com>khan <http://www.sharekhan.com>*
www.sharekhan.com
*Summary of Contents*
*STOCK UPDATE *
*State Bank of India* *
*Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,115
Current market price: Rs2,850
*Price target revised to Rs3,115*
Result highlights
- *Bottom line beats expectations: *For Q1FY2011 State Bank of India
(SBI) reported a net profit of Rs2,914.2 crore, up 25.1% year on year (yoy).
The outperformance can be traced to a higher than expected top line and
contained opex (due to write-back of excess wage hike provision. Meanwhile
gross slippages were high leading to a 6.6% sequential increase in the gross
non-performing assets (GNPAs).
- *NIM expands sequentially: *The reported net interest margin (NIM)
stood at 3.18% up 22 basis points sequentially. The improvement in the NIM
was led by an improvement in the cost of deposits due to a superior current
account and savings account (CASA) ratio coupled with a higher deployment
rate.
- *Higher slippages: *The gross slippages during the quarter stood high
at Rs4,081 crore of which around Rs574 crore was realised as non-performing
assets (NPAs) after the expiry of the agri debt waiver scheme. The
management expects incremental slippages to come off going forward.
- *PCR improves: *The provision coverage ratio (PCR) improved by 247
basis points sequentially to 60.7% (including the technical write-offs).
Considering the extension of the deadline to September 2011, the bank should
be able to reach the stipulation of 70%.
- *Strong advances growth: *In Q1FY2011, SBI?s advances grew by a strong
20.7% yoy to Rs663,828 crore. The growth in the advances was led by a growth
in the large corporate and retail segments. During the quarter the bank
disbursed around Rs7,000 crore to telecommunications (telecom) companies.
Meanwhile, the deposits grew at a much slower pace of 6.8% yoy, implying a
165-basis-point sequential expansion in the deployment rate. The slow growth
in deposits was due to the bank?s efforts to reduce the bulk deposits. The
CASA deposits grew by a strong 32% yoy, leading to an 84-basis-point
sequential increase in the CASA ratio to 47.5%.
- *Maintain Buy with revised price target of Rs3,115: *SBI has reported a
robust Q1FY2011 performance led by a strong growth in advances, expansion in
margins and lower operating expenses. Although the asset quality concerns
persisted during the quarter with gross slippages higher than that in the
previous quarters, yet it is likely that the same shall improve going
forward as the bank booked all NPAs arising out of the agri debt waiver
scheme during Q1FY2011. We maintain our positive stance on the bank in view
of its increasing CASA base, improved cost-to-income ratio and expanding
NIM. At the current market price of Rs2,850 the stock trades at 11.9x its
FY2012E earnings per share (EPS), 5.9x its FY2012E pre-provisioning profit
(PPP) and 2.1x its FY2012E book value (BV). We maintain our Buy
recommendation on the stock with a revised price target of Rs3,115.
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*SHAREKHAN SPECIAL*
*Q1FY2011 Pharma earnings review *
- Most pharmaceutical companies under Sharekhan?s coverage reported a
strong Q1FY2011 led by a robust performance in the export business (one-time
exclusive revenue in Sun Pharmaceuticals [Sun Pharma] and Glenmark
Pharmaceuticals [Glenmark]) and no major extraordinary items (limited
foreign exchange [forex] losses). Select geographies like Russia, Germany
and France grappled under the adverse currency movements. We expect a
revival in the export formulation business on the back of an increased focus
on branded and niche products, and huge abbreviated new drug application
(ANDA) pipeline, particularly for companies like Sun Pharma, Lupin and
Glenmark in FY2011. The domestic formulation business resumed normalcy in
this quarter and the buoyant growth witnessed in the quarter was partially
on a low base of the corresponding quarter of the last year (Q1FY2010). We
expect a similar robust growth trend in Q2FY2011 as well as across FY2011
due to a low base throughout the previous fiscal. The operating profit
margin (OPM) of all the pharmaceutical companies under Sharekhan?s coverage
has been pretty strong led by a better product mix (improved gross
margins).
- Improving balance sheet and working capital cycle has been the mantra
of the quarter. Most companies under our coverage showed a positive bias
towards de-risking their balance sheets as the interest costs declined by
32.6% year on year (yoy) during the quarter. The mid-caps continue to
outperform with another strong quarter. Our result picks, Glenmark, Lupin
and Sun Pharma, delivered a strong growth as compared to their peers. We
expect Glenmark and Ipca Laboratories (Ipca) to perform well considering
their inexpensive valuations and the steady nature of their core business.
However, a slow ramp-up in the key products and a delay in product approvals
could act as dampeners for Lupin in the near term.
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*Regards,
The Sharekhan Research Team* [email protected]
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