Update On Steel Sector


In line with our expectation, domestic prices underperformed global prices with virtually no increase on the backdrop of weak demand, increased domestic supplies and highly competitive imports from Japan and Korea owing to reduced duties under CEPA. At current levels, domestic prices have bottomed-out; however, we don’t see scope for rise more than Rs500/t on the backdrop of weak demand outlook and
increased domestic supplies.
* Continued restocking drove rise in global prices: Domestic HRC prices in Europe rose by ~US$30/t during January to US$654 largely on account of re-stocking. Otherwise, real demand across the markets continued to remain sluggish. Contrary to other markets, flat steel prices in US dipped by US$20/t due to delayed revival in activity post holidays. Our channel checks sounded confident on demand and expect prices to remain firm on the back of revival in re-stocking and real demand. Nucor recently announced hike of US$40/short ton in sheet prices to stimulate the market sentiments.
* Firm outlook on Chinese steel prices: Steel prices further increased US$6/t in January over US$50 rise during preceding two months on the back of strong restocking activity and improved demand in auto and consumer durables sector. We expect prices to remain firm over the next 3-4 months on the back of record low inventory and seasonally strong months for demand. However, the quality of demand remains the key risk since our channel checks attribute the sharp rise to extremely speculative and aberrant factors rather than any real pick-up.
* Domestic prices bottomed‐out; weak demand resists scope for steep increase: JPC’s December data suggests continued deceleration in consumption. Domestic consumption grew by a meagre 1.4% YoY in the month, with overall growth at 3.9% in Apr-Dec’2012 at 54.8mt. Our channel checks paint weak demand outlook, given subdued order bookings, tight liquidity and dearth of enquiries. Despite bottomed-out prices and higher global prices, we expect restricted price increase in the range of Rs500/t in February due to weak demand, increased
domestic supplies and structural shift to elevated imports.
* Valuation and Outlook: The current technical rally in global prices is primarily fuelled by re-stocking, similar to past 2-3 years. However, the recovery period would be elevated due to abnormal contraction in inventories. We maintain our Underweight rating on the sector on the back of underlying weak outlook on demand environment, subdued earnings profile and unattractive valuations.
  Buy Gitanjali Gems Limited For Target Rs.465.00


Gitanjali Gems is one of the largest integrated diamond and jewellery manufacturers and retailers in India.
* Gitanjali Gems Ltd has informed that Aston Luxury Group Ltd., has acquired 15.3% stake in Verite Co. Ltd. in Japan.
* Gitanjali Launches India’s First unique and innovative Gold and Diamond ATM machine, which is a one stop shop for buying medallions, coins, jewellery etc.
* Gitanjali Gems Ltd has demonstrated the results during the quarter; its boisterous growth of Net Profit is steers by 14.68% to Rs. 1516.59 million.
* Gitanjali Gems Ltd allotted 943,396 equity shares of Rs. 10/- each to Bennett Coleman  and Company Limited (BCCL), held by BCCL in the ratio of 1:1 as agreed upon.
* Net Sales and PAT of the company are expected to grow at a CAGR of 26% and 32% over 2011 to 2014E respectively.
* The company has recommended a dividend of Rs 3/- per equity share for the year ended March 31, 2012.
Investment Highlights
Results updates- Q2 FY13,
Gitanjali Group's operates from sourcing of rough diamond, cutting, polishing and distributing, to jewellery manufacturing, which includes designing, mould making, wading, casting, spruce grinding, filing, polishing and setting, reported its financial results for the quarter ended 30 Sep, 2012. The Second quarter witnesses a healthy increase in overall sales as well as profitability on account of launch of a unique and innovative Gold & Diamond ATM machine, which is a one stop shop for buying medallions, coins, jewellery etc.
The company’s net profit jumps to Rs.1516.59 million against Rs.1322.46 million in the corresponding quarter ending of previous year, an increase of 14.68%. Revenue for the quarter rose by 24.01% to Rs.39282.51 million from Rs.31676.41 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.16.47 a share during the quarter, registering at 7.52% increase over previous year period. Profit before interest, depreciation and tax is Rs.2712.56 millions as against Rs.2213.64 millions in the corresponding period of the previous year.
Outlook and Conclusion
* At the current market price of Rs.404.00, the stock P/E ratio is at 5.77 x FY13E and 4.56 x FY14E respectively.
* Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.69.98 and Rs.88.68 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 26% and 32% over 2011 to 2014E respectively.
* On the basis of EV/EBITDA, the stock trades at 2.98 x for FY13E and 2.42 x for FY14E.
* Price to Book Value of the stock is expected to be at 0.99 x and 0.88 x respectively for FY13E and FY14E.
The second quarter witnesses a healthy increase in overall sales as well as profitability on account of powerful combination of exciting products, an enhanced store network and robust infrastructural Support system. We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.465.00 for Medium to Long term investment.


 Buy Yes Bank Ltd For Target Rs.589.00



YES BANK, India’s new age private sector Bank, is a state-of-the-art high quality, customer-centric, service-driven Bank catering to the “Future Businesses of India”.
* Bank’s Capital Adequacy Ratio registered at 18.00% as on 31.12.12.
* CASA deposits grew by 74.9% y-o-y to Rs. 103408 mn taking the CASA ratio to 18.3% as at December 31, 2012 up from12.6% as of December 31, 2011.
* Net profit for Q3 FY13 was up 34.72% to Rs. 3423.10 mn as compared to Rs. 2540.90 mn for Q3FY12 driven primarily by sustained & diversified revenue growth.
* YES BANK added 12 branches across the country during the quarter, taking the total branch count to 412.
* Total Deposits grew by 20.2% to Rs. 564005 mn as at December 31, 2012 from Rs.469291 mn as at December 30, 2011.
* YES BANK has partnered with American Express to offer a credit card to retail and micro SME customers.
* Net Income and PAT of the company are expected to grow at a CAGR of 38% and 29% over 2011 to 2014E respectively.
Investment Highlights
Results updates- Q3 FY13,
The company’s net profit jumps to Rs. 3423.10 million as against Rs. 2540.90 million in the corresponding quarter ending of previous year, an increase of 34.72%. Revenue for the quarter rose 26.70% to Rs. 21336.40 million from Rs. 16840.60 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs. 9.57 a share during the quarter, registering 32.60% an increase over previous year period. Net Interest Income is Rs. 8975.10 millions as against Rs. 6390.10 millions in the corresponding period of the
previous year.
Outlook and Conclusion
According to the RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks', September 2011, Nationalized Banks, as a group, accounted for 52.2 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 21.8 per cent.
*  At the current market price of Rs.526.00, the stock P/E ratio is at 11.44 x FY13E and 9.28 x FY14E respectively.
*  Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs. 35.30 and Rs.43.55 respectively.
*  Net Income and PAT of the company are expected to grow at a CAGR of 38% and 29% over 2011 to 2014E respectively.
*  On the basis of Debt-Equity Ratio, the stock trades at 49.18 x for FY13E and 44.81 x for FY14E.
*  Price to Book Value of the stock is expected to be at 2.43 x and 1.93 x for FY13E and FY14E respectively.
* We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs. 589.00 for Medium to Long term investment.
  Buy Unity Infraprojects Ltd For Target Rs.61 


We recently met with the management of Unity Infraprojects Ltd to get an insight about order inflow scenario in the infrastructure sector as well as outlook on the company. Order inflow continues to remain lower than management's expectations mainly led by delays in finalization of awards due to administrative hassles and clearances. Company is L1 in Rs 5-6 bn worth of projects across roads, building and water segment and expects to get an inflow of Rs 25-30 bn for FY13. Though order inflow has slowed down across the entire sector, we continue to maintain BUY on Unity Infraprojects mainly due to its extremely low valuations. Stock mayunderperform in near term due to lower order inflows but decline in interest rates going forward would be positive for the company in medium to long term.
Valuation and recommendation
* At current price of Rs 43, stock is trading at extremely low valuations of 3.0x and 2.8x P/E on FY13 and FY14 respectively.
* We maintain our price target of Rs 61 based on 4x FY14 estimated earnings.
* Though order inflow has slowed down across the entire sector, we continue to maintain BUY on Unity Infraprojects mainly due to its low valuations. Company is also expected to benefit from decline in the interest rates going forward.
* Key risk to our recommendation and estimates may come from lower than expected execution or order inflow.
  Buy ICICI Bank Ltd. For Target Rs.1,270

Outlook
ICICI Banks Q2FY13 results were above street estimates. Strong credit growth, higher core NII growth amidst stable margins coupled with contained cost helped the net profit (standalone) grew by 30% to Rs 1956 crore, which was significantly higher than expectations. There was a marginal deterioration in asset quality. The Bank has guided for a ~20% growth in advances boosted by its secured retail lending portfolio and increased requirement for working capital from its corporate segment.
The Bank expects NIMs to be maintained around the 3% levels with CASA being maintained at 38-40% and cost to income ratio being contained in the range of 41-42%. Given the strong performance and positive guidance we recommend a BUY on this stock with a SOTP
target price of Rs.1,270 ( P/Adj BV of 2.0X) over the next 18 months. At the CMP of Rs.1069 the stock is trading at 1.8x and 1.7x its P/Adj BV for FY13E and FY14E respectively.
 
Key Takeaways
• Advances and deposits have grown by 17.6% and 14.8% to Rs.2,75,076 crore and 2,81,438 crore respectively. The loan book growth was largely driven by retail (+14% yoy) which has auto loans, home loans and commercial business loans, Adjusted growth in domestic corporate loan book was 27%. While the CD ratio was 97.7%, the CASA deposits share has declined by 160 bps qoq to 40.7%. The company maintained loan book and advances growth at a CAGR of 20% over the forecast period.
• As a result of the strong loan growth and higher NIMs of 3.0 (+40bps yoy), NII grew 32% yoy to Rs 3192.9 crore. Non interest income increased by 17.4% YoY to Rs 2043 crore. However, fee income increased marginally to Rs 1709 crore in Q2FY13. The bank's fee income growth continued to remain impacted by lower corporate banking fee income due to slowdown in new projects and financial closures.
• The net NPA ratio was 0.66% in Q2FY13 (+5 bps QoQ, -14 bps YoY). The provisioning coverage ratio in Q2FY13 was 78.7% (80.6% in Q1FY13 In the corporate segment, during Q2FY13, the Bank classified its loans outstanding to a media company aggregating about Rs.500 crore as non-performing, resulting in an increase in additions to NPAs as compared to the previous quarters. Including the addition of this loan, the Bank saw gross additions of Rs. 1220 crore to its overall gross NPAs compared to gross additions of Rs. 868 crore in Q1FY13.
Recoveries in Q2FY13 were Rs. 558 crore, resulting in net additions to gross NPAs of Rs. 662 crore. The Bank has also written-off Rs. 506 crore of NPAs in Q2FY13.
 
Buy Oriental Bank of Commerce For Target Rs. 410


Oriental Bank of Commerce (OBC) reported a PAT of INR3.3b for 3QFY13, in line with our estimate. Lower tax rate (nil v/s our expectation of 27.5%) compensated for the marginally lower than expected (~3%) operating profit and higher than expected provisioning of INR4.5b (our estimate: INR3.2b). Key highlights:
* Slippages for the quarter were INR8.1b (v/s INR6.5b in 2QFY13). Despite higher slippages, GNPA increased 6% QoQ due to aggressive write-offs (INR3.4b). In 9MFY13, it wrote off loans of INR11.2b (35% of FY12 GNPA).
* Fresh restructuring was to the tune of INR7.4b, but net addition was just INR3.1b, as the bank received Air India bonds of ~INR5b.
* Other highlights: (1) NIM improved 5bp QoQ to 2.84%, (2) Proportion of bulk deposits was 19% v/s 22.2% in 2QFY13 and 30% in 3QFY12, (3) CASA ratio  declined marginally to 23.9%, and (4) de-bulking of balance sheet continues and loan growth remains moderate at 12% YoY.
* Management guidance: (1) NIM of 2.85% (2.95% for 4Q) v/s 2.81% in 9MFY13, (2) Slippages of INR7b-8b in 4QFY13, (3) PCR guidance lowered to 65% from 70% earlier, (4) Loan growth of 14% and (5) in 4QFY13, management expects to restructure INR24b (Including INR12b of SEB).
Valuation and view: Reduction in high cost deposits and easing interest rate in the system will be margin accretive. Further the management has been utilizing one-off gains and higher recoveries from written-off accounts to aggressively clean up the balance sheet. De-bulking of balance sheet are the steps in the right direction. Overall we expect earnings CAGR of ~20% over FY12-15. Buy.