Net Interest margin (NIM) of 4.5% is the highest recorded by the bank in the last three years, according a Nomura Equity Research’s Quick Note on HDFC Bank
HDFC Bank delivered another 30% PAT growth quarter (at Rs18.9 billion), in line with Nomura’s estimate and consensus at Rs19 billion and Rs18.9 billion, respectively. Profit after tax (PAT) growth was supported by a healthy 20 basis points (bps) q-o-q improvement in NIM and stable asset quality. Loans grew 22.7% y-o-y supported by strong traction in retail loans. GNPLs (gross non-performing loans) declined 4% sequentially with GNPL ratio of 0.97%. These observations were made by Nomura Equity Research in its Quick Note on the private lender’s performance.
The bank restated some line items (with no impact on the overall PAT) as explained below. The restatement (on RBI's instructions) was driven by the following: the origination cost associated with garnering retail assets which was earlier adjusted from the loan yield is now taken in the opex line and recovery from written-off loans will now flow into non-interest income as against the earlier practice of being adjusted against provisions.
Margins at the upper end of three-year range: Net Interest margin (NIM) of 4.5% is the highest recorded by the bank in the last three years. The 20 bps sequential improvement in NIM is driven by a sharp 205bps q-o-q improvement in CASA (current account saving account) ratio and increase in the loan mix towards retail loans at 56.9% compared to 53.8% in 3Q13.
Retail loans continue to drive loan growth: Robust loan growth (up 22.7% y-o-y against Nomura’s estimate of 24.8% y-o-y) was supported by strong retail loan growth (up 27.3% y-o-y), taking the retail loans’ share up by 308 bps q-o-q. Retail loans growth was supported by personal loans (up 26% y-o-y), credit cards (up 45% y-o-y) and gold loans (up 64.5% y-o-y). LAS portfolio also registered a sharp uptick in 4Q, up 13.8% q-o-q. CV loan growth was understandably sluggish, given asset quality pressure in that segment.
For FY14, the bank looks to grow 5%-6% above the system average, with retail loans growing faster than corporate loans. Within corporate loans, the bank expects a relatively higher growth in FY14 than in FY13, partly from management's strategy of focusing on project loan refinancing market.
CASA improves, helped by both savings and current deposits: CASA growth picked up in 4Q with savings deposits growing 7.7% q-o-q (19.2% y-o-y) and current deposits growing 11.3% q-o-q (15.2% y-o-y). This led to a 205 bps sequential improvement in CASA ratio to 47.4%. The bank added 193 branches of the total 518 added in FY13 in deeper geographies. These are micro-branches with two to three employees per branch. Over the medium term, the operating leverage should kick in from these branches. The bank is now present across 1,845 cities in India, with 53% of its 3,062 branches in semi-urban & rural areas.
Asset quality remains rock steady: GNPLs declined 4% q-o-q with a GNPL ratio of 0.97% (1% in 3Q). Provision cover is at 79.9% and in addition to that the bank has a floating provision book of Rs18.4 billion (of which roughly Rs500 million of floating provision is added in the current quarter). CAR stands at a healthy 16.8% (Tier-1 at 11.1%).
At Nomura’s TP, HDFC Bank trades at 3.9x FY14F ABV of Rs175.5 and 20.1x FY14F EPS of Rs34.3 for an ROA of 1.8% and ROE of 21% for FY14F.
With increased focus on cost reduction and operational efficiency, 45% of the organisations have reduced office space per employee, according to a survey report “Real estate cost optimisation: The road less travelled” by Jones Lang LaSalle India
In the services industry, real estate cost is the second largest cost component after human resources and can be considered significant for other industries as well. India has been seeing a steady increase of real estate costs over the last few years This survey was conducted to reiterate the known facts of cost saving and to make corporate India aware of real estate cost saving opportunities, says Jones Lang LaSalle on its CFO (Chief Financial Officer) survey.
The report predicts that by end-2014, India office rents will grow by 24% over the trough levels of end-2009. The report cautions that real estate cost is expenditure that must be relooked at. Currently, CFOs tend to ignore cost-saving opportunities that could lead to significant value creation in real estate. CFOs also concede the need to build robust information infrastructure for decision making before acquiring offices on rent.
According to Jones Lang LaSalle, one of the common strategies followed by corporates to achieve cost reduction and operational efficiency is to relocate and consolidate/ expand operations to more cost-effective suburban locations. This move not only allows cost optimisation but also provides opportunity for organisations to give better amenities to employees and more space per individual, which in turn improves the operational efficiency within the organisation. On the other side, a substantial 45% of the organisations have also reduced office space per employee recently.
The concept of Alternative Workplace Strategy (AWS) taps into organisational prerequisites, creating an environment that supports and enables employee needs.
This strategically bundled concept results in increased cost savings, more efficient space utilisation, higher productivity and reflects the organisation’s brand value, according to the CFO survey report. In addition, work place Strategies are emerging as a global imperative for optimal employee productivity, satisfaction and retention. Mapping AWS can drive an organisation towards ultimate success, and is essential to overall portfolio and expense management. But despite of these factors and other benefits, only a minority of organisations in India have incorporated an AWS.
The survey reports caution that anticipated growth in office rents across all markets in this uncertain phase has compelled organisations to lease out spaces at a relatively attractive price compared to existing rates. One of the real estate strategies that organisations should consider is early renewal and extension of lease agreements. Most organisations in India have still not explored significant savings which could arise out of restructuring leases. It is also vital that developers and tenants confide in each other whilst renegotiating or restructuring a lease agreement. This amalgamation of extension and early renewal of lease agreements gives the occupier an immediate rental relief.
The report concludes that with 68% of organisations planning to expand their operations in the next five years, occupiers can focus more on structuring their lease agreements when they expand, whilst property owners can possibly look at identifying the sale and leaseback opportunities present to raise funds when they expand.
Cairn India’s focus is clearly back on drilling to further tap the Rajasthan resource—450 wells including 100 exploration wells planned over three years; two new rigs to join in the first quarter of calendar year 2013, taking the count to six; while the management’s plan is to contract five more in FY14, according to a Nomura Equity Research report
Cairn India reported PAT (profit after tax) of Rs25.6 billion for the fourth quarter of FY13 which was in line with Nomura’s forecast of Rs25.9 billion, but was 8% below Bloomberg consensus. EBITDA was flat q-o-q, but PAT fell 23% q-o-q due to higher exploration costs (dry well write-off in Sri Lanka, 3D seismic in South Africa) and higher forex gains in 3Q.
The company remains confident on 200-215kbpd FY14F exit guidance. (Mangala to maintain 150kbpd, Bhagyam reaching 40kbpd in 2H, Aishwariya reaching 10kbpd, and balance from Barmer Hill—the Field Development Plan (FDP) approval still awaited).
Cairn India’s focus is clearly back on drilling to further tap the Rajasthan resource (450 wells including 100 exploration wells planned over three years; two new rigs to join in the first quarter of calendar year 2013, taking the count to six; while the management’s plan is to contract five more in FY14). Cairn is targeting net capex of $3 billion over three years ($1 billion each year; 80% in Rajasthan). Even as its capex target looks ambitious (total gross investment of $3.8 billion until date in Rajasthan), Cairn would have plenty of cash left, according to Nomura Equity Research ($3 billion cash in hand, and likely to generate
Around $5.6 billion cash from operations over three years).
Nomura is more conservative on the Rajasthan block production profile and assumes higher capex in line with the new guidance. It assumes further ramp-up to only 230kbpd (earlier 245kbpd; company target 300kbpd) and also assumes sharper declines. The brokerage has FY14/15F EPS to decline by 2%-4% and has conservatively assigned a 17% discount to cash (in line with current dividend distribution tax).
Nomura highlights the following points from Cairn management’s conference call after announcing its 4Q numbers:
• Reported PAT of Rs25.6 billion (up 17% y-o-y, down 23% q-o-q) is in line with the brokerage’s estimate of Rs25.9bn, but 8% below Bloomberg consensus.
• Sequentially, production declined 1% and EBITDA decline was also 1%.
• Key reasons for the 23% decline in PAT q-o-q include: (1) higher exploration cost (dry well write-off of Rs2.7 billion and Rs0.7 billion expensed on 3D seismic in South Africa and
(2) large forex mark-to-market gains booked in 3Q, offset by higher other income in 4Q.
• FY13 EPS increased by 51% y-o-y, driven by a 32% increase in the Rajasthan RJ block production.
• The company announced a final dividend of Rs6.5 per share. Including interim dividend
(Rs5/share) the total dividend payout was 21.2%, which is in line with the 20% guidance.
• The company recently renegotiated the sales contracts with domestic refiners (for over
200kbpd). Based on improved pricing, Cairn has lowered its guidance on quality discount for the Rajasthan crude from earlier 10%-15% to now 8%-13%. Based on the brokerage’s numbers, Nomura assumes a discount of 13%, which is at the upper bound of indicated range.
According to Nomura, Cairn management again reiterated Rajasthan block production guidance of 200-215kbpd for FY14.
• Mangala – Cairn expects to maintain the currently approved peak production rate of
150kbpd. Of the approved 162 development wells, 157 wells have already been drilled.
In addition to five wells, Cairn is planning 48 infill wells, for which operating committee approvals are in place. These infill wells would later be used for EOR purposes.
• Bhagyam – While well deliverability has been below expectations, in place volume has surprised management positively. Of the 81 wells approved in FDP, 66 wells have been drilled. Apart from balance 15 wells, capex approvals are in place for further 15-18 wells. With additional around 30 wells (with higher deliverability) the company expects to reach approved rate of 40kbpd in 2H FY14.
• Aishwariya – Production started in March 2013. To date, 11 development wells have been drilled, and two have been brought into production. With initial results in line with the management’s expectations, Cairn India expects to reach approved 10kbpd in a few months.
• Barmer Hill – The company has submitted the FDP, and expects production to commence in FY14, subject to FDP approvals.
According to the Cairn India management, the company seems focused on tapping the Rajasthan block upsides. To expedite the approval process, the company has proposed to have an integrated development plan approach to the Rajasthan block, with annual capex approvals, rather than current tedious system of field wise approvals. The company has also recently applied for extension of PSC period in line with PSC guidelines.
• Management is targeting over 450 wells in the next three years—these include 100 exploration wells and over 350 development wells.
• Cairn currently has four rigs (two drilling and two completion rigs). Two more rigs are scheduled to join in 1Q CY2014, taking the count to six. In addition, the company is planning to contract further five drilling rigs, taking total rig count to possible 11.
• Over the next three years the company is targeting capex of $3 billion ($1 billion each year, with 80% in the Rajasthan block). The capex target looks ambitious. Nomura believes that compared to planned net investment of $3 billion over the next three years, total gross investment in the Rajasthan block to date has been $3.8 billion.
• Despite the large indicated capex, Cairn would continue to have significant cash in hand. It is a zero debt company, and has cash balances of $3 billion. Nomura expects Cairn India to generate cash-flow from operation of $5.6 billion over the next three years.
Nomura maintains that despite ambitious capex targets, there remains enough scope to raise dividend payout (payout in FY13 at 21.2% including dividend distribution tax) and/or share buyback (the brokerage believes that the share buyback would be a good venue to buy back the remaining 10.3% stake held by Cairn Plc).
Nomura Equity Research has adjusted its model for actual FY13 numbers. It has reduced its FY14/15F EPS estimate by 2% and 4%, respectively driven by lower production and higher provisions for exploration related write-offs and partly offset by higher other income.
The brokerage has marginally reduced its near-term production estimates. Its revised average Rajasthan production for FY14 is 188kbpd (from 190kbpd) and for FY15 is 216kbpd (from 215kbpd). It assumes RJ production to exit FY14 at 200kbpd in-line with lower bound of management target range of 200-215kbpd.
With higher exploration capex, exploration write-offs for dry wells would likely increase. Nomura assumes higher exploration write-offs of Rs14 billion (earlier Rs 2.5 billion) for FY14 and Rs15 billion (earlier Rs5 billion) for FY15F.
Nomura continues to value Cairn India on a sum-of-the-parts (SOTP) valuation methodology. As per this methodology, the brokerage has calculated the NAV of key fields under production—MBARS (Mangala, Bhagyam, Aishwariya, Rageshwari & Saraswati) and 20 other key discoveries (mainly Barmer Hills) using a discounted cash flow (DCF) methodology. The brokerage was earlier valuing recoverable resources in these 20 other discovered fields ((178mmboe - Cairn share 70%) at $6/boe (use 50% recovery).
Nomura’s NAV for these discovered fields is Rs202 per share (earlier Rs229/share). It is more conservative on the Rajasthan block production profile, as it assumes further ramp-up to only 230kbpd (earlier 245kbpd; company target 300kbpd) and also assumes sharper declines.
Nomura continues to value prospective resources of 1.9bboe (assume 10% recovery) at $6/boe. We assign a value of $6/boe to exploration upsides (prospective recoverable resources of 530mmboe—Cairn share of 371mmboe —Assume 50% recovery).
Nomura values large net cash at 17% discount (in line with current dividend distribution
tax). Earlier the brokerage was valuing cash at book value.
Its SOTP based NAV for Cairn India is Rs351/share while its revised target price is Rs350.
According to the brokerage report, Cairn India could face the following downside risks
• Delays in government approvals and delays in production ramp-up.
• Lower-than-expected oil prices and higher discounts for waxy Rajasthan crude
• Further increase in cess on oil production.