Companies & Sectors
HSBC says private banks to start outperforming public banks

HSBC says its time to buy private sector banks over public sector banks based on better bottom-line performance, quality of growth, higher margins

HSBC Global Research says the time is right for private banks to start outperforming PSUs. In a report dated 11th November, it underscores this proposition by pointing out the difference in the bottom line performance in Q2FY11(in its coverage universe) between private and public sector banks. While private banks grew 30%, PSU banks grew just 8%.

The second thing going for private banks, the report says, is that while asset quality pressures will continue and top line growth will moderate for PSU banks, the opposite will happen for private banks. Some other parameters on which private banks score over PSUs, HSBC says, are:

- Loan growth is trending sharply upwards for private banks.

- Margins are higher.

- Gross non-performing loans (NPLs) are on the decline, which will lead to lower provisioning pressure.

- Return on Assets (RoAs) are higher.

- Higher deposit growth.

- Higher CASA (current account savings account ratio).

- Higher loan-to-deposit ratio.

The report also points out that while "earnings growth at 25% CAGR from
FY10-13e and ROA expansion are similar for both PSU and private banks, the
contributors are quite different. While margin and fee growth are the
drivers for private banks, it is mainly lower provisions driving PSU banks."

Another point that is in favour of private banks, HSBC believes, is that PSU
banks have shown a 60% YTD outperformance over private banks and they now trade at 10-year high multiples (private banks are still at about their five-year averages). Hence, there is scope for private banks to rise higher.

Incidentally, some areas where PSUs score over private banks, HSBC says, are:

- Slightly lower cost of funds, and

- Higher RoE.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


Utilities: Religare says PLFs up; Macquarie finds fuel concerns rule investor mindset

 In two separate reports, broking firms Religare and Macquarie talk about rising PLFs in October and concerns of global investors about fuel supply risk and the increasing losses by state electricity boards. Both agree that merchant power prices will be under pressure

In a recent report to its institutional clients, Religare Research has said that the PLFs (plant load factor) of private power plants has shown strong improvement, but that in absolute terms, public sector power plant PLFs continue to be higher. "Average thermal PLF of power companies under our coverage increased to 84.6% in October versus 75.3% in September. Private power plants showed the strongest improvement at 76.3% against 64.8% in September, while the PLF of central power plants increased from 77.5% to 86.5%," Religare said in a report dated 10th November.

Adani's Mundra plant PLF improved to 91% in October versus 81% YTD. Jindal Steel & Power's Tamnar plant's PLF improved to 103% versus just 75% YTD. Lanco's Kondapalli and Amarkantak plant showed a 5% and 16% improvement in PLF, respectively, while its smaller Aban plant showed a 24% improvement. NTPC's Korba, Rihand, Faridabad, and Kawas plants showed improvement too.
However, in NTPC's case there was also a drop in PLF at quite a few of its plants. "NTPC's coal-based plants (~25.3GW) averaged 88.6% and gas-based units (~4GW) remained at 73.1%," Religare said. Reliance's Rosa plant improved only slightly. Tata Power's plants showed virtually no improvement.

Religare said OTC prices for Oct/Nov/Dec are expected at ~Rs 4.62/4.65/4.75 per kWh-virtually unchanged from September. While merchant power volumes continued to rise, the trend in tariffs continued to be downward. Prices of coking coal (Newcastle, South Africa) have been rising, while freight rates have picked up sharply since June.

Macquarie has said that most investors it met with recently in Asia, Europe and the US to talk about Indian utilities, were underweight the sector on concerns around fuel supply risk and increasing losses by state electricity boards.

In its report dated 10th November, Macquarie said that after the Coal India initial public offer investors have become very aware that there is a widening demand-supply gap for coal in India and that coal linkages are clearly not enough-a case in point being Lanco's 600MW Amarkantak project which has had to resort to e-auctions despite having linkages with Coal India. The brokerage perceives sole reliance on coal linkages as a big risk and as such finds NTPC in a precarious position.

Among the power companies positively placed in terms of fuel supply security it has called attention to Adani Power (since its parent is the country's largest coal trader, is a coal producer, and a greenfield asset owner and contract miner), and Tata Power since it is "the only utility with a net-long thermal coal position (17-19mtpa to FY17)."

On the losses by state electricity boards (SEBs), Macquarie said that the 13th Finance Commission Report projected state transmission and distribution power losses at $26 billion by FY15. "This weighs heavily on the SEB's appetite to acquire more expensive power as more merchant volume is fed into the power market. Macquarie Research and power traders we spoke too think this will continue to put pressure on merchant power prices-look for greater volume exposure than purely pricing exposure."

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


India Inc’s performance in Q2 marginally short of expectations

The financial performance of India Inc in the September quarter has been decent, albeit slightly lower than anticipated. Steel products, real estate and auto ancillaries posted robust growth while cement and IT companies fell short

A large part of the widely-anticipated Q2 earnings season is almost over and investors are hoping for a good set of numbers from the Indian corporate fraternity at the end of it. Although the reported financial performance so far has been decent, it has yet to catch up with the Street's expectations.

While analysts and experts were anticipating at least a 20% rise in revenues for India Inc, the results so far have fallen marginally short of this target. Among the Moneylife sample of 1,334 listed entities, 878 companies have come out with their September quarter figures till date. These companies have managed to post revenue growth of 18% while operating profit growth stands at 17% over the corresponding quarter last year.

Among the companies that have clocked robust growth are those belonging to the steel & steel products, real estate, auto ancillaries and engineering, electronics & electrical sectors. Strong demand and higher prices aided steel products manufacturers to post healthy numbers. Varun Industries, for instance, delivered a sales growth of 205% from Rs291 crore to Rs886 crore for the September quarter, while operating profits also surged 66% over last year. Revenues for Remi Metals Gujarat jumped 118% to Rs158 crore while operating profits zoomed 328% to Rs3.7 crore. Similarly, Sarda Energy & Minerals clocked revenue growth of 96% and operating growth of 162% over last year.

Within real estate, companies like Indiabulls Real Estate, Vijay Shanthi Builders, Ackruti City and DB Realty did extremely well, albeit from a low base. While Indiabulls registered a sales growth of 2,652% and operating profit growth of 500%, Vijay Shanthi Builders' revenues surged 148% and operating profits jumped 305%. Ackruti City witnessed its revenues climb 112% with profits also rising 91%. Meanwhile, DB Realty's sales went up 98% and operating profits surged 103%.

Auto ancillaries companies have piggybacked on the phenomenal growth in volumes for the automobile industry. Companies like Automobile Corporation of Goa, MM Forgings, Porwal Auto Components, Fairfield Atlas, Premier and Bharat Forge logged strong growth in the quarter. Revenues of Automobile Corporation of Goa grew 166% to Rs109 crore while operating profits climbed 326%. MM Forgings also clocked robust sales growth of 94% with operating profits zooming 179%.

Among the engineering, electronics & electrical companies, Nitin Fire Protection Industries, BGR Energy Systems and Centum Electronics have done well.

However, cement, media and some infrastructure companies suffered a drop in financial performance. Rising raw material prices seem to be hurting cement companies badly. Gujarat Sidhee Cement, Shree Digvijay Cement, Sagar Cements and Mangalam Cement faired poorly in the last quarter. Gujarat Sidhee's revenues fell 41% to Rs51 crore but its operating performance took a severe beating, with profits tanking by 1,020%. Shree Digvijay also suffered a sharp decline in revenues (down 46%) and profitability (down 195%).

The sustained decline in financial performance of media companies continued with Zee News, Network 18 Media & Investments and NDTV exhibiting poor performance. Some construction-EPC-infrastructure companies also turned in poor numbers for the September quarter but that could be due to the inherent lumpiness of their earnings. These include Gammon Infrastructure Projects, KSK Energy Ventures, MSK Projects (India) and Punj Lloyd. 


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