In a renewed effort to fire up the infrastructure sector, the prime minister recently announced plans to award mega projects worth Rs1.15 trillion (around $19 billion) through the PPP model by the end of FY14
With the exception of Gujarat Pipavav Port and L&T to an extent, Nomura Equity Research expects 1QFY14F to be a disappointing quarter for the sector. While GPPV will benefit from a low base last year (the loss of Maersk line to Mundra), L&T will likely benefit from strong order flow growth momentum. Cummins India is likely to report flattish trends despite building in some benefit from currency tailwinds. Crompton Greaves remains a wildcard as quarterly expectations tend to get postponed to the next quarter. Nomura does not rule out a positive surprise from Crompton Greaves, as the stock has already bounced from recent lows and Nomura awaits a fundamental business turnaround for being positive on the stock.
In a renewed effort to fire up the infrastructure sector, the prime minister recently announced plans to award mega projects worth Rs1.15 trillion (around $19 billion) through the PPP (public-private-partnership) model by the end of FY14. Key projects include the Rs300 billion of Mumbai elevated rail corridor, Rs400 billion worth power projects and Rs250 billion worth port projects.
L&T intends to enter the European offshore wind sector by utilising its fabrication yards in the hydrocarbons business. Its upstream division already manufactures and installs jackets for oil and gas platforms. With three jacket-fabrication yards in India and Oman and a production capacity of 150,000 tonnes per year, its specialty in offshore design and projects could have vast applications in the offshore wind sector, believes Nomura.
As per a Reuters report, Oman has awarded L&T a contract worth Rial135.6 million ($352 million) for the Batinah road project package 4. L&T is L1 in another three road projects in the Middle East for a total of Rs70 billion including this package.
L&T has announced new orders worth Rs40.57 billion across various business segments, of which Building & Factories were at Rs18.08 billion, Hydrocarbons Rs10 billion, Water & Renewable Energy Rs6.28 billion and the rest spread out between Power T&D and Material Handling.
In a major win for the company, Thermax has announced an Rs17 billion order for design, manufacture and commissioning of nine CBFC high pressure boilers of 500 TPH from a leading petrochemical company.
Law ministry does a U-turn on rescheduling of highway developers’ premium. Earlier, it had said that such a proposal is legally unsustainable. However, it has supposedly asked the finance ministry to look into the issue.
Nomura believes that the IndusInd Bank's expanding branch network, increasing branch density, increasing ticket size of SA deposits and deposit productivity should help drive the bank’s growth
IndusInd Bank reported 1QFY14 PAT growth of Rs3.35 billion, up 41.7% y-o-y versus Nomura Equity Research’s estimate of Rs3.08 billion. The PAT beat largely came in on account of better-than-expected non-interest income and lower operating costs. IndusInd Bank used its robust trading gains of Rs1 billion in this quarter to set aside floating provisions of Rs500 million, thereby increasing its provision coverage to 80% from 70% q-o-q.
Net interest income of Rs6.8 billion (up 2.8% q-o-q and up 40.4% y-o-y) was in line with the brokerage’s expected Rs6.75 billion. Net income margin (NIM) expanded marginally by 2 basis points (bps) q-o-q on the back of 27% y-o-y loan growth. Improvement in NIM was largely due to a 6 bps q-o-q decline in cost of funds compared with a 4 bps q-o-q decline in yield on assets and a 330 bps q-o-q increase in the credit-deposit ratio. Nomura expects expansion in NIM to 3.59% in FY14F compared with 3.43% in FY13.
Non-interest income came in very strong at Rs4.7 billion (up 48% y-o-y), helped by proprietary trading gains (111% y-o-y growth) and 26% y-o-y growth in core fees.
According to Nomura, IndusInd Bank will continue to benefit from the momentum in the CASA (current account savings account) deposit base built up over the past few quarters. It expects the bank to inch up its CASA ratio to 33% by FY14F (from 30% currently), driven by relatively stronger growth in savings deposits than current a/c deposits. The brokerage believes that the bank's expanding branch network, increasing branch density, increasing ticket size of SA deposits and deposit productivity should help drive this growth. Backed by CASA momentum, IndusInd Bank is expected to clock loan growth of 27.3% y-o-y in FY14F, much ahead of the expected system average growth in FY14. CASA momentum should help the bank maintain its margins in the year ahead.
Another positive to note is despite a macro-related slowdown in the CV cycle, the bank has done well to contain its credit costs at 55bps in FY13 compared to 47bps in FY12. Nomura is budgeting in LLPs of 60 bps for FY14F. Owing to these multiple levers, the brokerage has raised its FY14F earnings and maintains a Buy recommendation and has increased its target price to Rs580.
Nomura has raised its target price to Rs580 from Rs520 on an increase in its earnings estimates and roll-forward BV to 1-year forward. IndusInd Bank currently trades at 2.8x the average FY14F/FY15F ABV of Rs178 and 15.7x avg. FY14F/FY15F EPS of Rs31.6. Nomura’s target price implies 3.3x average FY14F/FY15F ABV and 18.6x average FY14F/FY15F EPS for FY14F adjusted RoE of 18.6%.
According to Nomura, IndusInd Bank’s loans grew 27% y-o-y compared to its expected 29.1%, with the consumer finance book growing 24.5% y-o-y and the corporate book growing 28.8% y-o-y. The brokerage believes that the bank will grow its loan book by 27.3% in FY14F, driven by 28.7% y-o-y growth in the retail segment compared with 26% growth in the corporate segment.
Deposits grew 23.5% y-o-y as the bank registered strong savings account deposit growth of 53.9% y-o-y. Current account deposits were relatively weak, declining marginally q-o-q CASA ratio improved q-o-q to 30% from 29.3%. This momentum is likely to continue, thus further supporting margins for the bank. Nomura expects the bank to end FY14F with a CASA ratio of 33.0% and 34.3% in FY15F.
Loan loss provisions (LLPs) came in at Rs939 million versus Nomura’s forecast of Rs491 million. This includes a floating provision of Rs50 million made by the bank to increase its provision cover to 80% from 70% in the previous quarter. Gross non-performing loan (GNPL) ratio increased to 1.06% from 1.03% and net non-performing loan (NNPL) ratio improved to 0.21% from 0.31% in the last quarter.
Total CAR was 14.85% under BIS-3 guidelines, with a Tier-1 ratio of 13.5%. Nomura believes asset quality for the bank will remain stable and will likely be able to contain its fresh delinquencies at the current run rate.
The brokerage is expecting delinquencies of Rs5.4 billion in FY14F compared with Rs5.3 billion in FY13. However, it expects higher LLPs of 60 bps in FY14F (55 bps in FY13) as the management has guided towards increasing its provision cover by making floating provisions whenever non-interest income permits.