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Research Speak - 17-7-2010

Research Speak - 17-7-2010

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Published by A_Kinshuk

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Published by: A_Kinshuk on Jul 22, 2010
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Market Commentary
Q1FY11 Results season has kicked in with most companies so far reporting earnings as per expectations.Financial sector companies particularly HDFC, Axis Bank as well as some of the mid cap companies like Exide,Indusind Bank, BASF have reported good numbers. Infosys results were below expectations; while TCS reportedbetter than expected numbers. We believe the Q1 results to be a mixed bag. Results of companies in sectorslike metals, cement and telecom will be disappointing. Automobile companies are likely to report betternumbers on the back of record sales; though there may be some pressure on margins. Few Infrastructure,capital goods and FMCG companies like IRB infrastructure, Nagarjuna construction, BHEL and ITC are likely topost good results.We expect profit booking in broader indices as valuations of some large cap stocks/sectors are fairly high; thecase in the point is the FMCG sector, which is trading at 22-26(x) one year forward earnings. The progress of themonsoon also needs to be watched as some parts of the country have reported deficient rainfall and weakmonsoon outlook would be a spoilsport as far as the markets are concerned.If we measure the performance of India and other emerging markets with developed markets, we observe, fromthe chart above, that Nifty has clearly outperformed all of them. China, which is supposed to be the biggestgrowth story, has been underperforming even the US and European markets since the beginning of this calendar
     M    a    r  -     0     9     A    p    r  -     0     9     M    a    y  -     0     9     J    u    n  -     0     9     J    u     l  -     0     9     A    u    g  -     0     9     S    e    p  -     0     9     O    c    t  -     0     9     N    o    v  -     0     9     D    e    c  -     0     9     J    a    n  -     1     0     F    e     b  -     1     0     M    a    r  -     1     0     A    p    r  -     1     0     M    a    y  -     1     0     J    u    n  -     1     0     J    u     l  -     1     0
World Indices
Dow JonesS&P 500ShanghaiNiftyBovespa Brazil
Research Speak
Week Ended – 17
July, 2010
2year. The only close competitor was Bovespa of Brazil. However, with China’s immediate growth beingquestioned, the commodities have cracked and so did the commodity heavy Brazillian index. Hence, investorsinto the Indian markets have been rewarded for the resilient growth, buoyant financial system and politicalstability in the country.
PE ratioP/BRatioUp from 52Week LowDown from 52Week High
DOW JONES INDUS. AVG 14.20 2.56 16%11%S&P 500 INDEX 15.05 2.03 14%15%NASDAQ COMPOSITE INDEX 27.40 2.55 16%16%BRAZIL BOVESPA INDEX 13.37 1.79 20%15%FTSE 100 INDEX 15.34 1.69 18%13%CAC 40 INDEX 12.89 1.22 9%17%NIKKEI 225 33.49 1.23 4%21%HANG SENG INDEX 15.53 1.76 10%14%SHANGHAI SE COMPOSITE 18.03 2.38 5%43%
NSE S&P CNX NIFTY INDEX 18.93 3.22 28%1%Average 18.42 2.04 14%17%
A similar picture is painted by the table above. We can see that NIFTY has been trading at ~19 times its trailingtwelve month(TTM) EPS. However, looking at global average of 18.43, this clearly seems to on slightly higherside. P/B ratio is good 50% higher than the world average. Even higher than 2.38 times of Shanghai and 1.76times Hangseng. Hence, the outperformance and relative overvaluation of NIFTY is more or less established. If f we consider the movement of the indices from their 52 week high/low, we see that India is 28% off its 52 weeklow, the highest in our sample and double than that of average 14%. And moreover this has come after almost90-100% bounce back in the year before. The recent correction has wiped of significant chunks from worldindices, on an average retracement of 17%. However, Nifty has only retraced 1% from its 52 week high. Thisagain reemphasises the point that NIFTY has been significantly outperformer and most of its story of highearnings and high ROE is already discounted in the prices of stocks, at least from the large cap universe.By saying all these, we do not mean that the rise and outperformance of India is not justified. But the point thatwe want to convey is that the outperformance has taken the index and several stock into overbought zonewhere making significant returns seems to be difficult keeping in mind their fundamentals. Hence, the marketgoing forward would be stock pickers market. The time has come for “alpha hunting” as “beta grazing” wouldgive no significant returns. FIIs have already pumped in $8.4 Bn in the Indian markets in 2010. Hence, fewbillions of dollars pulling out is not ruled out and that would give decent correction in the markets.
3Global factors have suddenly turned quite negative. With fed turning cautious about the outlook of US recovery,we saw the DOW cracking on Friday. The stress test on European banks are likely to throw up more trouble.Hence, we will see markets correcting in next couple of weeks after a long uptrend. The reasons for thecorrections would be majorly internal with higher valuations, but the triggers will be global. We expect themarkets to go down, but our recommended universe will correct modestly and might just throw up very goodbuying opportunities.We advise investors to move out of large cap stocks trading at premium valuations to quality mid cap stockswith lower valuations and good fundamentals and prospects once we see them correct in next week. Our recentrecommendations like Voltas, BlueStar, Gayatri Projects, Bank of Baroda, TTK Prestige and EKC can beconsidered for medium term once they correct from current levels.
Stock and Sector Update
AXIS Bank – Result Update
AXIS bank came out with better than expected Q1FY11 earnings. Following are the result highlights:
Net Interest Incomes grew by 45% YoY.
stood at 3.71% compared to 3.34% last year but lower than 4.09%in Q4FY10
Operating profit for the quarter stood at Rs. 1450 crs, 23.27% higher than previous year. If we exclude the de-growth in trading income, the core operating profit grew by good 47%
Net profit grew by 32% to Rs. 741 crs. EPS however grew by only 15.81% to Rs. 17.95 due to dilution as thecompany issued 4.768 cr shares. Shareholder’s funds increased by 56.61% from previous year
Fees income grew by 19% YoY. Trading profits however slipped 40% YoY owing to the rise in yields and loss onthe bond portfolio
Demand deposits on a daily average basis grew by 38.51% and constituted 40% of aggregate daily averagedeposits during Q1FY11. The bank has been able to maintain the ratio compared to last year. The growth in theCASA has been due to the massive addition of 215 branches from March 2009 onwards and addition of 879ATMs in the same period
GNPA of the bank stood at Rs. 1341 crs, slightly higher than RS. 1318 crs in previous quarter. GNPA as apercentage of customer assets stood at 1.13% compared to 1.01% last year. Provisioning coverage for the bankwas however comfortable at 76.62% including prudential write-offs (89.59% before accumulated write – offs),leading to a Net NPA of 0.35% compared to 0.41%
Capital Adequacy Ratio for the bank stood at 14.54% compared to 15.28% last year. The bank has been very judicious as far as utilizing its capital. Hence now, when the NIMs are healthy with good demand for fundswithout much fear of asset quality, the can expand its book with simultaneous improvement in ROE. ROA for thebank is quite healthy at 1.63%. This has translated into an ROE of 18.8%, slated to expand keeping in mind thesignificantly high CAR.

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