CMP: Rs 915
Bharti Airtel is one of HSBC’s preferred picks in the telecom sector because it believes the stock offers low risk exposure to the domestic wireless sector at attractive valuations. Bharti Airtel, with low operating and financial leverage, offers the best earnings visibility vis-à-vis other domestic telecom companies and trades at FY09E P/E of 18.6x. The current estimates for Bharti Airtel factor in the potential combination of high subscriber growth, low subscriber quality and high capital expenditure (capex). Unlike its peers, for whom EBITDA is likely to be subdued given the new rollouts, Bharti Airtel will continue to benefit from scale through its rising subscriber base. The creation of Indus (tower JV) is a significant catalyst as it allows Bharti Airtel to benefit from lower capex and deeper coverage, while offsetting spectrum constraints and monetising its tower assets. HSBC remains bullish on Bharti Airtel’s earnings outlook and forecasts a 25.3% compound annual growth rate (CAGR) in earnings per share (EPS) for FY08-10E. This view is based on robust subscriber growth, recent initiatives to stimulate usage and stable EBITDA margins.
Research: Motilal Oswal
CMP: Rs 779
Motial Oswal reiterates its ‘buy’ rating on Indiabulls Financial Services with a revised target price of Rs 1,086. In its first quarter post-demerger, Indiabulls reported 270% y-o-y and 57% q-o-q growth in loan book to Rs 8,800 crore in Q3 FY08. Disbursements, at Rs 3,300 crore, were the highest ever in any quarter. Though yields declined to 21% due to an increase in secured loans, earnings grew 80% y-o-y. Post the impressive Q3 FY08 numbers, Motilal Oswal is raising its estimates on disbursements and loan book for FY09 and FY10. Indiabulls may disburse loans worth Rs 10,500 crore in FY08, which will increase to Rs 26,000 crore in FY10.
This will result in 143% CAGR in loan book over FY07-10E. But by factoring in lower yields, Motilal Oswal expects the strong growth in loan book and higher fees from processing and insurance distribution to drive earnings growth. Operating efficiencies will also support earnings, which are expected to see CAGR of 81% over FY07-10E. The company has applied for a licence for its life insurance business, which is likely to be launched in Q1 FY09. Despite being a late entrant in this segment, its large customer base and wide distribution network will ensure fast growth. Motilal Oswal values Indiabulls at 3x FY10E book value (17x P/E) and the insurance venture at Rs 100 per share (at 49% stakeBank of India
Research: Morgan Stanley
CMP: Rs 395
Morgan Stanley reiterates ‘overweight’ rating on Bank of India (BoI) with a target price of Rs 525. BoI reported Q3 FY08 earnings of Rs 510 crore, up 101% y-o-y and 20% on a sequential basis — higher than the expectation of 69% y-o-y growth. The bank’s core operating profit grew 74% y-o-y on sequential improvement in margins, robust fee income growth and control on operating expenses. In fact, the bank overprovided costs during the quarter — it has proactively provided for wage arrears for FY08 on an estimated basis. Asset quality strength persisted, with BoI’s coverage ratio improving to 78% in Q3. Productivity is improving across all areas — the bank opened 101 branches last year, without adding a single employee. Core earnings were strong. BoI’s continuation of strong core earnings momentum is also impressive. This is the sixth consecutive quarter the bank has reported earnings growth of over 50% y-o-y. Even core earnings growth has averaged 40% y-o-y during this period. The stock is trading at 10x FY09E earnings, 2x book with an RoE of 21%, which is very attractive.
CMP: Rs 1,601
Edelweiss maintains ‘buy’ rating on HDFC Bank. The bank’s Q3 FY08 profit was up 45% y-o-y, ahead of consensus estimates. Net interest income (NII) grew 55% y-o-y to Rs 1,430 crore. The bank’s business momentum increased on strong contribution from SME and corporate segments. Provisions rose q-o-q with higher specific provisioning. The bank booked one-off gains of Rs 100 crore on sale of its stake in CAMS during the quarter. It also made one-off provisions on indirect taxes of Rs 73 crore. Adjusting for these extraordinary incomes, net profit grew 36% y-o-y. Pre-provisioning operating profit grew 30% y-o-y to Rs 930 crore. Key highlights of the quarter were: (1) Net interest margins improved q-o-q to 4.3%, with decline in cost of funds and increase in yields on investment; (2) Core fee income grew 38% y-o-y; (3) The proportion of low-cost deposit declined slightly to 51%; (4) Operating expenses increased 78% y-o-y due to higher other operating expenses; (5) Overall provisioning increased 59%; and (6) Balance sheet grew 47% y-o-y. Edelweiss is revising its earnings estimates upwards for FY08E and FY09E by 2% and 6%, respectively, and expects the bank to post EPS of Rs 45 for FY08E and Rs 59.6 for FY09E, respectively. The stock is trading at 3.6x FY09E book and 24x FY09 earnings.