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Accumulate GSFC; Hold Canara Bank, BHEL: Emkay
Emkay Global Financial Services has come out with its research report on Gujarat State Fertilizers Company (GSFC), Bank of India (BOI), Canara Bank and Bharat Heavy Electricals (BHEL).
Gujarat State Fertilizers Company (GSFC) Though chemical spreads remain encouraging compared to historical average, however with recent decline in spreads, we expect GSFC's earnings to decelerate. GSFC had been a beneficiary of the strengthening caprolactam-benzene cycle during the previous 6-7 quarters however with recent decline in spreads, earnings decelerated in Q3FY12. We maintain Accumulate rating with target price of Rs 530. Valuations still remain attractive with cash of Rs 8.5bn currently which is likely to increase to Rs 15bn (cash/share of Rs 194) by FY13E. Despite attractive valuations, 50% of cmp in cash and equivalents and FY13 EV/EBITDA of 1.5x, P/E of 4.9x we maintain our Accumulate rating on the stock due to declining trend of caprolactam - benzene spreads.
Bank of India (BOI) The bank has been grappling with concerns over its asset quality for long now. During Q3FY12, the slippages concerns seem abated for while. But still with low PCR (60%), we would expect BOI to run a higher credit cost at average 85bps over FY11-13E, thereby dragging RoAs. However, we have upgraded our earnings estimates by 14.7% in FY12E and 5.8% in FY13E to take into account lower than expected provisioning done over M9FY12 (despite high NPL ratios). We haven't changed our slippages or recoveries estimates and hence, there is no change in the ABV estimates. The stock is currently quoting at 1.4x FY12E/1.1x FY13E ABV. We believe that the stock has run up ahead of the fundamentals and is quoting at the same valuations and BOB and PNB. We downgrade the stock to REDUCE with target price to Rs 320. We believe upside risk to our estimates could arise (1) if there is lowering of pressure on growth if Net NPLs / net worth ratio (21%) comes down and (2) if credit costs continue to trail the slippage rate though not warranted. Also, any surprise in form of lower slippages / improved recoveries will act as a positive for the bank and take the valuations upwards.
Canara Bank Better NPA management through strong cash recoveries / up-gradation with moderation in slippages was the key highlight during the quarter. While a sudden spike in restructured loan portfolio was a along the expected lines and a one-off event, we were a bit disappointed on NPA provisioning. However, we remain impressed given banks remarkable job on asset quality front. However, the lower LLPs despite high slippages remain a disappointment. For M9FY12, the LLPs are % of advances were at 0.5% vis-à-vis net slippages (gross less reco/upgrades) at 1.1% for the same period. To take into account lower LLPs, we have upgraded our earnings estimates by 8/3% for FY12/13E. As our slippages and recoveries estimates remain unchanged, there would be no change in ABV estimates. In a systematic scenario of loan growth moderation, a 16% yoy credit growth on the overall front for the bank seems reasonable. Further with healthy capital ie CAR at 13.2% including Tier I at 9.5% (excluding 9m profit), we believe there is room for growth. The stock trades at 1.2x / 1x FY12/FY13 ABV. We maintain HOLD with target price of Rs500.
Bharat Heavy Electricals (BHEL) With multi-fold challenges to the core business model and lack of triggers to earnings as well as rating, we maintain BHEL as top AVOID in the Emkay coverage universe. Also, we are more likely to witness 20% earnings decline in FY14E. Though, we believe that PER de-rating from 23X to 13X could be the floor, lack of earnings growth, lack of triggers and challenges to business model makes it unattractive. We maintain our negative bias with HOLD rating and revised target price of Rs 275/Share.
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