'See single-digit FY17 profit growth, high slippages for ICICI'

Prabhudas Lilladher has reduced the target price for ICICI’s stock to Rs 250 per share and Kumar suggests to buy in the stock at around Rs 210 per share.Below is the verbatim transcript of Nitin Kumar's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: We saw buys from most of the bigger brokerages, what is your key takeaway from the analyst call? A: ICICI continues to guide for elevated levels of slippages. Street expected that things will look up in the next fiscal after ICICI bank has done with asset quality review (AQR) and takes a lot of corporate pain and while one of the large borrowers, there has been some cases of divestment. The bank guided that net interest margins (NIMs) could compress by 20 basis points (bps) over Q4 levels. So, this would imply that the earnings show that the bank will remain muted and the additional disclosures that they have given in terms of watchlist, which includes both funded plus non-funded exposures looks to be pretty chunky and slippages from them could be very heavy that one may witness and as such the pressure will remain on the stock. Latha: What is your slippage number for FY17? A: This year on a net basis, they have added close to Rs 15,000 crore including both restructured plus standard slippages from the standard assets. The number could be somewhere compared to these levels over the next year. We are expecting in terms of percentage slippage issue of close to 3.8 percent for FY17. There is a little over 4 in FY16. Sonia: Based on the disappointing earnings this quarter, would you cut your earnings estimates for FY17 and FY18 and if yes, by how much? A: We have cut FY17 earnings and we are expecting single digit sort of profit after tax (PAT) growth for ICICI. I think for FY18, we have not cut estimates because we expect things to normalise and after that FY18 should look better because I think the non-performing loans (NPL) formation could be front-ended for the first half of FY17. Something similar on that trend could be the case for ICICI. So though the management has not guided, I think overall at least in FY17 we should see the peak out in terms of NPL formation. So FY18 we still remain positive. Sonia: Based on your analysis, in terms of the valuation of the stock what are you giving it now because the only thing going for the stock now is that it is trading at an attractive valuation of around little over one times FY17 price to book, what are you forecasting on the stock? A: We have reduced the price target from Rs 300 to Rs 250 and our valuation is 1.4 times for the standalone bank and then we have valued subsidiaries at around Rs 80-82. Latha: At what point will to start buying the stock at all? A: Maybe around Rs 210 levels, one can look at the stock because that would be the price wherein the bank will be available close to one time book. Latha: At the moment it is a sell? A: No, it is not a sell. We have reduced price target to Rs 250, the stock is around Rs 236-237. Sonia: Do you think just in the medium-term the upside for the stock could be capped as well purely because there are other banks that are performing much better, the likes of Yes Bank, IndusInd Bank, so perhaps some money could move out of ICICI and into these banks? A: That is possible. I think the premiums of these high growth banks and the retail banks will continue to increase and because in these banks, the project related corporate bank, the earnings growth is not there and there has been a big overhang on the asset quality that has come in particularly after this quarter. So the upside will definitely be capped and the concerns on the front-ended slippages one may see, will lead investors to move to the other retail banks. Latha: Is it that you reduced ICICI and Axis or prefer one over the other? How do the two compare? A: Not taking a relative call here, we have reduced a price target of ICICI to Rs 250 and we have reduced price target of Axis to Rs 460. Latha: Do you also cover Shriram Transport and Federal Bank? A: Yes, we do. Latha: What are your thoughts on Federal Bank? A: The slippages continue to remain elevated this quarter but operationally the bank has done relatively better in the sense that the margins have improved on the back of strong loan growth during the quarter and the fee income also showed some pick up and while it has been the case that the slippages have been higher every quarter for the bank, this quarter was also due to the fact that the bank had to downgrade some bit of ECB loans which was relatively a very large portion the total slippages the bank witnessed this quarter. If you will have to adjust for it and the banks has taken most of the pain, I think the NPL formation from next year onwards should go down from the current levels and the pickup in the operational earnings like a focus on fee growth and the margins remaining stable at 3.1 to 3.15 percent what the management is guiding, the earnings growth next year could be much sharper for Federal. The stock recently went down to around Rs 42-43 anticipating some stress on asset quality, I think in the interim there could be some pressure but one can look at it as a buy from a medium-term perspective.