India Infoline calls a ‘Buy’ on Yes Bank
CMP: Rs. 857 Target Rs. 1005
Over the past three quarters, Yes Bank’s customer assets growth has picked up materially, asset mix has improved and share of savings and branch banking deposits has increased. These trends are manifestation of impressive execution on the strategy of accelerating growth and adding granularity to business. Substantial investment in branch network (has increased by 50% over past 24 months) has played a pivotal role here. Improvement in network productivity (widening distribution of retail asset/liability products), addition of new branches, recovery in corporate lending environment and benign wholesale funding rates are likely to drive a robust 27% CAGR in advances over FY14-17. Yes Bank is well capitalized (Tier-1 ratio at 11.8%) to pursue brisk growth.
Revenue growth outlook is robust: NIM outlook for the bank is strong with bulk deposits rates heading south, persistent improvement in CASA ratio and expected increase in the share of retail (including MSME and business banking) loans which are better yielding and have longer duration. Growth in non-interest income has been robust driven by impressive traction in financial advisory, branch banking and transaction banking fees and this trend is likely to continue. Additionally, declining interest rate should drive substantial gains on the corporate bond portfolio for Yes Bank.
Asset quality to remain solid; credit cost to decline: In the ongoing credit cycle, Yes Bank’s asset quality has remained steady. The current stock of Net NPLs and standard restructured assets stands at just 0.4% of advances and 2% of networth (much lower than most peers). While in current quarter the restructuring activity could increase (due to end of regulatory forbearance from FY16), medium term asset quality outlook remains sanguine given an improving macro. So the credit cost is expected to moderate.
Valuation has room to re-rate further: A combination of high loan growth, NIM expansion and lower credit cost would drive a strong 26% earnings CAGR for Yes Bank over FY14-17. During the period, average RoA and RoE is estimated to be at impressive 1.7% and 21% respectively. Valuation is attractive at 2.3x FY17 P/ABV in the context of robust fundamentals and improving operating environment.
Religare calls a ‘Hold’ on Cairn India
CMP: Rs. 239 Target Rs. 270
In view of a ~45% decline (over H2FY15) in global crude oil prices, CAIR has more-than-halved its FY16 capex guidance from US$ 1.2bn to US$ 0.5bn. It has also undertaken measures to optimise opex and renegotiate contracts with service providers to limit costs. We think with this move, CAIR aims to shift focus to development (from exploration) and preserve free cash flows for a sustainable dividend payout. While reserve accretion and production could be hit, we restate HOLD on a likely revival in crude by FY16-end.
Cuts FY16 capex guidance by 58%: In line with oil majors (IOCs and NOCs), CAIR has today pared its FY16 capex guidance to US$ 0.5bn (from US$ 1.2bn) in view the sharp decline in crude prices. The capex focus has also been shifted predominantly to core and growth projects (85%) from exploration (15%), in a deviation from FY15 when ~40% of the US$ 1.1bn capex was spent on exploration.
Negative for production/reserve growth: Under the new exploration program (FY15-FY17), CAIR had targeted 3bn boe of incremental prospective resources leading to an RRR of 150% over this period. So far, 2.1bn boe has been drilled, of which 1.5bnboe has been established and rest is under evaluation. Lower exploration spends could severely hit the aspired RRR.
FY16/FY17 EPS estimates pared: With a reduction in the capex/exploration spends, CAIR is unlikely to achieve its earlier guided production CAGR of 7-10% (FY15-FY17). We therefore trim our production growth estimates to ~5% CAGR from ~8% CAGR earlier, and accordingly our FY16/FY17 EPS estimates to Rs 35.3 (-14%)/Rs 35 (-9%).
TP cut to Rs 270; maintain HOLD: With a lower capex likely leading to deferred/ lower reserve accretion and muted production growth, we cut our Mar’16 TP to Rs 270 (from Rs 290 earlier). We however maintain HOLD on the stock as we expect crude oil prices to bounce back to US$ 80-90/bbl by FY16-end.