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Thursday, April 26, 2012

Dolat Capital calls a ‘Buy’ on Indian Overseas Bank
CMP: Rs. 90  Target Rs. 124

Recently, we interacted with Indian Overseas Bank (IOB)’s management for a view on its business growth and asset quality
In Q4FY12, the bank is expected to record a business growth of 23% YoY to Rs 3.2tn. Going forward, in FY13, the bank’s management expects credit and deposit growth to moderate in a range of 18-19% and 17-18% respectively. In deposits, CASA share is expected to be maintained at 26% level. Fresh incremental loans are disbursed mainly to Power, Steel and manufacturing sectors.

In Q4 FY12, the management expects expansion in NIM on sequential basis. In Q3 FY12, the bank reported margin of 2.6% compared to 3.3% in Q3 FY11; in 9MFY12, the bank’s margin fell by 34bps to 2.74%. Further, in FY13, the management expects to maintain NIM at FY12 level. In end-March’12, it is expected that the bank’s GNPA to remain flat (QoQ) at Rs 40bn. In Q4FY12, on asset quality front, it is expected that the bank would clock strong recoveries and write-offs would also be reasonably high. In 9MFY12, Out of total slippages of  Rs 22bn,  Rs4.9-5.0bn came from CBS migration (around Rs 2.9bn from agriculture sector alone). Slippages accretion due to CBS migration would be absent in FY13, thereby aiding asset quality.

In Tirupur textile industry, around 18 manufacturing & processing units have been impacted. IOB’s exposure to these units is close to Rs 1.2bn, and all banks’ exposure to these units is close to Rs7bn. IOB’s exposure to Hotel Leela is around Rs 3.5bn (0.25% of its total advances). Total exposure to power discoms stands at Rs 53.4bn and to telecom sector is Rs 12bn.

In our view, the bank’s business would expand by 18.5% YoY with slight drift in margin. In FY13, GNPA is expected to rise on the back of further loan restructuring till 2HFY13 and slippages from the restructured loan book. During FY14, we estimate IOB’s RoAA and RoAE at 0.6% and 13% respectively. We maintain our earnings estimates for FY13 and introduce FY14 earnings estimates and rollover our target price on FY14’s estimates. We upgrade our stock rating to
BUY (from previous Accumulate rating) with a target price of Rs 124 at 0.9x adjusted book value FY14.

SPA Securities calls a ‘Buy’ on Persistent Systems
CMP: Rs. 354  Target Rs. 435

The company came back strongly in the 4Q with a revenue growth of 4.9% QoQ and a solid margin expansion of 260bps QoQ, after a forgettable 3QFY12. This was mainly on the back of 38% sequential growth in the IP business. For FY12 PSYS crossed INR 10bn revenue for the first time, growing at 28.9%. We remain confident that the increased sales focus approach will help it maintain a sustained growth performance and thus expect a re-rating to follow soon. We have increased the multiple to our FY14E EPS of 48.4 and raise our TP to INR 435.

IP and Sales focus paving the way: The company improved its Sales and Marketing focus, resulting in 35 new client additions to 288 and clients with more than $1mn revenue contribution jumping to 251 from 211 in the past 6 months. This was achieved with an incremental S&M spend of just 6%, thus not impacting its EBITDA margins which rose to 28.6%. The EBITDA Margin for FY12 was 23.2% up 280bps YoY. Margin expansion was primarily led by non-linear IP business which remains a strong margin lever for the company.

FY12 expected vs actual: PSYS FY12 revenue of $207.4mn was in-line with our estimates of $208.3mn and bang in the middle of the company’s guidance of $205-$210mn registering a growth of 22.1%. The revenue of INR 10bn grew faster at 28.9% helped by dip in INR during the 2HFY12. Net Income of INR 1,417mn, however, beat our estimates of INR 1,306mn handsomely due to higher than expected margin improvement.

FY13E / FY14E estimates: Due to an improved growth visibility and margin improvement, we have revised our EPS targets upwards for FY13E and FY14E by 3% and 8% respectively. Though the sluggishness in the IT services business will continue in the 1HFY13, we expect PSYS to achieve our conservative revenue CAGR of 15.2% for FY12-FY14E. We have also factored in (i) lower utilization; (ii) IP led business and (iii) incremental IP business to flow from lower-tax units to offset any effect of INR appreciation in FY14E Margin assumption of 25.5% which compares well within the 28.6% PSYS did in 4QFY12, building in substantial conservatism.

Valuation and Outlook: Steady growth especially from cloud and collaboration market of size $250bn and an improving margin profile, in our view, commands a revision of PSYS beaten-down PE multiple of  8.0x FY13E and 6.8x F Y14E   EPS. We value the stock at 9x our FY14E EPS of INR 48.4, thus continuing to recommend BUY with a TP of INR 435.

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