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Stock Recommendation: State Bank of India, Blue Dart Express

Daiwa Capital Markets/Mumbai 21 Jan 13 | 10:25 AM
Related to : State Bank of India
 State Bank of India
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BSE   21 Nov 14 | 12:00 AM

305.05  7.95 (2.68%)

NSE   21 Nov 14 | 12:00 AM

305.50  8.4 (2.83%)

State Bank of India
CMP: Rs 2,499


We believe a large part of the bank’s asset-quality deterioration has already occurred and its fresh NPLs are likely to continue falling over the next 2-3 quarters. Also, we believe that its NPL recoveries will pick up significantly over the next 6-12 months and that this will lead to a rerating of the stock.

We now forecast the credit costs for State Bank of India’s (SBI) consolidated entity to fall by 20bps for FY14 (from 10bps earlier), which would offset any NIM compression and higher operating costs, in our view. Moreover, we believe that any NIM pressure would be only temporary; such pressure would arise largely because we expect lending rates to be cut by 50-75bps in the next 6-12 months.

As 80% of the bank’s loan book comprises loans with floating interest rates and linked to the base rate, any cut in the lending rate would mean the loan book would be repriced almost immediately. However, as most of the bank’s term
deposits are fixed (as is the case with all the other banks), a cut in the pricing of the deposits would take a while to occur, leading to NIM compression for the next two quarters.

We are raising our FY13-14 earnings forecasts by 12.1% and 10.5%, respectively, due to the lower NPL provisioning and higher other income that we now expect for this period.

What we recommend We believe that fresh NPLs will continue to fall and that there is a possibility that net slippages (fresh NPLs minus NPL recoveries and upgrades) could turn negative, meaning that gross NPLs will fall in the next 2-3 quarters, which should lead to a further rerating of the stock.

We are upgrading our rating to Outperform from Hold and increasing our Gordon Growth Model-based six-month target price to Rs 2,874 from Rs 2,365. We now assign an FY14E PBR of 1.38x (vs. FY13E PBR of 1.3x earlier) as we are rolling forward our valuation basis.

Unlike some analysts, we believe the NIM pressure and higher costs will be just temporary issues, and that the market will continue to rerate the stock on the back of improvement in asset quality. Daiwa Capital Markets

Blue Dart Express
CMP: Rs 1,995


The domestic express package industry is valued at ~INR100 billion, of which the organized segment is only ~50%. The organized express package market can be sub-divided into 1) air express (~INR23b) and 2) ground express (~INR28b). It is one of the fastest-growing segments within the logistics industry and expected to post a CAGR of ~17% over FY12-15. Implementation of GST is likely to be a key positive for BDE and accelerate the shift in market share from unorganized to organized players. Given company's favorable positioning within the industry, we expect it to grow at above industry growth rates and continue to incrementally gain market share. Industry is evolving into a differentiated oligopoly market, with top four players enjoying ~75% market share.

Company is a 75% subsidiary of the global logistics leader DHL and present across both air and ground express package distribution vertical. While BDE is an undisputed market leader in the air express segment, with a dominant market share of ~45%, it is fast emerging as a key player in the ground express cargo segment too with a market share of ~12% currently. BDE is also fast emerging as a key player in the e-com segment, which is clocking a CAGR of 30-40%, with a market share of 30-35% and revenues of ~INR1b (~8% of its overall revenues).

BDE has an unmatched infrastructure advantage compared to its competitors. It has an in-house extensive fleet of three Boeing 737 and four Boeing 757 freighters offering a revenue payload of over 370ton/night, a flotilla of over 6,272 vehicles, 365 facilities including 56 domestic warehouses and 12 express hubs and over 7,792 employees. BDE's own fleet ownership, high service standards and extensive pan India infrastructure advantage have been its key differentiating strengths and enabled it to stave off competition from both local and MNC competitors. We believe the company by virtue of its first-mover advantage and infrastructure advantages enjoys a head start of 3-4 years against its current and potential competitors

BDE is likely to post revenue and net profit CAGR of ~18% and ~22% respectively over CY12-15. As express package industry has a very high fixed cost of 75-80%, operating leverage is very high. Going forward, we believe a combination of factors such as increasing share of value-added business and operating leverage are likely to expand BDE's EBITDA margins from ~12% in FY12 to 13.4% by FY15. By virtue of its first-mover advantage and deep understanding of the domestic market, company has successfully created a pole position within the industry. BDE trades at P/E of 36.1x CY12 earnings and EV of 22.8x CY12 EBITDA Bloomberg consensus estimates. Not Rated.- Motilal Oswal Securities

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