Profitability Metrics Inches Up

When it comes to commercial banks, brokerages are turning bullish on the expectation of strong earnings growth for the last quarter (Q) of Financial Year (FY) 2019. Axis bank is one such bank, which witnessed a positive turnaround in Q3 FY2019, boosting analyst confidence. Bank’s profit after tax (PAT) for Q3FY2019 witnessed a stellar growth of 131 per cent year-on-year (YoY) at Rs1,681 crores. Bank’s net interest margin (NIM) for Q3 was up by 3.47 per cent from 3.36 per cent in Q2. Bank’s increasing focus on the retail and small and medium enterprises segment has boosted the margins. “Going ahead, recoveries on stressed assets, hike in Marginal Cost of Funds based on Lending Rate and changes in the product mix is likely to provide support to margins to remain at the current level,” noted an analyst at ICICI Direct.

Presently bank’s current account savings account (CASA) deposit at Rs2,35,552 crore accounted for approximate 46 per cent of deposits. Brokerages are of the view that with the recent slower deposit growth in industry CASA remains a key focus area to ensure profitable and sustainable credit growth. “Deposits increased 26 per cent Y-o-Y to Rs5,14,092 crore. The CASA trajectory remained weak with ratio declining to ~46 per cent versus 48 per cent in last quarter. We expect the CASA ratio to sustain at current levels though the pace of saving account accretion may slow down. We expect total deposits to increase at 16.9 per cent CAGR in FY18-21E,” said the analyst at ICICI Direct.

Coming to bank’s asset quality metrics, the gross non-performing asset and net non-performing asset stood at 5.75 per cent and 2.36 per cent, down from 5.96 per cent and 2.54 per cent quarter-on-quarter (Q-O-Q). Bank’s new management has given return on equity (RoE) trajectory of 18 per cent by  FY2021-2022.

“Axis Bank has delivered a strong performance with multi-quarter high earnings. With a capable management team in place and an improving credit cost/margins outlook, We, thus, expect RoA/RoE to improve to 1.3 per cent /16.1 per cent by FY2021,” said an analyst at Motilal Oswal Financial Services.

When it comes to credit card business, the bank’s market share has doubled over the last five years and is now the fourth largest in the country. Bank’s network as on December 31, 2018, has Rs3,964 domestic branches and extension counters are available in 2,321 centre’s.  The analyst at ICICI Direct said, “Axis Bank’s growth in the past decade has been ahead of the industry. In the past eight years, the increase has been at 30 per cent CAGR compared to 19 per cent for the industry. This was due to a sustained increase in branch network and the bank’s strong corporate relationships.” Brokerages like ICICI Direct, Sharekhan and Motilal Oswal remains bullish on the company’s stock.

Expanding Its Global Reach

Productivity enhancement ensures a better future

One of the leading global engineering, procurement  and construction (EPC) player, Kalpataru Power Transmission (KPTL), posted an impressive revenue growth of 22 per cent in (Quarter) Q3 Financial Year (FY) 2019. Company’s cost optimisation and productivity enhancement initiatives aided earnings before interest, tax, depreciation and amortization (EBITDA) margin to grow at 10.7 per cent in Q3FY 2019 and 11.1 per cent over nine months (9M)FY 2019. The company, a part of the Kalpataru Group, is into power generation and transmission, construction of roads, real estate, oil and gas with a presence in over 50 countries. In March 2019, it signed a definitive agreement to acquire 85 per cent stake in Linjemontage i Grastorp AB, a Swedish company for an enterprise value of $24 million.

With KPTL’s low-cost Indian manufacturing base and large Transmission and Distribution  (T&D) project combined with opening of the Swedish market might result in marginal improvement. This would also expand the company’s geographical presence. “Linjemontage’s 2018 revenue was Rs.518 crore indicating enterprise value (EV) to sales of 0.3x and EV to EBITDA of 8.6x for acquisition,” said an analyst at ICICI Direct. However, he warned investors about expensive valuations. “Valuations ascribed seem to be a tad expensive given LG’s low margins of three to four per cent. However, better procurement efficiencies and change in product mix (high focus on 400 KV projects) will aid KPTL to scale up the PAT margins of Linjemontage to five per cent over the next two to three years,” he further said.

Company’s order book stood at Rs14,167 crore as on December 31, 2018. Currently KTPL’s overseas T&D space accounts for 36 per cent of the company’s order book, as it is witnessing strong order inflow in 9MFY2019. With the acquisition, the company would gain access to European markets boosting its overseas footprint. “We expect KPTL to be one of the key beneficiaries of strong transmission capex in both domestic and global markets. Considering the strong visibility on revenue and order flow front, sustained earnings momentum and likely improvement in return ratios, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs544.(Quoted as on March 26, 2019),” said an analyst at Reliance Securities.

Linjemontage’s revenue has grown at an average rate of 25 per cent over last three years. Further its average ROCE has been over 25 per cent in last two years, being mostly debt-free. “We have not factored Linjemontage’s valuation at this stage and await the transaction to get closed in Q1FY2020. Linjemontage, being a profitable company, can provide dividends from its first year of acquisition” said an analyst at Sharekhan. This bodes well for investors looking at the long-term horizon.

himali@outlookindia.com