• Indian stock market and companies daily report (September 28, 2015, Monday)

    Indian markets are expected to open in red tracking the SGX Nifty and the Asian cues.

    The US markets were mixed on Friday, after Federal Reserve Chair Janet Yellen cleared some of the uncertainty regarding the outlook for interest rates. Fed chief Janet Yellen stated that the Fed remains on track to raise interest rates by year's end.

    The European markets ended the Friday's session on a positive note led by comments from Janet Yellen, which provided the clarity investors had been seeking on the direction of U.S. monetary policy.

    The Indian markets ended modestly higher on Thursday ahead of a long weekend and the upcoming monetary policy meeting on Tuesday. Mixed global cues, rupee weakness and portfolio churning on the eve of the expiry of September derivative contracts limited potential gains.

    Markets Today

    The trend deciding level for the day is 25,828 / 7,856 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 25,985 - 26,107 / 7,907 - 7,946 levels. However, if NIFTY trades below 25,828 / 7,856 levels for the first half-an-hour of trade then it may correct towards 25,706 - 25,549 / 7,817 - 7,765 levels.

    IDBI Bank proposed to be privatised

    News articles suggest that the Finance Ministry is working on a proposal to transition IDBI Bank to a model similar to Axis Bank. Recently, comments to this effect were made by the Finance Minister, which though were not clear on the timelines, but from the latest news, it appears that the timeline for the same could be sooner than later. Under the proposal, the government would look to reduce its stake to 49% in the bank and also hold this stake indirectly through other PSU financial institutions. If this proposal goes through, this would amount to privatisation of IDBI Bank and would in our view create room for significant upsides over a period of time.

    Significant valuation gap vis-a-vis private banks creates scope for upsides over the long-term: On the valuation front, in line with other PSU Banks, IDBI Bank is trading at 0.7x FY2017E P/ABV (adjusted for SASF and taking into account dilution due to upcoming government capital infusion), whereas private banks like Axis Bank are trading at around 2.0x FY2017E P/ABV. However, this gap in valuations will not be bridged in a short period of time, but will rather be subject to improvement in IDBI Bank's actual fundamentals on similar lines as private banks, which is likely to take several years and entails significant execution risk.

    For instance, up to 2004, Axis Bank (at that time known as UTI Bank) used to trade at an average one-year forward P/ABV multiple of around 1.1x and it took substantial period for the stock to get re-rated. The re-rating happened gradually as the bank's retail business mix increased (and contribution of volatile segments like treasury reduced), modern channel and technology roll-out took place at a rapid place (branch, ATM, payment systems, etc.) and market share gains and earnings growth accelerated to similar levels and consistency as other private banks like HDFC Bank.

    Moreover, the current competitive landscape is a lot tougher than a decade back, with existing private banks having an already dominant positioning. Also, IDBI Bank's own balance sheet too is quite large at Rs3.4 lakh cr, creating challenges for IDBI Bank to mirror private banks' growth in their initial phase. Rather, in our view, initial valuation upsides would likely emerge from scope for improvement in processes ranging from loan appraisal to staff incentive structures to board structure to overall management and operational efficiencies, which itself for a massive organisation like IDBI Bank would be a significantly challenging and long-drawn out process. That said, for IDBI Bank, one advantage compared to other PSU banks that may aid the transition process, is that it's branch network, technology and staff strength is not burdened by legacy like other PSU bank peers, which is reflected in the bank's Opex/Total Assets ratio being lower at 1.2% (vs. 1.8% and 2.0% for PNB and SBI respectively).

    Bank's current fundamentals remain challenged: IDBI Bank's stock price has rallied 35% from recent lows, outperforming peers significantly and likely driven by these developments. Hence, any indications of the proposal not going through or getting delayed would result in the stock giving up these recent gains. This is especially as the bank's current fundamentals are challenged by asset quality concerns.

    Asset quality continues to be weak with total stressed assets at 14.8% in 1QFY2016 as compared to 14.1% in 4QFY2015 and 13.3% in 1QFY2015, and annualized slippage ratio at 4% in the last two quarters. Exposure to stressed assets like Power, Metals, Infra, Textiles and Gems & Jewellery is at 39.2%, which is quite high as compared to other PSU banks (25.3% for PNB, 32.7% for SBI, 23.5% for BOB). ROE is expected to be at a low level of 6-7% in FY2016E. Also, granularity of loan book and deposits is lower than peers with corporate lending at 67% of total loan book and bulk deposits constituting 49% of total deposits. On Tier 1 capital, there is some respite as the Government has decided to infuse '2,229cr in IDBI Bank, which would improve CET 1 from 7.3% to 8.2%; however, this would still be well below other peer banks (9.3%, 9.5% and 9.2% for PNB, BOB and SBI respectively).

    Notwithstanding the near-term fundamental concerns regarding asset quality and profitability as well as significant execution risks even if the proposal goes through, we believe the risk-reward ratio would be favourable considering the substantial headroom for re-rating of valuations over the longer-term. Overall if the bank does get privatised, in our view it would be a landmark development and would likely result in material upsides on the stock even in the short-term considering the favourable risk-reward outlook. As the event is not confirmed officially, we are not changing our long-term rating on the stock, but re-iterate that the upside potential from the event is expected to be significant.

    US FDA revokes approval to Sun Pharma's anti epilepsy drug

    US Food and Drugs Administration (FDA) has withdrawn an approval granted in March to Sun Pharma Advanced Research Company's (SPARC) antiepileptic drug due to regulatory compliance issues at Sun Pharma's Halol plant. SPARC had earlier received a final approval from USFDA in March 2015 for this product and was evaluating several marketing partners for commercialization. However SPARC has now received a complete response letter from the USFDA rescinding its earlier approval, citing that the compliance status of the manufacturing facility was not acceptable on the date of approval, The company told that Sun Pharmaceuticals is working with USFDA in resolving good manufacturing practices deviations at the facility and has taken several corrective measures.

    Economic and Political News

    - Forex reserves up $631.5 million to $352.02 billion

    - RBI lets more leverage for companies with partial credit enhancement

    - Exports languish, 23 sectors out of 30 decline in August

    Corporate News

    - Maruti wage deal: Workers to get '16,800 pm avg salary hike

    - Nestle steps up marketing for Maggi relaunch

    - Vedanta seeks increase in iron ore production cap in Goa

    Contributed by Angel Broking
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