India - Infoline Hindustan Zinc, National Aluminium Company, Reliance Industries, Hindustan Construction Company



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Our central investment theme of high core profit growth and asset quality improvement is playing out well in Bank of India, which was amply evident in Q4 FY07 results. While results have been far above our expectation, core profit growth was in line with expectation. Net NPAs have halved from the March 06 levels to 0.74%. We have revised our profit growth expectation for FY08 by 2.4%, though maintained flat for FY09. We maintain our BUY rating on the stock with a price target of Rs 244.

Result update Stable margins through sustained CASA of 40%

Despite a 31% loan book (against our expected 26%), pressure on resources remained low as CASA was stable at 40% (expected 39%). Higher yields on the loan book (94bps expansion during FY07), and contained deposit cost (26bps expansion), pushed up margins by 19bps yoy to 3.2%.

Robust fee income traction

BOI has maintained its fee income traction reflected in the 31% growth in commission exchange and brokerage and 23% in the forex income. Sustained domestic business along with robust international operations (20% of the volumes and 30% of the operating profit) has kept fee income growth high.

Asset quality improvement on fast track

We rate BOI as the best play on asset quality improvement. We derive comfort from the Bank’s contained loan growth strategy for FY08 and high focus on recoveries. Gross NPAs in FY07 have come down from 3.7% to 2.4% and net NPAs from 1.5% to 0.74%. Recoveries during the year stood at Rs10bn.

Sustained high ROE could improve valuations for the Bank

We expect ROE to average 21% over FY07-09. Even despite a likely equity dilution of 15%, ROE would still remain high at ~17.5% in FY08. This is likely to keep valuations high for BOI. We maintain our BUY rating on the stock with a price target of Rs244.

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Indiainfoline Tyre_Industy 16 Apr


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Investment Case

China not to take its foot off the pedal soon

The current backwardation situation indicates tight supply scenario
prevalent in the industry, which is due to huge demand from the Chinese
market. This demand will be driven by investments in the power and
construction sector, coupled with robust consumption. Double digit growth
rate in the power generation sector over the next five years will support
China’s copper demand for the year. Demand from construction and
consumer durables is expected to be robust during the year, rising at a
rate of 18% and 13% over CY2006 respectively. The State Reserve Bureau
(SRB) is expected to replenish its stock piles during the year, raising demand
forecast for CY2007 by 10.8% - 13.5% to 3.9 - 4.1mn tons.

Inventory levels not enough to cushion supply cuts
Inventory levels of copper are not enough to cushion any drop in supply.
The current inventory levels are approximately equal to 3.5 days of cover
as per the demand forecast for CY2007. The average inventory levels
maintained throughout the year for CY2005 was 1.2 days and that in CY2006
was equal to just 2.5 days of usage. Though the current levels are higher
than that of the last two years, it is much lower than the 21.5 days witnessed
in CY2002 and 12.8 days in CY2004. The rise in the demand from China
has led to a drastic reduction in the inventory levels in the past one month.
The decrease in the inventory levels will support the rally in copper prices.

Resurgence of Euro Zone led by Germany to consume more copper in
CY2007
For the last decade every, market player has been talking about the strong
demand from the emerging markets like India, Thailand, Brazil and many
more. People have agreed to these arguments and today everyone is
focusing on this. But in the shadow of the emerging markets the Euro
zone has been rising every quarter in the last 2 years. The Euro Zone
Gross Domestic Product (GDP) growth was 2.7% in 2006, the best
performance since 2000 and is expected to witness a growth of 2.3% in
2007. The GDP and the manufacturing sector in the Euro zone has been
rising quarter on quarter indicating to a rise in the demand for the industrial
metals. According to ICSG, the demand from Europe is expected to be
more than 5mn tons in the CY2007, a rise of 2% from that of CY2006.
U.S economy moderating, not headed for recession
The US economy has coped very well with the hit to GDP growth from the
housing recession. Forecasts that the housing slump would push the
broader economy into recession have been wide off the mark. But the
direct effect on economic growth is not the only transmission mechanism.
The next issue is whether cutbacks in the supply of housing loans could
trigger a financial crisis. If so, this would be a genuine threat to the health
of the US economy. We assume that the rate tightening cycle is over and
the Fed can cut its interest rates as we move into the second half of the
year. We assume that the slump in the housing sector has bottomed out
and the demand for the metal will remain around current levels.

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