Stock Market Update on Yes Bank for 1QFY2012

StockMarket Update on Yes Bank for 1QFY2012 with an Accumulate recommendation.

For 1QFY2012, Yes Bank reported a strong performance with net profit growth of 38.2% yoy (6.2% qoq) to `216cr, marginally above our estimate of `212cr. Profit growth was driven by sequentially stable NIMs and a sharp drop in provisioning expenses (due to write-back of `15cr), which offset the lower-than-expected non-interest income. The bank seemed to have moderated growth for maintaining NIMs. We maintain our Accumulate recommendation on the stock.

Business growth moderates; steady NIMs and strong asset quality: During the quarter, the bank seemed to have moderated its balance sheet growth to maintain NIMs, as evident from the sequential decline in advances of 3.7%. Consequently, deposit accretion also declined by 5.1% qoq. CASA deposits continued to grow at a brisk pace of 49.8% yoy, leading to an improvement in CASA ratio to 10.9% from 10.5% in 1QFY2011. The bank surprised positively with sequentially stable NIMs at 2.8% on the back of a 90bp rise in yield on advances, which offset the 70bp qoq increase in cost of funds. With advances growth moderating, non-interest income growth came down to 14.9% yoy. Asset quality of the bank continued to be in a sweet spot, with best-in-the-industry gross and net NPA ratios of 0.17% and 0.01%, respectively, coupled with provision coverage (excluding technical write-offs) of 95.2%. Branch expansion plans were on track, with addition of 41 branches to take the network to 255 branches.

Outlook and valuation: Structurally, as the bank’s balance sheet continues to grow rapidly, we believe there may be downside risks to the bank’s RoA. On the liabilities side, building a savings deposit franchise involves execution risks. However, as we believe that we are very close to the peak of the current interest rate cycle and as liquidity has improved compared to the extreme tightness during the last few quarters, the environment is expected to be relatively more conducive for banks such as Yes Bank. The stock is trading at of 2.0x FY2013E ABV. We maintain Accumulate on the stock with a target price of `353.

Stock Market Update on Dr. Reddy’s Laboratories for 1QFY2012

Stock Market Update on Dr. Reddy’s Laboratories for 1QFY2012 with a Buy recommendation and a Target Price of `1,920 (12 months)

Dr. Reddy’s Laboratories (DRL) reported higher-than-expected 1QFY2012 results. Net sales increased by 17.5% yoy, led by 21.0% yoy and 7.4% yoy growth across the global generics and proprietary products businesses, respectively. Net profit during the quarter, however, came higher than our estimates, on account of lower tax provision during the quarter as compared to our expectation. Overall net profit grew by 25.1% yoy to `262cr (`210cr). DRL has reinforced its FY2013 guidance of US$2.7bn, with RoCE expected to come in at 25%. We maintain our Buy recommendation on the stock.

Good set of numbers: DRL reported net sales of `1,978cr (`1,683cr) in 1QFY2012, growth of 17.5% yoy, which was higher than our estimates of `1,851cr. The US market reported strong growth of 47.4% yoy, led by higher market share in its key markets. Sales from Russia grew by 18.3% yoy. The domestic market reported single-digit growth of 5.7% yoy.

Outlook and valuation: DRL has reinforced its earlier revenue guidance of  US$2.7bn by FY2013E with RoCE of 25%. We expect net sales to report a 13.3% CAGR to `9,584cr and adjusted EPS to record a 22.7% CAGR to `96.0 over FY2011–13E. We maintain our Buy recommendation on the stock with a revised target price of `1,920.

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