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Summary
of Contents
STOCK UPDATE
Union Bank of India
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs278
Current market price: Rs255
Price target revised to Rs278
Key points
- Change in revenue mix: During
FY2009, Union Bank of India (UBI)’s revenue mix underwent some change,
with the revenue contribution from the retail banking segment
witnessing a meaningful increase. In line, the profits from the retail
segment too jumped and the segment contributed 47% to the profit
before tax during the year.
- Continued improvement in
efficiency: Over
the past few years UBI has consistently improved its performance on
various efficiency parameters. This is clearly evident from the fact
that despite a 7% year-on-year (y-o-y) increase in the number of employees,
the net profit per employee increased by around 16.5% year on year
(yoy). The strong return ratios also clearly reflect the bank’s focus
on profitable growth.
- Increase in off balance sheet
exposure, unsecured loans: During FY2009 UBI witnessed a
29.8% y-o-y increase in its off balance sheet exposure. This sharp
increase in the off balance sheet exposure was mainly driven by a
significant increase (29.3% yoy) in liability arising out of
outstanding forward exchange contracts. Moreover, contrary to the
trend seen in the industry, there has been a steep rise (72% yoy) in
UBI’s unsecured loan portfolio. Though there has been no major
negative surprise on asset quality front so far, such sharp increase
in the bank’s unsecured loan portfolio in context of the current
macro-economic situation is worrisome.
- Exposure to sensitive
sectors: In
terms of exposure to sensitive sectors, UBI’s exposure to capital
markets has fallen during the year both in absolute as well as
relative terms. The stood at 1.7% of the bank’s total advances
vis-à-vis 2.5% in the previous fiscal. Besides, though the exposure to
real estate segment (in absolute terms) has increased sharply during
the year, it has remained largely stable in relative terms.
- Spike in restructured loans: Post
Reserve Bank of India (RBI)’s directive allowing banks to restructure
the loans that could have been potential non-performing assets, there
has been a significant upsurge in the quantum of restructured loans of
various public sector banks, with UBI being no exception. As on March
31, 2009, the amount of restructured loans of UBI spiked up 10x yoy
and the total amount of loans restructured as well as pending
applications together constituted 3.8% of the total outstanding loans
as on March 31, 2009.
- Capital raising helped boost
CAR: As
on March 31, 2009, UBI’s tier-I capital ratio stood comfortable at
8.19%, while the overall capital adequacy stood at 13.27% (as per
Basel II norms). In FY2009, the bank raised Rs340 crore of tier-I and
Rs800 crore of tier-II capital, which helped it in remaining well
capitalised despite high business growth during the year.
- We have fine-tuned our
earnings estimate for FY2010 factoring in the additional information.
We are revising our FY2011 earnings estimate upwards by 5%, as we
revisit our asset quality assumptions and factor in lower credit costs
in view of expected economic recovery in H2FY2010. At the current
market price of Rs255, the stock trades at 5.9x its FY2011E earnings
per share (EPS) and 1.4x its FY2011E adjusted book value (ABV). We
maintain our Hold recommendation on the stock with a revised price
target of Rs278.
SECTOR UPDATE
Cement
Top four register 12% growth
After witnessing a double-digit volume growth in the previous three months
(March, April and May 2009) cement dispatches continued its momentum in
June also with the top four cement players (ACC, Ambuja Cements, Grasim
Industries and Ultratech Cement) posting robust volume growth for the
month. The cumulative volume growth of these four leading domestic cement
players for the month increased by 12% year on year (yoy) to 6.5 million
metric tonne (MMT). The growth in cement consumption during the month was
mainly on account of higher government spending on infrastructure projects
and strong demand from personal home building activity in rural and
semi-urban areas. However all the four players have posted poor performance
on a sequential basis, with their cumulative dispatches declining by 1%.
This was on the back of higher base effect of May 2009.
RAILWAY BUDGET SPECIAL
Railway Budget 2009-10
The United Progressive Alliance (UPA) government presented its
Railway Budget in the parliament today. Against the expectations of being
populist in nature, the Railway Budget turned out to be a mix of reformist
with a social face as the new railway minister decided to leave freight
rates and fares unchanged. The minister emphasised the need to enhance the
railway infrastructure in the current fiscal. We present below the
highlights of the Railway Budget for FY2010.
Highlights of the Railway Budget
- Passenger fares and freight
rates left unchanged.
- Focus on implementation of
dedicated freight corridor. Mega logistic hubs planned alongside the
proposed Eastern and Western Dedicated Freight Corridors.
- New policy would be unveiled
to allow construction and operation of private freight terminals and
multi-modal logistic parks.
- Significant emphasis on
improvement of railway infrastructure, expansion of network coverage
and provision of better amenities, though the timeline for the
proposed investments and the actual actionable measures are yet to be
spelled out.
- The railway ministry has
identified 50 railway stations to be developed as world class stations
and has recognised additional 375 stations as “Ideal Stations” under
the public-private partnership (PPP) mode.
- The railway budget has
reduced the freight target for FY2010 to 882 metric tonne (MT),
implying a 5% growth over the 910MT mentioned in the interim budget,
and estimated gross freight receipt at Rs884 billion, indicating a
10.8% growth over the Rs931 billion estimated in the interim
budget.
Performance review for 2008-09
- Traffic receipts saw an
increase of 11.4% to Rs79,862 crore as against the revised budgeted
growth of 15% to Rs82,393 crore.
- Freight loading at 833
million tonne grew by 5% year on year (yoy)
- Indian Railways’ cash surplus
before dividend came in at Rs17,400 crore, after disbursing Rs13,600
crore towards the implementation of the Sixth Central Pay Commission,
as against the budgeted amount of Rs19,320 crore.
- The actual annual
plan expenditure for FY2009 was Rs36,336 crore, which was marginally
below the budgeted outlay of Rs37,500 crore.
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