Index. Stock Update >> Federal Bank. Viewpoint >> NOCIL. Visit us at December 16, For Private Circulation only

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1 Visit us at December 16, 2015 Index Stock Update >> Federal Bank Viewpoint >> NOCIL For Private Circulation only REGISTRATION DETAILS Regd Add: Sharekhan Limited, 10th Floor, Beta Building, Lodha ithink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai , Maharashtra. Tel: Sharekhan Ltd.: SEBI Regn. Nos. BSE - INB/INF ; BSE- CD ; NSE - INB/ INF ; CD-INE ; MSEI - INB/INF ; CD-INE ; DP - NSDL-IN-DP-NSDL ; CDSL-IN-DP-CDSL ; PMS- INP ; Mutual Fund-ARN ; Commodity trading through Sharekhan Commodities Pvt. Ltd.: MCX ; (MCX/TCM/CORP/0425) ; NCDEX ; (NCDEX/TCM/CORP/0142) ; NCDEX SPOT-NCDEXSPOT/116/CO/11/20626 ; For any complaints at igc@sharekhan.com ; Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do s & Don ts by MCX & NCDEX and the T & C on before investing.

2 stock update Federal Bank Reco: Buy Stock Update Valuations turn reasonable post-correction; upgraded to Buy CMP:Rs54 Price target: Market cap: Company details Shareholding pattern Price chart Rs75 Rs9,307 cr 52 week high/low: Rs80/52 NSE volume: (no. of shares) 40.9 lakh BSE code: NSE code: Sharekhan code: FEDERALBNK FEDERALBNK Free float: cr (no. of shares) Key points Inexpensive valuations: The stock of Federal Bank has corrected by around 18% since our last report (dated October 20, 2015) following weak set of numbers in Q2FY2016 and deterioration in asset quality. Presently, the stock trades at 1.0x its FY2017E book value (BV) which is around 17% discount to five-year mean valuations (ie 1.2x). While we expect earnings to witness significant improvement from FY2017 onwards, the current valuations increases the comfort and mostly factors in the concerns. Structural initiatives positive for medium to long term: The bank took several initiatives to improve liability base which resulted in an increase in current account and savings account (CASA) ratio over the past three years (31.8% vs 27.5% in FY2012). Federal Bank is focused on prudent growth strategy with thrust on retail, and small and medium enterprises (SME) sectors which will augur well for long term. Also, the increased branch expansion in non-home markets (ie outside Kerala) will help to tap more business opportunities and improve deposit base going ahead. Asset quality to stabilise, higher tier-1 CAR adds to comfort: Led by strengthening of the risk management framework, the performance of retail and SME portfolios has been satisfactory though corporate portfolio has caused stress. Going ahead, as the pipeline of stressed account eases, we expect its asset quality to stabilise. Higher provision coverage (76.6%) coupled with strong capitalisation (tier-1 capital adequacy ratio [CAR] 14.1%) as compared with its peers increases the comfort. Upgrade to Buy, PT unchanged at Rs75: While Federal Bank s FY2016 earnings may be affected by higher provisioning, we expect return on equity (RoE) and return on asset (RoA) to improve to 13.2% and 1.1% respectively by FY2017. We believe, the structural initiatives taken by the management (CASA, fee income, risk management, portfolio mix etc) over the past two to three years should strengthen bank s performance over coming period. We have therefore upgraded the rating to Buy with an unchanged price target of Rs75 (1.4x its FY2017 BV). Key risk: Performance of corporate portfolio has been volatile which if deteriorates could affect asset quality and earnings. Price performance (%) 1m 3m 6m 12m Absolute Relative to Sensex Valuation Net interest income (Rs cr) 1, , , , ,041.8 Net profit (Rs cr) , ,182.6 EPS (Rs) P/E (x) Book value (Rs/share) P/BV (x) RoE (%) RoA (%) Sharekhan 2 December 16, 2015

3 stock update Peer comparison Company RoE (%) RoA (%) P/BV FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E City Union Bank South Indian Bank Karur Vysya Bank Karnataka Bank Federal Bank Asset quality (%) Non-interest income (Rs cr) Net interest margin (%) One-year forward PE band Sharekhan 3 December 16, 2015

4 stock update Financials Profit and loss statement Rs cr Key ratios Net interest income 1,975 2,229 2,380 2,578 3,042 Non-interest income ,111 Net total income 2,639 2,922 3,259 3,546 4,153 Operating expenses 1,185 1,442 1,632 1,809 2,058 Pre-provisioning profit 1,455 1,480 1,627 1,737 2,095 Provisions Profit before tax 1,194 1,212 1,520 1,403 1,792 Tax Profit after tax , ,183 Balance sheet Rs cr Liabilities Networth 6,365 6,951 7,738 8,458 9,564 Deposits 57,615 59,731 70,825 82,157 95,713 Borrowings 5,187 5,688 2,308 2,670 3,111 Other liabilities 1,866 2,224 1,979 2,406 2,846 & provisions Total liabilities 71,033 74,594 82,850 95, ,234 Assets Cash & balances 2,742 3,104 3,380 3,944 4,594 with RBI Balances with banks 977 1,425 1,400 1,449 1,500 & money at call Investments 21,155 24,118 24,409 27,439 30,577 Advances 44,097 43,436 51,285 59,491 70,794 Fixed assets Other assets 1,662 2,086 1,910 2,855 3,204 Total assets 71,033 74,594 82,850 95, ,234 Per share data (Rs) Earnings Dividend Book value Adj. book value Spreads (%) Yield on advances Cost of deposits Net interest margins Operating ratios (%) Credit to deposit Cost to income CASA Non-interest income/ Total income Assets/Equity (x) Return ratios (%) RoE RoA Asset quality ratios (%) Gross NPA Net NPA Growth ratios (%) Net interest income Pre-provisioning profit Profit after tax Advances Deposits Valuation ratios (%) P/E P/BV P/ABV Capital adequacy (%) CAR Tier I Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Sharekhan 4 December 16, 2015

5 viewpoint NOCIL Viewpoint Fairly valued post-recent appreciation; Book profit with gains of 25.5% CMP: Rs62 Key points Handsome gain, stock appreciated by 25.5%: Since our Viewpoint on July 10, 2015, the stock of NOCIL has appreciated by 25.5% in the last five months in spite of the volatility in the equity markets. Thus, the stock has handsomely outperformed the benchmark indices. Fairly valued for a commodity player: Our positive stance was based on improving outlook for rubber chemicals business post anti-dumping duty. Also, the company is expected to benefit from its timely expansion at Dahej to manufacture intermediate products. The effect of the positive factors is clearly visible in the strong earnings growth reported in Q2 and H1 of the current fiscal. However, after the appreciation, the stock trades at close to 12x its FY2017E earnings which is not cheap for its commoditised business. Thus, we see limited upside in near term and recommend booking profit at the current level. Key risk: Further improvement in margins from the current level of 17% reported in H1FY2016 could result in a higher-than-expected growth in earnings and subsequent further re-rating of the stock. Valuations Particulars FY2013 FY2014 FY2015 FY2016E FY2017E Net sales (Rs cr) Growth (%) Operating profit (Rs cr) OPM (%) Adj PAT (Rs cr) PAT margin (%) Adj EPS (Rs) PE RoCE (%) RoE (%) EV/EBIDTA Price/Book value D/E Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Sharekhan 5 December 16, 2015

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