DCB Bank - Q4FY18 Results - Another Quarter of Robust Performance

DCB Bank continued to deliver healthy performance on all major metrics in 4QFY18 as well led by (a) strong growth in loan book (+28.6% YoY & 9.4% QoQ); (b) all-time high NIMs of 4.16% in FY18 vs. 4.04% in FY17; (c) strong growth in other income (+33.4% YoY & 13.2% QoQ); (d) continued sequential improvement in C/I ratio to 59.4% vs. 62.3% in 3QFY18; and (e) lower fresh slippages of Rs805mn vs. Rs1,031mn in 3QFY18. Led by 70% YoY and 16% QoQ improvement in upgrades and recovery from gross NPA to Rs667mn, its headline gross and net NPA ratio came in at 1.79% and 0.72%, respectively compared to 1.89% and 0.87% in 3QFY18. The Bank’s overall stressed loan portfolio, which improved sequentially, remains within the Management’s comfort zone. 

Management Commentary & Guidance

• Loan book grew by 28.6% YoY and 9.4% QoQ to Rs203.4bn aided by CV, AIB, Corporate Banking and SME segments. Expecting 22-25% growth in loan book in FY19E, the Bank looks forward to double its loan book over the next 3-3½ years.

• All-time high NIMs is attributable to some attractive refinancing options used by the Bank. The Management expects NIMs to remain in 3.7-3.8% range on sustainable basis. The Bank expects cost of fund to stabilise at around current level.

• The Bank opened 56 new branches in FY18 and has completed physical expansion drive started in 2QFY16. Going forward, the Bank will expand branch network in a suitable manner without affecting its overall cost to income ratio as well as profitability.

• The Bank expects C/I income to improve owing to likely improvement in operational efficiency of existing branches and other distribution channels. It expects to reach C/I ratio of 55% by FY19-end from 59.4% in 4QFY18.

• The Management is quite comfortable till the gross NPAs remain below 2% and net NPA below 1%, as the Bank’s customers are predominately SME and mid-size business houses. 

• Its core fee income is likely to grow at healthy pace in next few quarters led by strong growth in income from sale of Priority Sector Lending Certificate and 3rd party product distribution.

DCB-Bank-Price trend 

Outlook & Valuation

Continuing to focus on increasing loan book in low-ticket Retail, SME and AIB segments, the Bank is augmenting its footprint both on physical and digital front. Though this aggressive expansion strategy might impact its return ratios in the near-term, we believe it is beneficial from long-term perspective. Further, the Management focuses on increasing efficiency of existing network to improve cost to income ratio in the long-term, which will lead to sustained earnings growth. As creditworthiness of its core client group from SME/MSME segment is steadily improving post GST roll-out, we expect further improvement in Bank’s operating performance. Rolling over our valuation to FY20E, we reiterate our BUY recommendation on the stock with a Target Price of Rs247 based on 2.4x FY20E Adjusted book value.

Next Read : Mindtree - Q4FY18 Results Update - Excellent Operating Performance Continues

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Mindtree - Q4FY18 Results Update - Excellent Operating Performance Continues

Mindtree has posted a healthy performance in 4QFY18. Its revenue grew by an impressive 5.6% QoQ (4.5% in CC terms) to US$226.2mn (exceeding our estimate by 1.4%) led by superb show in key verticals i.e. Travel & Hospitality (+9.9% QoQ), Technology, Media & Services (+9.3% QoQ) and MFG, Retail & CPG (+6.4% QoQ) in USD terms. On the flip side, BFSI revenue declined by 3.4% QoQ, which the Management believes to be a one-off. Aided by impressive revenue growth, favourable currency movement and higher utilisation, its EBITDA margin expanded by 103bps QoQ to an 8-quarter high of 16.1%, Notably, margin growth is followed by 348bps QoQ expansion in the previous quarter, driving confidence on FY19 margin trajectory, with revenue growth being the key lever. Mindtree won its single largest contract from a US airline customer. The company won deals worth US$298mn in 4QFY18 (+42.6% YoY). The Management’s expectation of even growth along with margin expansion in FY19E vs. FY18 led by healthy revenue growth is a major positive, in our view. Good revenue visibility across all verticals, strong deal wins and high digital component drive our confidence further.

Healthy Operating Metrics All-Round

From volume and pricing perspective, its blended volumes grew by a robust 7.8% QoQ, while blended pricing declined by 1.9% QoQ. Going forward, Mindtree is stepping up usage of automation and use of tools to reduce efforts for the same volume, which is likely to lead to a sustainable improvement in pricing, especially in ‘run-the-business’ projects, where clients look for cost savings. Mindtree has started disclosing the number of BOTs in operation, which stood at 335 as of FY18-end.

Mindtree added a gross of over 1,100 employees in 4QFY18 (with net addition of 523 employees) taking total headcount to 17,723 as of FY18-end. Employee utilisation came in higher, with ex-trainee utilisation at 75.1% (vs. 74.3% in 3QFY18), while cum-trainee utilisation came in at 73.8% (vs. 72.8% in 3QFY18). Management is comfortable with the current utilisation rate.

Outlook & Valuation

Greater confidence on margin growth led by robust business momentum is the key positive for Mindtree, in our view. Further, strong order book and good revenue visibility across verticals drive our confidence on healthy growth over FY18-FY20E. Notably, the growth is expected to be evenly spread out in FY19E rather than being back-ended. Hence, we believe that strong exit rate in 4QFY18 will drive >16% USD revenue growth and >200bps expansion in EBITDA margin in FY19E.Upgrading our EPS estimates by 4%/14% for FY19E/FY20E, respectively and applying a target PE multiple of 20x FY20E EPS, we maintain our BUY recommendation on the stock with a revised TP of Rs1,000.

Next Read : Cyient - Q4FY18 Results Update - Good Performance Healthy Business Outlook
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Cyient - Q4FY18 Results Update - Good Performance, Healthy Business Outlook

Cyient posted a healthy 8.3% QoQ USD revenue growth in 4QFY18 led by DLM business (+81% QoQ), while core services business grew by 2% QoQ. From vertical perspective, Semiconductor (+7.5% QoQ) and Communications (+11%) that saw robust growth. With 1.8% QoQ decline in USD revenue, Aerospace remained subdued. Within the core services business, while DNO revenue surged by 5% QoQ in USD terms, ENGG revenue remained flattish. A positive is a healthy outlook for FY19E, with the Management guiding for double-digit revenue growth in core services business (in-line with FY18 growth), 20% growth in DLM (35% growth including B&F acquisition) and flattish EBITDA margin, implying healthy double-digit growth in absolute EBITDA. Tax rate is likely to be much lower by 200-300bps, implying an effective tax rate of 22-23%, which is likely to translate into healthy double-digit earnings growth, in our view. 

DLM Drives Growth

Cyient’s revenue grew by 8.3% QoQ to US$164.6mn owing to robust DLM business (+81% QoQ) led by strong orders on the back of strong seasonality. On YoY basis, DLM grew 37%, with the strong 4Q performance aiding to the company to clock double-digit growth of 13.4% in FY18 in USD terms. Cyient has also acquired a US-based firm, B&F Design, in-line with its strategy of focusing on end-to-end solutions, from design to manufacturing and after-market services. From a core services business, growth was led by Semiconductor and Communications verticals (+7.5% and +11% QoQ, respectively). Cyient’s largest customer, UTC continues to face headwinds, which is reflected in top-5 client revenue (1.1% QoQ revenue decline), which is expected to continue in the near-term. The Management expects this account to return to growth from 1QFY19 onwards. On margin front, EBITDA margin came in lower by 49bps QoQ owing to investments made in the business. Nonetheless, its adjusted PAT grew by 7.1% QoQ led by healthy revenue growth and higher other income. 

Outlook & Valuation

At CMP, the stock trades at a PE of 15.1x/12.9x FY19E/FY20E EPS, respectively, which we believe is reasonable given improving core business metrics, strong traction in most verticals, newer strategic business initiatives, client relationships, quality balance sheet and healthy adjusted EPS growth (14.9% CAGR) over FY18-FY20E. We are enthused by the strong traction Cyient is witnessing in its business and believe the company should command a higher multiple in light of better growth. Our target PE multiple to 15x (14x) FY20E EPS to factor in improving growth trajectory, we maintain our BUY recommendation on the stock with a revised Target Price of Rs755 
Previous Read : Mindtree - Q4FY18 Results Update - Excellent Operating Performance Continues
Next Read : IndusInd Bank - Q4FY18 Results Update - Operating Performance Remains Healthy

IndusInd Bank - Q4FY18 Results Update - Operating Performance Remains Healthy

IndusInd Bank continued to deliver a healthy performance across operational parameters in 4QFY18 and FY18 albeit with minor setback on asset quality front. In line with our estimate, its net profit grew by 26.8% YoY and 1.8% QoQ to Rs9.5bn led by higher NII of Rs20.1bn (+20.4% YoY and +6% QoQ). Loan book grew by 28.2% YoY and 12.8% QoQ owing to strong growth in CV loan book and healthy growth in corporate loan book. While NIMs at 4% appear to be superior, C/I ratio at 45% is considered to be best-in-class. Savings bank deposit grew by a whopping 70% despite the base impact of demonetization in 4QFY17 leading to further improvement in CASA ratio to 44% as of Mar’18-end. On the flip side, the Bank has negatively surprised on asset quality front led by substantially higher divergence as suggested by the RBI in Annual Supervision Audit for FY17. It has reported a divergence of Rs13.6bn on gross NPA front in the RBI review, out of which only 14% (Rs1.9bn) slipped into NPA, while the remaining got either resolved or sold. Further, its overall stressed assets ratio has reduced to 1.23% in Mar’18 from 1.31% in Dec’17 and 1.30% in Mar’17.

Key Highlights for 2QFY18

• IndusInd Bank has 5.2% exposure towards gems and jewelry segment, the major chunk of which is lent to diamond cutting and polishing players. However, the Bank does not see any major impact on asset quality in the wake of the recent detection of fraud by few gems and jewelry players. Further, classifying 1 account as fraud (which is under investigation by different agencies), the Bank has adequately provided for the same.

• We expect the merger of Bharat Financial Inclusion to complete by 1HFY19E. Financially, the merger is likely to release capital (due to lower risk weight on MFI loan in Bank’s book), which may in turn boost earning profile and growth prospects.

• Credit cost stood at 62bps for FY18 and the Management expects it to bring down further to 55bps in FY19.

• The Management expects organic growth in loan book (excluding BFIL) to remain at ~25% in FY19.  Further, it expects NIMs to remain stable, going forward despite an increase in overall interest rate in the system due to improved ALM mix.

Outlook & Valuation

Acquisition of Bharat Financial Inclusion has placed IndusInd Bank in a sweet spot. With access to the best-in-class microfinance business network along with scale and profitability, we envisage significant upside potential in terms of loan growth, fee income generation and CASA mobilization, going forward. Further, recent changes in branch licensing and PSL certificate trading norms by the RBI will also help the Bank to achieve the synergy at a faster pace. We believe the Bank’s premium multiples are likely to improve further considering the strong growth and operating leverage across businesses. We expect the Bank’s earnings to witness 33% CAGR through FY18-20E. Rolling over our estimates to FY20E, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs2,196  based on 4.3x FY20E Adjusted book value.

Next Read :Time to cherry-pick in the mid-cap space