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Kotak Bank, BPCL, Tata Power: What do our estimates say? - Views on News from Equitymaster

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  • Jul 28, 2014 - Kotak Bank, BPCL, Tata Power: What do our estimates say?

Kotak Bank, BPCL, Tata Power: What do our estimates say?
Jul 28, 2014

Kotak Mahindra Bank

We recommended Kotak Mahindra Bank in May 2013 citing the fact that the bank had taken the lessons of having stronger retail presence to heart. Having limited franchise was not really a hurdle for the bank in the past as it had presence, through its subsidiaries, even in semi urban and rural areas. Moreover, the deregulation of savings account interest rate was working wonders for the bank. It had already been able to nearly double its savings account base within 24 months, by offering 6% interest on the accounts. Since the accounts were replacing costly term deposits, they were to have a benign impact on the net interest margins (NIMs) as well. Our assumptions proved right and Kotak Bank went from strength to strength in terms of loan growth and margin expansion.

Kotak Mahindra Bank breached our target price of Rs 960 on 18th June 2014. While bank continued to sustain a good performance on the margin and asset quality front in FY14, its balance sheet growth has come in substantially lower than that of its peers over the last few quarters. Even if we are to assume that Kotak Bank's growth rate will get normalized by the end of FY15, the current valuations seem to factor in most of the medium term upsides. As per our revised estimates, the stock can hardly offer an average annual return of about 6-7% from current levels. We therefore recommend investors to Sell the stock and book profits.

Bharat Petroleum Corporation Ltd

It was in August 2012 that we came up a Hold recommendation on Bharat Petroleum Corporation Ltd (BPCL). While nothing seemed to be going right for downstream oil sector in India then, what gave us some comfort about the company was strong market position and growing presence in the upstream segment.

While uncertainty about under recoveries and subsidy remains, with phased deregulation in diesel prices, the scenario is seemingly improving for downstream oil companies. The same has eased concerns on working capital and interest costs to some extent. However, in the long term, deregulation in diesel is also likely to attract competition from private players.

The stock price for BPCL has exceeded our Sum of the Parts based (SOTP) target price of Rs 476 in April 2014 and is now trading at RS 592. At current valuations, we believe that all the upsides are well priced in and the risk to reward ratio has become unfavorable. BPCL still remains vulnerable to volatility in crude oil prices and exchange rates. As far as full diesel deregulation is concerned, there is still a long way to go. Any delay beyond the expected timeline cannot be ruled out since diesel is a fuel for mass consumption and a hike in its prices has a cascading impact.

Keeping all the upsides and risks in mind, we believe that at current valuations, the stock does not leave enough margin of safety for the investors. As such, we recommend investors to Sell the stock at current prices. With respect to our original recommendation price, the stock has delivered point to point returns of 68% (30% returns on an average annual basis).

Tata Power

Tata Power is one stock which the bore the maximum brunt of stagnancy in India's power sector reforms. That too despite the fact that the company put in place India's first UMPP project and had already bought coal mines in Indonesia for import of the mineral. Our assumptions about improvement in power sector capacity expansion did not filter into the company's earnings and as a result the stock languished. We believe that after the sharp run up in the stock price in the past few months, there is very little upside left in the medium term. Yes, while a few things have gone in favour of Tata Power in the recent past, it must be noted that on an overall basis its return ratios will be impacted and thus be poorer then what they were earlier. Not to mention the many uncertainties surrounding the legalities of the compensatory tariff that was allowed to the company. Also, with not too many projects expected to come on stream over the next few years (and thus keeping the growth prospects uncertain), we are of the view that that the current valuations do not offer a significant upside from here on. We recommend investors to Sell the stock.

Investors could consider buying the stocks mentioned in the list of top stocks to buy in the latest StockSelect. A gentle reminder that please do ensure no stock forms more than 5% of your overall portfolio.

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