1. Healthcare

Bank of Baroda January 30, 2015 Nitin Kumar [email protected] +91‐22‐66322236 Pritesh Bumb [email protected] +91‐22‐66322232 Rating Price Target Price Implied Upside Sensex Nifty BUY Rs193 Rs220 14.0% 29,183 8,809 BOB reported disappointing results with 3Q FY15 PAT plunging by 68% y‐y led by aggravated provisions and one‐off tax expenses of Rs4.1bn (including penalty) levied by Dubai Income Tax Authority. Business growth remains muted (1% decline in 9MFY15) leading to ~5.5% miss in our NII estimate. Asset quality deteriorated sharply which management ascribed to prolonged economic slowdown while the guidance for the next quarter remains equally cautious. We believe that while BOB still has relatively better asset quality and coverage ratio than peers any turnaround is now pushed into FY16. We cut our FY16E earnings by 19% and reduce our price target to Rs220 based on 1.2x Mar‐17E ABV. Retain BUY. 
PPOP growth remains modest; domestic NIM declines by 10bp q‐q: BOB’s PPOP growth stood modest at 6.4% YoY dragged by weak NII growth (affected by interest reversals and 10bp margin compression) even as core‐fee income registered healthy growth of 16% y‐y. However aggravated provisioning to maintain coverage ratio and one‐off tax expenses of Rs4.1bn (including penalty) levied by Dubai Income Tax Authority resulted in 68% y‐y decline in net profits. 
Business growth remains flat; BOB is prudently shunning high‐cost deposits: BOB’s business growth remains tepid (1% decline in 9MFY15) led by weak trends in both domestic and international business. BOB shed preferential term deposits from Rs117.9 bn at FY14 end to Rs80.8bn while cut down the share of CDs in term deposits from 7.5% to 2.5% during the similar period. Management pointed that an acute dearth of loan demand arising from prolonged economic slowdown remains an overhang on business growth. 
Asset quality surprises negatively; cut earnings and revise PT: Fresh slippages stood elevated at Rs30.42 bn while BOB restructured loans worth Rs15.98bn (Rs 11.75bn in 2QFY15). The bank guided for elevated levels of slippages/potential restructuring in 4QFY15 as well. We cut our FY16E earnings by 19% and reduce our price target to Rs220 based on 1.2x Mar‐17E ABV. Retain BUY. (Prices as on January 30, 2015) Trading data Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Major shareholders Promoters Foreign Domestic Inst. Public & Other Stock Performance (%) 1M 6M Absolute (10.8) 8.9 Relative (17.3) (2.9) How we differ from Consensus EPS (Rs) PL Cons. 2016 22.4 29.0 2017 26.2 34.3 415.9 2,153.4 2345.2 56.26% 17.96% 17.97% 7.81% 12M 81.8 39.4 Key financials ( Y/e March) Net interest income (Rs m) Growth (%) Operating profit (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs) % Diff. ‐22.8 ‐23.6 Price Performance (RIC: BOB.BO, BB: BOB IN) (Rs)
250
2014
119,653
5.7
92,910
45,411
21.3
(0.8)
5.0
2015E 130,219 8.8 95,346 37,245 17.3 (18.8) 4.6 2016E
144,407
10.9
104,608
48,179
22.4
29.4
5.0
2017E
167,587
16.1
120,949
56,434
26.2
17.1
5.5
2014
1.98
13.4
0.75
1.2
1.4
9.1
2.6
2015E 1.90 10.0 0.54 1.1 1.5 11.2 2.4 2016E
1.88
11.9
0.63
1.0
1.3
8.6
2.6
2017E
1.87
12.7
0.63
0.9
1.1
7.4
2.8
200
150
100
50
Source: Bloomberg Nov‐14
Sep‐14
Jul‐14
May‐14
Mar‐14
Jan‐14
0
Profitability & Valuation NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report Q3FY15 Result Update Disappointing results; normalcy to return from FY16 only
Bank of Baroda Exhibit 1: BOB Q3FY15 – Disappointing quarter as high provisions on NPA and one off taxes dent earnings NII performance came in weak sequentially
as high slippages led to high interest
reversals coupled with lower loan growth
Staff expenses remained low despite
providing run‐rate provisions Bank upfront has provided taxes levied by
Dubai tax authorities of Rs~4.1bn
pertaining to earlier years
. Loan growth has come off to 12% YoY.
Management does not see any significant
pick‐up in loan book as fresh capex has
been muted P&L (Rs mn) Q3FY15
Interest Income 107,180
Q3FY14 YoY gr. (%) 96,907 10.6 Q2FY15 QoQ gr. (%)
108,257
(1.0)
Interest Expense 74,319
66,336 12.0 74,246
0.1
Net Interest Income (NII) 32,861
30,571 7.5 34,011
(3.4)
Treasury income 4,966
3,876 28.1 4,314
15.1
Other income exc. Treasury 5,938
5,445 9.1 5,602
6.0
Total income 43,765
39,892 9.7 43,928
(0.4)
Operating expenses 20,375
17,917 13.7 19,898
2.4
‐Staff expenses 11,198
10,557 6.1 11,078
1.1
‐Other expenses 9,177
7,360 24.7 8,820
4.0
Operating profit 23,390
21,975 6.4 24,029
(2.7)
Core operating profit 18,424
18,099 1.8 19,715
(6.5)
Total provisions 12,623
7,619 65.7 8,880
42.1
Profit before tax 10,768
14,356 (25.0) 15,149
(28.9)
Tax 7,428
3,722 99.6 4,107
80.9
Profit after tax 3,340
10,478 (68.1) 11,042
(69.8)
Deposits 5,645,997
5,037,718 12.1 5,669,259
(0.4)
Advances 3,936,305
3,524,462 11.7 3,857,663
154,530
119,258 29.6 82,913
66,236 230,988
211,692 Balance sheet (Rs mn) Gross NPA (Rs mn) Net NPA (Rs mn) O/S Std. restr. assets (Rs mn) 2.0
130,576
18.3
25.2 67,045
23.7
9.1 224,170
3.0
Profitability ratios Margins were down on domestic loans on
high interest reversals, but overseas
margins also have come under pressure as
spreads have come off
RoaA 0.2
0.7 (53) 0.7
(48)
RoaE 3.4
13.1 (963) 11.7
(832)
NIM 2.2
2.4 (17) 2.4
(20)
Yield on Advances 8.1
8.3 (21) 8.4
(27)
Cost of Deposits 5.2
5.2 (6) 5.2
‐
3.9
3.3 53 3.3
53
Asset Quality Gross NPL ratio Net NPL ratio Asset quality deteriorates as Bank reported
Coverage ratio Std. rest. Assets/ Total 2.1
1.9 23 1.7
37
46.3
44.5 189 48.7
(231)
5.9
6.0 (14) 5.8
6
fresh slippages of Rs30bn & Rs15.7bn of
Business & Other Ratios fresh restructuring constituting from the
Low‐cost deposit mix 32.4
32.3 15 31.9
53
Cost‐income ratio 46.6
44.9 164 45.3
126
Non int. inc / total income 24.9
23.4 155 22.6
234
Credit deposit ratio 69.7
70.0 (24) 68.0
167
CAR 12.4
12.0 41 12.2
23
Tier‐I 9.4
8.7 69 9.3
15
Infra, textiles & Construction EPC
Source: Company Data, PL Research January 30, 2015 2
Bank of Baroda Exhibit 2: Loan growth was muted especially the domestic loan book Domestic Loan growth
International Loan growth
50.0%
40.0%
30.0%
20.0%
10.0%
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
0.0%
Source: Company Data, PL Research Exhibit 3: Both domestic and overseas margins have come under Exhibit 4: CASA growth has been the only positive for BOB pressure CASA (%)
35.0%
NIM (%)
Domestic NIM (%)
4.5%
34.0%
4.0%
33.0%
32.0%
3.5%
31.0%
3.0%
30.0%
29.0%
2.5%
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
4Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
1Q12
28.0%
2.0%
Source: Company Data, PL Research Source: Company Data, PL Research Exhibit 5: Gross slippages came in extremely high and was negative surprise 2Q14
3Q14
4Q14 1Q15
2Q15
3Q15
Opening NPAs 97,625 108,879 119,536 118,759 120,868 132,685
Gross Slippages 20,170
15,339
11,175 20,221
17,570
30,420
Recovery 2,391
1,970
6,265 5,626
2,780
2,380
Up‐gradations 1,851
2,987
516 7,412
2,350
1,800
4,674
(274)
5,171 5,073
3,680
3,280
Write offs Closing 108,879 119,536 118,759 120,868 130,576 154,530
Annualized Slippages % 2.43%
1.77%
1.19% 2.08%
1.83%
3.15%
Restructuring Incremental 16,370
12,130
11,570 9,860
11,750
15,980
(% of loans) 1.97%
1.40%
1.24% 1.01%
1.22%
1.6%
Source: Company Data, PL Research January 30, 2015 3
Exhibit 6: Fresh slippages rose to highest in any given quarter Bank of Baroda Exhibit 7: Credit cost was high on high slippages Gross Slippages (%), annualized
3.50%
Credit Cost
3.00%
1.5%
2.50%
1.2%
2.00%
0.9%
1.50%
Source: Company Data, PL Research 3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
4Q11
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
0.0%
2Q12
0.00%
1Q12
0.3%
4Q11
0.50%
1Q12
0.6%
1.00%
Source: Company Data, PL Research Exhibit 8: ROAs will inch up gradually over FY16E ROA decomposition 2011
2012
2013 2014 2015E
2016E
2017E
Net Interest Income/Assets
2.83%
2.63%
2.33% 2.03% 1.95%
1.93%
1.92%
Fees/Assets 0.76%
0.72%
0.62% 0.63% 0.56%
0.61%
0.58%
Investment profits/Assets 0.14%
0.15%
0.13% 0.13% 0.12%
0.07%
0.08%
Net revenues/Assets 3.74%
3.50%
3.08% 2.79% 2.63%
2.62%
2.58%
Operating Expense/Assets ‐1.49%
‐1.31%
‐1.23% ‐1.20% ‐1.20%
‐1.22%
‐1.19%
Provisions/Assets ‐0.43%
‐0.65%
‐0.86% ‐0.65% ‐0.56%
‐0.49%
‐0.48%
Taxes/Assets ‐0.45%
‐0.26%
‐0.07% ‐0.16% ‐0.31%
‐0.26%
‐0.26%
Total Costs/Assets ‐2.37%
‐2.23%
‐2.16% ‐2.02% ‐2.07%
‐1.97%
‐1.93%
ROA 1.36%
1.28%
0.92% 0.77% 0.56%
0.64%
0.65%
Equity/Assets 5.40%
5.87%
5.90% 5.66% 5.58%
5.40%
5.08%
ROE 25.3%
21.7%
15.7% 13.6% 10.3%
12.3%
13.1%
Source: Company Data, PL Research Exhibit 9: We reduce our TP to Rs220 from Rs235 on sharp cut in earnings PT calculation and upside Fair price ‐ EVA 214 Fair price ‐ Two stage GGM 226 Average of the two 220 Target P/ABV 1.2 Target P/ABV2 1.4 Target P/E 8.4 Current price, Rs 192
Upside (%) 15%
Dividend yield (%) 2.2%
Total return (%) 17%
Source: Company Data, PL Research January 30, 2015 4
Bank of Baroda Exhibit 10: We cut our earnings by 25% in FY15E & by 20% in FY16E on higher credit costs & one‐offs (Rs mn) Old New % Change FY15E
FY16E
FY15E FY16E FY15E
FY16E
Net interest income 132,732
150,425
130,219 144,407 (1.9)
(4.0)
Operating profit 103,093
120,277
95,346 104,608 (7.5)
(13.0)
50,097
59,728
37,245 48,179 (25.7)
(19.3)
23.3
27.7
17.3 22.4 (25.7)
(19.3)
149.5
169.4
129.2 153.5 (13.6)
(9.4)
Net profit EPS (Rs) ABVPS (Rs) Price target (Rs) 235 220 Recommendation BUY BUY (6.5) Source: Company Data, PL Research January 30, 2015 5
Income Statement (Rs m) Y/e March Int. Earned from Adv. Int. Earned from Invt. Others Total Interest Income Interest expense NII Growth (%) Treasury Income NTNII Non Interest Income Total Income Growth (%) Operating Expense Operating Profit Growth (%) NPA Provisions Investment Provisions Total Provisions PBT Tax Provisions Effective Tax Rate (%) PAT Growth (%) 2014 2015E 2016E
2017E
278,781 86,960 23,656 389,397 269,744 119,653 5.7 7,438 37,189 44,627 434,025 11.8 71,371 92,910 3.2 29,352 1,986 37,937 54,973 9,562 17.4 45,411 1.3 335,962 85,935 24,691 446,587 316,368 130,219 8.8 8,182 37,338 45,520 492,107 13.4 80,394 95,346 2.6 36,874 (1,243) 37,151 58,195 20,950 36.0 37,245 (18.0) 371,120
90,687
27,926
489,734
345,326
144,407
10.9
5,138
45,844
50,982
540,716
9.9
90,782
104,608
9.7
34,152
(746)
36,751
67,857
19,679
29.0
48,179
29.4
429,648
101,284
30,738
561,669
394,082
167,587
16.1
6,577
50,523
57,100
618,769
14.4
103,738
120,949
15.6
37,361
(448)
41,464
79,485
23,051
29.0
56,434
17.1
Quarterly Financials (Rs m) Y/e March Q4FY14 Q1FY15
Q2FY15
Q3FY15
Interest Income Interest Expense Net Interest Income Non Interest Income CEB Treasury Net Total Income Operating Expenses Employee Expenses Other Expenses Operating Profit Core Operating Profit Provisions Loan loss provisions Investment Depreciation Profit before tax Tax PAT before EO Extraordinary item PAT 102,886 71,643 31,243 13,263 4,192 893 44,506 18,710 10,399 8,311 25,796 24,903 11,532 6,374 — 14,264 2,536 11,728 — 11,728 106,580
73,297
33,283
10,245
3,473
2,242
43,529
18,733
11,055
7,678
24,796
22,554
5,267
7,718
—
19,529
5,910
13,619
—
13,619
108,257
74,246
34,011
9,917
3,328
1,790
43,928
19,898
11,078
8,820
24,029
22,240
8,880
5,843
—
15,149
4,107
11,042
—
11,042
107,180
74,319
32,861
10,904
3,732
2,436
43,765
20,375
11,198
9,177
23,390
20,954
12,623
11,498
—
10,768
7,428
3,340
—
3,340
2014 2015E
2016E
2017E
193 2,153 415,926 6.3 21.3 162 134 9.1 1.2 1.4 5.0 2.6 193
2,153
415,926
5.9
17.3
174
129
11.2
1.1
1.5
4.6
2.4
193
2,153
415,926
5.1
22.4
191
154
8.6
1.0
1.3
5.0
2.6
193
2,153
415,926
4.3
26.2
211
177
7.4
0.9
1.1
5.5
2.8
2014 2015E
2016E
2017E
2.0 0.8 13.4 1.9
0.5
10.0
1.9
0.6
11.9
1.9
0.6
12.7
Efficiency Y/e March 2014 2015E
2016E
2017E
Cost‐Income Ratio (%) C‐D Ratio (%) Business per Emp. (Rs m) Profit per Emp. (Rs lacs) Business per Branch (Rs m) Profit per Branch (Rs m) 43.4 69.8 210 9.9 1,958 9 45.7
70.0
194
7.0
14,657
53
46.5
70.2
195
7.9
13,925
57
46.2
71.3
199
8.1
13,913
56
Asset Quality Y/e March 2014 2015E
2016E
2017E
Gross NPAs (Rs m) 118,759 Net NPAs (Rs m) 60,348 Gr. NPAs to Gross Adv. (%) 3.0 Net NPAs to Net Adv. (%) 1.5 NPA Coverage (%) 49.2 Source: Company Data, PL Research. 172,050
96,898
4.1
2.3
43.7
165,559
80,166
3.4
1.6
51.6
164,690
73,159
2.8
1.3
55.6
Key Ratios Y/e March CMP (Rs) Equity Shrs. Os. (m) Market Cap (Rs m) M/Cap to AUM (%) EPS (Rs) Book Value (Rs) Adj. BV (100%) (Rs) P/E (x) P/BV (x) P/ABV (x) DPS (Rs) Dividend Yield (%) Balance Sheet (Rs m) Y/e March 2014 2015E 2016E
2017E
Par Value 2 No. of equity shares 2,153 Equity 4,307 Networth 359,857 Adj. Networth 299,509 Deposits 5,688,944 Growth (%) 20.0 Low Cost deposits 1,464,878 % of total deposits 25.7 Total Liabilities 6,595,045 Net Advances 3,970,058 Growth (%) 21.0 Investments 1,161,127 Total Assets 6,595,045 Source: Company Data, PL Research. 2 2,153 4,307 385,611 288,712 6,035,969 6.1 1,533,136 25.4 7,104,400 4,224,142 6.4 1,167,258 7,104,400 2
2,153
4,307
421,300
341,134
6,953,437
15.2
1,814,847
26.1
8,233,893
4,883,108
15.6
1,322,663
8,233,893
2
2,153
4,307
463,995
390,837
8,121,614
16.8
2,192,836
27.0
9,674,037
5,791,366
18.6
1,495,773
9,674,037
Bank of Baroda Profitability (%) Y/e March NIM RoAA RoAE January 30, 2015 6
Bank of Baroda Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 % of Total Coverage
Rating Distribution of Research Coverage 45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
PL’s Recommendation Nomenclature 42.4%
37.6%
18.8%
Accumulate
Reduce
: Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month Not Rated (NR) : No specific call on the stock Under Review (UR) : 1.2%
BUY
BUY Rating likely to change shortly Sell
DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Nitin Kumar (B.E, PGDM, CFA), Mr. Pritesh Bumb (MBA, M.com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. 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PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co‐managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Nitin Kumar (B.E, PGDM, CFA), Mr. Pritesh Bumb (MBA, M.com), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. 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In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. January 30, 2015 7