Corporation Bank: Pressure on margins

ANALYSTS' CORNER

ICICI Securities has downgraded Corporation Bank from buy to hold. The report expresses concerns over the bank's margins and asset quality and has reduced their earnings estimates by about 10 per cent for FY06E as well as FY07E. The stock is currently trading at the upper end of the public sector banks' valuation range.

The report adds, "We downgrade the stock, while acknowledging that strong topline performance, a well-capitalised condition and foreign investment headroom remain key positives. Investment re-pricing implies margin downside.

The bank has indicated that it will be difficult to hold on to even the reduced yield due to the redemption of Rs 1,600 crore investments during FY06. This is likely to have an adverse impact on net interest margins, which are expected to decline to 3.51 per cent in FY06.

The bank's retail asset quality is slipping, although the signs are nascent. In view of the intense competition in the retail assets market, we would prefer to observe how the bank tackles this situation. The stock trades at FY06E P/E of 10.4x.

Syndicate Bank: Derisked balance sheet

Motilal Oswal Securities recommends a buy on Syndicate Bank. The report states that it has a respectable asset base of Rs 52,100 crore, the tenth largest state-owned bank in India. Its net NPAs are expected to fall below one per cent in FY06. Earnings are expected to show robust growth of 58 per cent.

The report adds, "The bank has de-risked its balance sheet significantly and has also managed its earnings fairly well. We believe that the key investment arguments favouring Syndicate Bank are an average 20 per cent growth in FY07 and FY08, loan growth, significant proportion of bonds transferred to HTM, cushion against rate increase of 75 bps, low FII ownership in the stock leaving significant room for investment and attractive valuations. Though the stock has appreciated post its recent capital offering, we believe that at 1.1x FY07E book value and 4.9x FY07E earnings, it offers significant upside from current levels."

TCS: Offshore gains

ICICI Securities has maintained a buy on Tata Consultancy Services. The report states that the company management sounded confident about the growing offshore opportunity and TCS's leadership role in expanding it. The company continues to see good traction in the ADM deals, with stable pricing.

But the highlight of the discussion was the progress made by TCS in new service lines such as infra services, consulting, enterprise solutions, testing and engineering services. The company now bills more than $100 million in each of these service lines.

The report adds, "We continue to be positive on TCS based on short-term indicators such as strong hiring plans, ramp-up in clients and margin buffer. Additionally, long-term indicators such as its ability to win large contracts, new service lines and strong client mining potential further bolster our recommendation. The stock trades at FY06E P/E of 21.6x."

On the back of strong client wins in Q1FY06 and strong hiring plans, the report estimates a pick-up in revenue growth.