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Saturday, June 13, 2009

Ashok Leyland Ltd and Canara Bank:-Whats the future fortells

1)Scripscan:Ashok Leyland Ltd
cmp:31
Traded in:Nse-bse

Story:one can sell Ashok Leyland as growth prospects for the company appear limited, and a rising capital outlay poses risks. Fundamentally, the key reasons for a healthy growth outlook in commercial vehicles include a sustained pick-up in economic activity, focus on infrastructure spending and a strong replacement cycle. Moreover, growth in agriculture, infrastructure and manufacturing sectors all of which have positive linkages to the freight business should remain positive over the long term. However, the near term looks challenging for Ashok Leyland due to sharp increase in interest rates, which will affect demand.A slowdown in the economy will also lead to a slowdown in the investment cycle, which will impact Ashok Leyland?s profitability. The 12-month target price of Rs 25 for the company is based on 5x March 10E consolidated EPS, based on trough valuation multiples to reflect slower-than-expected earnings growth.Buy the counter only below 20 to exit at higher levels.

1)Scripscan:Canara Bank
cmp:240
Traded in:Nse-bse

Story:I am neutral on Canara Bank as the RoE is likely to be capped at ~12% for FY09-10 due to the sharp increase in loan loss provisioning costs. Canara Bank reported a 46% y-o-y growth in topline, led by 26% y-o-y loan growth and margin expansion of 24 basis points to 2.7%. Margin expansion was a reflection of: a) improving pricing power and increase in lending rates; and b) repayment of high cost deposits by Canara Bank in the previous year, which reduced cost of deposits from 6.8% in Q2 FY08to 6.6% in Q2 FY09. Despite loan growth being sustained at +20% and margins likely to expand further, earnings growth in coming quarters and in FY10 will remain muted as Canara Bank will need to provide for: a) higher wage costs under the new wage settlement; and b) loan loss provisions as delinquencies pick up, since the bank has no cushion due to its dismal coverage levels. As a result, RoE is likely to remain at ~12%, justifying Canara Bank?s low price-to-book multiple of 1 odd FY10 book.Switch to an axis or a hdfc bank for better results.

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