Downgrade STFL to neutral, target Rs.800

The stock is currently trading at 2.0x book, which is 10% lower than its five-year average P/BV. We believe the stock would trade close to its historical average P/BV even in an improving macro, given the lower ROE profile versus history.

We believe the stock is already pricing in the improving growth outlook and declining asset quality risks. We raise our price target to R800 (from R750 earlier) based on our residual income model (13.5% CoE). Our new price target implies 2.1x FY14e book and 10.5x FY14e earnings. We raise earnings marginally by 2% for FY13/14e and expect the loan book (AUM) to increase at a CAGR of 17% in FY12-14e. We expect NIMs for FY14e to stay flat at ~7.7% and expect credit costs at 2%/1.8% for FY13/14e.

For Q3FY13, we expect net income of R390 crore, a growth of 27% y-o-y, led by growth in net operating income of 20% y-o-y to R1,000 crore. We estimate NII growth at 18% YoY to R950 crore.

We also expect an improvement in NIMs by 47 basis points to 7.86%, and AUM growth of 22% y-o-y. Loan growth has picked up from the lows of 11% y-o-y in Q4FY12

... contd.