HDFC
Research: Goldman Sachs
Rating: Buy
CMP: Rs 1,981
Goldman Sachs believes stable macro economic conditions, a favourable growth outlook for the mortgage business and unlocking value of strategic investments are likely to be the key drivers of HDFC’s stock performance. It reiterates ‘buy’ rating on the stock, which has a total return potential of 20%. Goldman Sachs sees HDFC as a play on opportunities in the mortgage market and one that offers investors value due to growth in other areas of financial services. Over time, the value accruing from these investments, particularly life insurance, will grow faster than the value of the mortgage business. Key catalysts for the stock include signals of stable monetary conditions, a less volatile interest rate environment, earnings delivery in line with consensus expectations and clear visibility on the sell-down of some of HDFC’s strategic investments in FY08.
HDFC Bank
Research: Edelweiss Securities
Rating: Buy
CMP: Rs 1,231
HDFC Bank’s Q1 FY08 numbers were in line with Edelweiss Securities’ estimates. Net profit grew 34% YoY to Rs 320 crore, while net interest income grew 28% YoY. Net interest margins improved YoY to 4.2%, while non-interest income increased by 46%. The proportion of low-cost deposit declined slightly to 52%. The bank’s operating expenses increased 40% YoY due to expansion in its branches. Higher general provisioning led to overall provision growth of 50% YoY, while the balance sheet grew by 32% YoY. Edelweiss maintains its EPS estimate for FY08 at Rs 43 and reduces EPS estimate for FY09 by 2.15% to Rs 56.6. Edelweiss is incorporating actual FY07 numbers, reducing its margin expectations and increasing fee income growth expectations to 30% from 27.5% in FY08E. Edelweiss likes the bank for its liability franchise and asset quality. It believes the bank is a safe bet compared to its peers due to its stable and predictable growth. The stock trades at 3.1x FY09E book and 20x FY09E EPS. Edelweiss Securities’ maintains its ‘buy’ recommendation.
JP Associates
Research: DSP Merrill Lynch
Rating: Buy
CMP: Rs 870
DSP Merrill Lynch initiates coverage on JP Associates (JPA) with a ‘buy’ recommendation. JPA offers a blend of asset play (hydro power, real estate and expressway) and 20% CAGR in parent EPS over FY07-09E. Key rationales for DSP Merrill Lynch’s bullish stance are asset accretion led by infrastructure concessions, acquisition/monetisation of 6,250 acres of real estate in Noida. NAV may get a boost following rise in the value of land bank, with the likely transformation of the Delhi-Agra region led by the expressway, and the proposed Greater Noida airport. Other NAV kickers are a three-fold rise in power capacity by FY12E and new infra concessions. DSP Merrill Lynch believes JPA’s aggressive management will be able to leverage potential for growth as India builds infrastructure on the purchasing power parity (PPP) model.
Chennai Petroleum
Research: Citigroup
Rating: Buy
CMP: Rs 300
Citigroup has raised Chennai Petroleum Corporation (CPCL)’s FY08-09 estimates by 19-25% on the back of sustained strength in the refining cycle and reduced subsidy burden. Dividend yield of 5.6% provides downside support. The company reported PAT of Rs 323 crore (EPS Rs 21.7) during the quarter, which was slightly higher than expected due to strong gross refining margins (GRM). Reported GRM of $8.8/bbl was in line with Singapore complex GRM of $9.6/bbl. Adjusting for subsidy payouts, CPCL has broadly tracked Singapore GRMs, apart from certain one-off quarters. New estimates are based on GRMs of $6.5/bbl in FY08E and $6.0/bl in FY09E, though gains are partially offset by a stronger rupee. Citigroup does not expect pure refiners to be included in the subsidy net as duty protection has fallen to 1% and a major contribution from RIL’s refinery is unlikely, given its EOU status. Replacement cost analysis suggests further hidden value. On a conservative EV/complexity bbl of $1500 (against replacement cost of $2,000 and RIL/RPL’s current multiples of $1,900-2,200), CPCL could be worth Rs 490. The steep discount to replacement cost offsets the risks from a potential merger with IOC.
Infosys Technologies
Research: Ask
Rating: Buy
CMP: Rs 1,940
Infosys Technologies’ Q1 FY08 results were above the Street’s expectations. But the company has missed its topline guidance for the second time in a row (though it has outdone its EPS guidance in both quarters). Revenues, at Rs 3,773 crore, were flat sequentially (against ASK’s expectation of Rs 3,885 crore) and PAT was also flat at Rs 1,028 crore (against ASK’s expectation of Rs 945 crore). The guidance in rupee terms for FY08E has been revised downwards (-5.1% at the higher end), while the dollar guidance has been increased marginally. Though demand looks robust, the rupee seems to have taken the fizz out of the growth story. ASK has revised its FY08E EPS downwards to Rs 80 (-1.7%) and FY09E EPS to Rs 97.4 (-2.7%). It has also revised the exit P/E multiple from 25x to 24x as earnings growth has slowed considerably. ASK anticipates an EPS CAGR of 20.6% over FY07-09E (vis-à-vis 39.3% over FY05-07E). But ASK remains positive on the company’s fundamentals and believes that most of the bad news has been factored into the current market price. It maintains ‘buy’ recommendation on the stock.
DLF
Research: Motilal Oswal
Rating: Buy
CMP: Rs 600
Motilal Oswal’s target net asset value (NAV) premium for DLF is higher than the target average it would apply for other property development companies. Motilal Oswal believes that DLF, India’s largest real estate company, is the best proxy for the promising domestic real estate opportunity. It is excited about DLF’s dominant presence in emerging segments of premium apartments, commercial offices and retail, which are highly profitable businesses with strong entry barriers. Thus, DLF is relatively better-placed to face the challenging macro environment, which will encourage lower risk premiums, going forward.
Tata Motors
Research: Enam
Rating: Buy
CMP: Rs 767
Medium and heavy commercial vehicles (M&HCV) volumes are key to short-term profitability. Tata Motors’ product portfolio is highly leveraged towards M&HCV (~32% of volumes and >60% of EBITDA), making it vulnerable to a slowdown in the segment. M&HCV volumes remain uncertain for FY08 due to increase in lending rates and risk to fleet operator economics. But long-term drivers are in place. Tata Motors is undertaking structural changes to mitigate product cyclicality and reduce its dependence on M&HCVs from 60% of EBITDA to less than 50% over the next 2-3 years. The reasons for this are: an agreement with FIAT to jointly manufacture and distribute FIAT cars in India by end FY08, quantum of exports to increase from 18% to 25% in the next 2-3 years and substantial potential value in five key subsidiaries, especially Tata Technologies.
