Saturday, June 13, 2009



Stock Update -- Housing Development Finance Corporation

Stock Update -- Tata Tea


Housing Development Finance Corporation (HDFC) has received an in-principle nod from its Board of Directors for a combined offering of secured redeemable nonconvertible debentures (NCDs) along with detachable warrants. The issue size is pegged at Rs4,000 crore. The NCDs together with the warrants will be issued on a qualified institutional placement basis.

Investment in HDFC Bank and business growth
The capital raising is likely aimed at funding HDFC’s proposed investment in HDFC Bank as well as future growth in the mortgage business. Following the acquisition of Centurion Bank of Punjab (in a share-swap deal), HDFC’s stake in HDFC Bank has come down to ~19%. With a view to maintaining its ~23% stake, HDFC had purchased warrants (each convertible at Rs1,530) and made a 10% upfront payment. The remaining 90% (Rs3,600 crore) is to be paid by December 2009. Besides funding the warrant conversion, the fund raising would help finance growth in the mortgage business. However, the proportion of funds to be diverted towards HDFC Bank’s warrant conversion can be less than Rs3,600 crore.

Maximum dilution seen at 3.5%
According to the management, if and when the warrants are exchanged, the maximum dilution that could take place in future would not exceed 3.5% of the expanded equity. The fund raising structure (NCD + detachable warrant) would enable HDFC to raise near-term debt without diluting its near-term earnings. Importantly, the dilution would occur later (most likely after FY2011) and hence does not call for any change in our assumptions.

Right timing
According to media reports on the development, the tenure of the secured redeemable NCDs is three years with a coupon rate of 7.25-7.50%. The fund raising seems well timed considering that the corporate spreads have normalised to pre-Lehman Brothers levels. As evident below, the spread between the AAA banking company yields and government securities (GSecs) for three years maturity is currently at ~160 basis points down from +400 basis points in November-December 2008. Moreover, the warrant conversion option would act as a sweetener from investors’ perspective.



Result highlights

Tata Tea’s Q4FY2009 numbers (derived from FY2009 and M9FY2009 numbers) are below our expectations. The top line grew by 9.4% year on year (yoy) to Rs1,226.1 crore in Q4FY2009, which is below our expectation of Rs1,319.7 crore for the quarter. Though the operating profit margin (OPM) is marginally above our expectation, a lower than expected top line and higher tax incidence led to a 43.1% decline in the adjusted net profit before minority interest and extraordinary items.

The OPM declined by 218 basis points yoy to 13.8% in Q4FY2009 mainly on account of higher raw material and employee expenses. As per our expectation, the raw material cost as percentage to sales surged by 327 basis points to 36.9%. Also, the employee expenses increased by 22.3% yoy to Rs156.0 crore during the quarter, which were higher than our expectation of Rs131.3 crore. However a 240-basispoint decline in advertisement and promotional expenditure as percentage to sales led the margins to be in line with our expectation of 13.5% for the quarter.

Consequent to a year-on-year (y-o-y) decline in the OPM the operating profit declined by 5.6% yoy to Rs168.9 crore during the quarter (as against our expectation of Rs178.8 crore).

Higher than expected depreciation charges and substantial jump in the tax incidence led to a steep decline in the profit after tax before minority and extraordinary items by 43.1% yoy to Rs56.3 crore during the quarter, which was below our expectation.

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