Monday, February 22, 2010

>HDFC BANK: Best bank to own in the current environment (KOTAK SECURITIES)

Best bank to own in the current environment. We believe that banks with strong retail and CASA deposit franchisees are best placed at times of rising rates. HDFC Bank has been the best bank in terms of CASA growth and asset quality over the past few quarters. We believe that above-industry loan growth (20%+), 4%+ margins and lower provisioning should drive 30% PAT growth over the next 6-8 quarters. Upgrade our recommendation on HDFC Bank to BUY (from ADD earlier).

Upgrade to BUY, notwithstanding expensive valuations
While valuations for stock remain expensive at 19XFY2011E PER and 3XFY2011E, we believe that likely strong earnings growth of 28-30% over the next couple of years coming from core operational earnings, improving asset quality and better than industry growth is likely to sustain these high valuations. The stock has underperformed by 3% over the last 3 months and outperformed marginally over the last month. Given the strong economic outlook, on the
backdrop of high government deficit, we expect interest rate environment to remain challenging. HDFC Bank is one of the best banks to own in such an environment given its strong core liability franchisee; upgrade our recommendation to BUY.

Quality operational performance; will trade at a premium to others
We are extremely impressed by HDFC Bank’s recent operational performance—excelling on all key parameters. Margins improved sequentially by 10 bps to 4.3%, driven by strong traction in CASA deposits (up 38% yoy and CASA percentage now is 51%). We expect margins could further improve if interest rates rise as HDFC Bank’s high CASA franchisee would ensure lower deposit costs. The pace of new NPL formation has peaked, which is likely to result in lower absolute NPLs (only bank to report absolute lower NPLs, both at gross and net level over last couple of quarters) and credit provisioning requirement going forward. Quality of earnings has improved considerably as earnings now are being driven by core performance with negligible treasury contribution.

Superior CASA franchisee—would ensure strong margins in a rising rate environment
One of the key positives of HDFC Bank has always been its strong CASA franchisee. Over the last few quarters, CASA deposit growth has been spectacular for the bank; savings deposits grew by 41% yoy to Rs467 bn and current deposits grew by 34% yoy to Rs333 bn as of December 2009— this is the best in the industry. Reported CASA ratio has increased to 51%, while the core CASA ratio was at 49%, up from 40% last year. With interest rates set to rise, the power of CASA franchisee is likely to be reflected in superior margins and a steady loan growth. We expect margins to improve by 20 bps in FY2011E over FY2010E (as per our model). This is despite a likely increase of 15bps in deposit costs due to daily average working for savings deposits.

To read the full report: HDFC BANK

>TATA MOTORS:JLR: Lower Incentives = Higher Profits (CITI)

Premium car discounts have declined in the US — almost 20% QoQ. The average incentives / vehicle for BMW, Mercedes and Porsche dipped to ~ $4,444 / unit in 3QFY10, indicating that discounting pressure is easing within premium cars – this augurs well for JLR, where typically ~15-20% of volumes are from the US.

Pre-owned car prices remain steady the UK — after a slight slippage in Oct / Nov, the average transaction price of a pre-owned car has firmed up again – indicating fairly healthy demand in the UK in the pre–owned market. We infer that pricing trends should also be stable in the new car market.

3Q Results could surprise positively — Our explicit forecasts for JLR 3QFY10 factor sales of 50,000 units and EBITDA of £111m. That said, JLR has sold >56,000 units, implying upward risks to our estimates. We note that sensitivity to incentives / ASPs is also extremely high – a c£500 / vehicle reduction in incentives could result in EBITDA increasing by £25m (on a base of 50,000 units).

JLR Jan 10 sales at 16,269 units — imply that JLR has to achieve ~11,000 units / month over Feb / Mar to achieve our full year forecast of 174,900 units. We think this target is easily achievable, given the current run rate of ~16,000 units / month in 4Q. Seasonality is fairly high given model year changes, hence QoQ comparisons are rendered invalid.

New model launches -- XJ eagerly awaited — Bookings had started in London (by early Dec) for March delivery, with an expected price of around UKP55,000 for the lower end up to ~UKP90,000 for the 5L XJR.

Maintain Buy — We caveat that global macro risks (and the knock-on impact on consumer confidence, auto sales, et al) is the key risk in the investment thesis for Tata Motors, given that JLR accounts of ~56% of consolidated revenue, and ~50%

To read the full report: TATA MOTORS


Rebound in refining juxtaposed with recent sell-off augurs well for the stock
We reiterate Buy on RIL with 26% potential upside to our target price. With a 10% fall YTD, the stock trades at 14.0x FY11E PE and 8.4x FY11E EV/E. Key prospective catalysts: i) recent rebound in margins and light-heavy differentials, coupled with plant closures, augurs well for refining outlook; ii) petchem is enjoying near-term tail winds from tight markets and delays in new start-ups; iii) proposed deregulation of auto-fuels could help RIL revive its fuel retailing business; and iv) potential exploration success, acquisitions and gas dispute resolution.

Buy on refining, petchem tail winds and 10% correction

Refining bottoming out; US$1/bbl swing implies 3.6% upside to earnings
Our channel checks and the company’s recent results suggest that global refining margins may be at rock bottom. We believe that oil demand revival, spurred by improved economic outlook and ongoing capacity rationalization, could eventually turn around refining margins. The caveat is that the revival is difficult to time and we cannot wish away the volatility in oil prices even under normalized markets.

Higher-margin E&P to drive growth, de-risk the portfolio
We expect RIL’s ramp-up in KG D6 gas driving margin expansion and also EPS CAGR of 34.3% for FY10-12. In addition, the increasing share of the E&P (oil&gas) segment should help remove the cyclical risk in refining and petrochemicals.

Prospective catalysts: reviving earnings; potential end to KG D6 gas dispute
Our target price of INR1,235/sh uses equal weighting for PE-based and DCF methods. We use 16.1x FY11e PE based on RIL’s five-year average 12m rolling PE. Our DCF uses 10.2% WACC, based on our assumptions of India CoE of 13.4% and terminal growth of 4%. Risks are: i) a worsening global economy along with new capacities hurting refining and petchem outlook; ii) the RIL-RNRL dispute dragging on; iii) production outages; and iv) policy vagaries.

To read the full report: RELIANCE INDUSTRIES


Contingency plans to overcome FDA issues
The company is awaiting an FDA audit for the Dewas facility, and is confident of a clean result. However, corrective action is still being pursued at Paonta Sahib unit, and may take a while. The liquid injectables unit at Ohm, which also received a warning letter, is likely to shut down after resolution. The new unit at Mohali needs to obtain FDA approvals before starting supplies. In the interim, management seemed confident of being able to monetise opportunities through site transfer, e.g. Sumatriptan, Valtrex last year, Flomax in Q2 CY10, and blockbuster Lipitor (Q4 CY11).

Focus on growing top line, rationalising costs
Key drivers include (1) domestic (est 15%-plus CAGR), through new launches to plug product gaps, an expansion of the sales force (4,000 from present 2,500), and acquisitions (2) RoW, which include Latam (Brazil), Africa, CIS/Russia, and (3) Japan, leveraging Daiichi Sankyo's product and distribution capabilities (details in April 2010). In Europe, the company will focus on cost rationalisation, already showing up through the turnaround of operations.

Improving financials
Recent trends show gradual improvement in sales and margins. Management indicated further 200-300bps increase in EBITDA margins over 2-3 years.

To read the full report: RANBAXY