>HDFC BANK (INDIABULLS)

Limited upside potential

HDFC Bank’s Q1’10 Net profit at Rs. 6.06 bn, was down marginally by 3.9% qoq, while it increased 30.5% yoy. During the quarter, importantly, the loan-book has grown; the NIM has remained stable, and cost-income ratio has trended down. The only down-side are the NPLs, which we do not foresee as abating in the near-medium term. We are presently amid a low credit-demand scenario, wherein balance-sheet expansion, especially for a Bank focused on margins, is going to be difficult for the next one or two quarters. Accordingly, we have tempered our estimates for the same; as well as for our cost estimates. This yields a fair value estimate of Rs. 1,446. The stock currently trades at a P/B multiple of ~3.8x, which is relatively higher than its peers. We perceive the stock to be fairly valued, and downgrade our rating to Hold.

Advances growth likely to remain moderate: The Bank’s advances increased 4.8% qoq. The resumption in lending, we believe, was a result of the availability of lesser-yielding alternatives, improvement in corporate-earnings, and the resultant declining credit-risk aversion. Moreover, given a low-demand environment, banks are competing to cater to the prime, credit-worthy borrowers. HDFC Bank has signalled its intent of growing its loan-book by further reducing its PLR. Estimating a growth of 19-20% in its advances for FY10, we expect it to record a 4-5%
increase in Q2’10.

NIM likely to come under pressure: The Bank’s NIM at 4.1% for the quarter, declined marginally by 6bps sequentially. If adjusted for the taxfree interest income earned on the Bank’s surplus liquidity parkedwith short-term money market funds, the Bank’s NIM would have been 4.2%. We expect some pressure on the NIM as the bank is competing to acquire prime borrowers at lower rates of interest. Therefore, we expect the NIM to range between 4.0% and 4.1% for Q2’10.

NPAs likely to continue trending upwards: At the close of Q1’10, the Bank’s Gross NPA ratio increase by 6bps to 2.05%. Gross NPAs increased by 8.8% sequentially to Rs. 21.6 bn.

To see full report: HDFC BANK

>OPTION STRATEGY (INDIA INFOLINE)

Strategy- Covered Call- RELIANCE

Analysis:
The stock looks very attractive as it has crossed above its 50 DMA in today's (5th August 2009) trading session. In the option segment, out of money calls are also witnessing gradual build up. Maintain a stop loss at Rs 1980 for the future.

To see Recommendations & Strategy : RELIANCE

>DECCAN CHRONICLE (ANGEL BROKING)

PERFORMANCE HIGHLIGHTS

■ Modest Top-line growth, up 12%: For 1QFY2010, Deccan Chronicle Holdings (DCHL) reported modest 12% yoy growth to Rs216.6cr (Rs193.5cr) on a standalone basis, partially aided by higher Elections spend. Management has indicated that Top-line growth during the quarter was largely driven by rate hikes taken earlier (have started reflecting now), while volumes continue to be under pressure (fell yoy).

■ Lower Interest costs boost Earnings, up 26%: DCHL’s Earnings for the quarter, on a standalone basis, registered a 26.3% yoy jump to Rs77cr (Rs61cr) despite modest Top-line growth and flattish Margins, largely aided by a 44% decline in Interest costs to Rs11.1cr (Rs19.8cr) and 19.4% rise in Other Income to Rs7.1cr (Rs5.9cr). While the Tax rate for the quarter remained flat in yoy terms, Depreciation charges increased by almost 30% yoy on account of higher capex.

■ Operating Margins flat: On the Operating front, DCHL registered a flattish performance with Operating Margins at 48.9% driving 11.9% yoy growth in EBITDA (driven by Top-line growth) to Rs105.9cr (Rs94.7cr). Newsprint costs remained flat (as a % of Net Sales), but increased 11.5% yoy in absolute terms owing to higher Circulation. We believe that full benefits of falling newsprint prices (have declined from peak of US $950 to US $600) has still not kicked in due to higher priced inventory. In terms of other costs, while Staff costs increased by 134bp yoy during the quarter, Other expenditure fell by 117bp yoy. Going ahead, we expect DCHL to benefit significantly from the decline in newsprint costs as full benefits of lower prices and Rupee appreciation kick in. However, stiffer competition in Chennai and initial losses on account of the Bangalore edition and Financial Chronicle are likely to keep the company’s Margin expansion under check.

To see full report: DECCAN CHRONICLE

>MICROSTRATEGY (MACQUARIE RESEARCH)

Fundamental support for valuations

Event
■ Emerging market equities, including India, have been a big beneficiary of the improving global macro environment and continued easy money policy of central banks around the world. The recent India June 1Q10 quarterly reporting season highlights some recovery in company fundamentals.

Impact
■ The June 1Q10 quarterly reporting season has provided some relief to stretched valuations for the Indian market. Our analysis shows quarterly earnings of large-cap companies in India grew YoY and sequentially by 33% and 17%, respectively. More important, over 50% of the companies had better earnings on a sequential QoQ basis.

■ EBITDA margin recovery remains the key driver of this earnings growth, as sales revenue only barely registered positive sequential quarterly growth, although more than 50% of companies still had better sales than in the March 2009 quarter.

■ Higher operating leverage due to higher margins could lead to even better earnings growth once the top-line growth also picks up, particularly for capital goods, telecoms, software and banks.

■ At the stock level we find the improved macro environment is driving earnings upgrades across all sectors, except property. Companies with the worst EPSg forecast for FY10/11 performed the best last month, while those stocks with the highest FY10/11 PER performed the worst.

Outlook
■ In the short term, we favour stocks with the lowest forecast EPS growth, in the hope of subsequent positive earnings revisions driving performance. We would avoid stocks with extremely high forward PERs, as positive earnings revisions seem to have already been factored in for such stocks.

To see full report: MICROSTRATEGY