Buy HDFC Bank For Target Rs.700We believe, HDFC bank to retain premium valuation vis-à-vis its peers on back of consistent earnings growth (~30% growth during last 43 quarters), superior liability franchise, robust NIM and better asset quality. The stock has relatively underperformed SENSEX by 6.3% in last 2 months and currently trading at reasonable valuation (3.6x FY14 ABV). Hence, we upgrade the stock to BUY from ACCUMULATE earlier with unchanged TP of Rs.700 (4.0x FY14E ABV). We recommend HDFC bank as one of the preferred picks in our banking universe.
Stock's relative underperformance largely driven by marginal uptick in NPLs (albeit within management's guidance); however, asset quality remains best in the class
Valuation & recommendation
We believe, HDFC bank to retain premium valuation vis-à-vis its peers on back of consistent earnings growth (~30% growth during last 43 quarters), superior liability franchise, robust NIM and better asset quality. We maintain our earnings estimate and expect earnings growth at 30.2% CAGR during FY12-14E with healthy return rations (FY14E: RoE: 22.8% & RoA: 1.7%).
The stock is trading reasonable at CMP (3.6x FY14E ABV) and hence we upgrade the stock to BUY from ACCUMULATE earlier with unchanged TP of Rs.700 (4.0x FY14E ABV). We recommend HDFC bank as one of the preferred picks in our banking universe.
Buy Bajaj Corp Ltd For Target Rs.261Risk-Reward Ratio Favourable; Upgrade To Buy
We feel the recent decline in Bajaj Corp’s (BCL) stock price provides a good buying opportunity. While we have been positive on the structural story in the light hair oil (LHO) segment, our view was constrained by valuation. Following the 12% correction in stock price post 3QFY13 results, we have upgraded BCL to Buy (from Hold) but retained our target price of Rs261. We expect BCL to maintain strong
volume growth momentum of 18%-20% over the next two years, largely driven by robust product distribution in rural areas, higher nvestments on brands and rising urbanisation leading to a shift in the consumers’ preference from unbranded hair oils to branded LHOs. Further, the dividend yield stands at 3.4%, higher than peers at the current market price, assuming similar dividend payout for FY14E.
Volume growth to remain intact: BCL posted strong volume growth of 22.3% in its lead brand Almond Drops Hair Oil (ADHO) in the 9MFY13 period. The strong volume growth was on account of robust product distribution in rural areas - ADHO was available at 2.54mn retail outlets as of end-November 2012 (17% YoY growth), higher investments on brands with advertising expenditure at 13.7% of sales in the 9MFY13 period versus 12.3% in the 9MFY12 period and rising urbanisation leading to a shift in the consumers’ preference from unbranded hair oils to branded LHOs. Further, the management has indicated that BCL is not witnessing any demand slowdown for its products in rural areas. We expect BCL to continue its strong double-digit volume growth trajectory and look forward to positive results again in 4QFY13.
Stable LLP prices: Gross margin expanded by 349bps YoY in the 9MFY13 period on account of reduction in LLP (liquid light paraffin) prices by ~6% YoY, a key raw material. Further, the management has indicated that it has booked LLP at Rs75/kg in 4QFY13 (5% down QoQ). Our channel checks showed stable LLP prices so far in 4QFY13, which indicates that booking prices for 1QFY14 are likely to remain stable. We have factored in a 3% YoY increase in LLP prices for FY14E.
Stock trades at attractive valuation: At the current market price, BCL trades at 14.6x P/E based on FY15E earnings, which is at a 37% discount to peers despite the in-line performance expected over FY13-FY15. Dividend yield stood at 3.4%, higher than peers at the CMP, assuming similar dividend payout for FY14E. Lower PAT growth is likely in FY15E despite better volume growth than peers on account of higher effective tax rate (27.0% versus 20.6% currently), as the income-tax benefit for one of its manufacturing plants in Himachal Pradesh expires in 2015. However, the management has stated that in case the Goods and Services Tax (GST) is implemented before the end of 2015, the effective tax rate would be below 27% as BCL is entitled for tax abatement, which can provide upside to our earnings estimates. We have upgraded our rating on BCL to Buy with a TP of Rs261 based on 17x FY15E earnings.
Buy Gujarat Pipava Port (GPPL) For Target Rs.54 We met the management of GPPL to get an insight on the future developments in the industry and the company. We believe
container volume for the company to remain strong with the full impact of new lines added in Nov-Dec 2012 contributing to the volumes. With JNPT operating at 100% capacity utilisation, incremental volumes on the West coast may come to GPPL leading to potential addition of new lines in CY13E. GPPL is also adding capacity in its container segment from current 0.85 mn TEUs to 1.5 mn TEUs by CY15E.The company has tied up ECB finance (low average cost) for this capex at the port. We are not very optimistic about the bulk and liquid cargo in near term as captive liquid and bulk volume would depend on revival or restart of certain stalled projects in the vicinity
Overall we estimate container volumes for the port to grow by ~11.8% to 0.64 mn TEUs in CY13E and by ~19% to 0.76 mn TEUs in CY14E. With improving operating leverage, we expect the margins of the company to improve. Debt situation of the company has also improved. The stock has fallen by almost 20% in the last six months (period when the company lost container business to other ports). We believe all the negatives have got factored in the current price and Reiterate BUY rating with a target price of Rs 54 for the stock.
Valuation and Recommendation
Overall we estimate volumes for the port to grow at ~9% in CY13E and grow by ~14% in CY14E with container volumes growing at 12% in CY13E and 19% in CY14E. With improving operating leverage, we expect the margins of the company to improve. Debt situation of the company has also improved. The company's strong parentage and tie-ups will add value to the company. The stock has fallen by almost
20% in the last six months (period when the company lost container business to other ports). We believe all the negatives have got factored in the current price. Our estimate of the net present value of equity cash flow of the existing businesses - sum-of-parts value comes at ~ Rs 52 per share. Pipavav Rail Corporation contributes ~ Rs 2 per share to the value of GPPL valuing the company at Rs 54 per share. Reiterate
BUY rating with a target price of Rs 54 for the stock.
Buy Jaiprakash Associates Ltd. (JAL) For Target Rs.77.00 Jaiprakash Associates Ltd. (JAL) is the engineering and construction arm of the Jaypee group focused on development of river valley and hydro electric projects since 1996.
* During the quarter, the robust growth of Net Sales is increased by 3.80% to Rs. 34308.70 millions.
* Jaiprakash Associates has raised Equity Funds to the extent of Rs. 532.90 crores by allotment of 6,42,04,810 equity shares of Rs. 2/- each at an issue price of Rs. 83/- per share to Qualified institutional Buyers through QIP issue of USD 100 million.
* During the quarter FCCB aggregating USD 3,96,00,000 have been converted onto 2,84,45,567 Equity Shares of Rs. 2/- each at a predetermined price of Rs. 77.50 per share.
* Jaiprakash Associates entered into a JV Agreement with Madhya Pradesh State Mining Corporation Ltd for Coal Mining at Amelia Coal Block in Madhya Pradesh.
* Jai Prakash acquired Bina Power Supply Company from the Aditya Birla Group to set up a 1500 MW coal fired thermal power plant at Bina in Madhya Pradesh.
* The company has won two contracts byMangdechhu Hydroelectric Project Authority, Bhutan for construction of the two contract packages pertaining to 720 MW Mangdechhu Hydroelectric Project.
Investment Highlights
Results updates- Q3 FY13,
Jaiprakash Associates Ltd is the engineering and construction arm of the Jaypee group focused on development of river valley and hydro electric projects and a leader in construction of river valley and hydropower projects on turnkey basis for more than four decades, reported its financial results for the quarter ended 31st Dec, 2012.
The company’s net profit decreased to Rs.1109.30 million against Rs.2049.50 million in the corresponding quarter ending of previous year, a decrease of 45.87%. Revenue for the quarter increased 3.80% to Rs.34308.70 million from Rs.33053.90 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.0.51 a share during the quarter, registering 46.59% decrease over previous year period. Profit before interest, depreciation and tax is Rs.8809.80 millions as against Rs.9380.00 millions in the corresponding period of the previous year.
Outlook and Conclusion
* At the current market price of Rs.67.75, the stock P/E ratio is at 27.38 x FY13E and 35.16 x FY14E respectively.
* Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.2.47 and Rs.1.93 respectively.
* On the basis of EV/EBITDA, the stock trades at 8.50 x for FY13E and 8.12 x for FY14E.
* Price to Book Value of the stock is expected to be at 1.14 x and 1.10 x respectively for FY13E and FY14E.
* We recommend ‘HOLD’ in this particular scrip with a target price of Rs.77.00 for Medium to Long term investment.
Buy LIC Housing Finance Ltd For Target Rs.327Healthy loan book growth, NIMs expansion = positive FY14E
outlook
Investment Rationale
Loan growth to remain healthy
Over last 3-4 years, LIC Housing has consistently outperformed the industry on loan book growth front. LIC Housing reported 32% CAGR loan growth during FY 09-12. Owing to challenging macro environment, loan book growth slightly slowed-down (23.8% y-o-y loan book growth rate seen at Q3FY13-end). This slow-down is mainly on a/c of ~20.0% decline in y-o-y loans made to Builders segment (to Rs 28.1 bn).in Q2FY13 and 3.9% in Q3FY13). We sense that this ratio would improve significantly from here, as loans made to builders would catch-up from here-on, as builders are likely to benefit from lower interest rates, faster pace of approvals seen across Delhi & Mumbai real estate markets. Also, we expect the loan book growth momentum to be maintained, as LIC Housing continues to penetrate in smaller cities across Eastern & Central India. On a whole, we expect the overall loan book of LIC Housing to grow at 21.2% CAGR during FY12-14E to Rs 927.1 bn.
NIMs to expand marginally
Against our expectations of improvement in the NIMs, we were disappointed by 1bp sequential decline in Q3FY13 NIMs to 2.09%. Q3FY13 NIMs movement was mostly impacted due to interest reversals on builder loan NPAs. Whereas, re-pricing of individual home loans yields- mainly the teaser loans product “fix-o-floaty”, supported in maintaining the NIMs.
We sense LIC Housing would benefit from ~Rs 30 bn (in Q4FY13) & ~Rs 27 bn (in Q1FY14) of teaser loan re-pricings, going forward. LICs thrust to raise funds through ECBs (External Commercial Borrowings) route, coupled with their strategy to reduce dependency on bank borrowings, give them some more room to expand their NIMs. We highlight that LIC has still not passed on the Feb-12 base rate cut announcement. We sense that NIMs expansion could be possible, going forward.
We have revised downwards our NIM’s expectations for FY13E by 6 bps to 2.17%. We also are of the view that worst is behind, from NIMs perspective (2.09% for Q3FY13). We sense that increased disbursals to builder segment in FY14E coupled with more and more loans getting converted from fixed rate to floating rate (fixed rate
loans of 8% continue to be below current floating rates), would help the LIC Housing’s NIM’s improvement. We expect FY14E NIMs to improve to 2.29% (vs. earlier expectations of 2.32%).
Valuation
Given their strong market positioning and FY14E growth prospects, we remain positively biased towards the stock. Also factors such as expectations of healthy loan book growth, NIMs expansion in FY14E, NPAs well under control comfort us about the strong fundamentals of the LIC Housing.
Even though NIMs have fallen down in the last 2 quarters to 2.09% in Q3FY13, we are of the view that fall in the NIMs has bottomed-out and there exists scope for NIMs improvement. Our view of expansion in the NIMs is on the basis of (1) repricing of Rs 57 bn of teaser loans in next 2 quarters, (2) increasing dependency on the low cost ECBs, (3) pick-up in lending to builders segment, which usually has higher yields (vs. individual home buyers).
improved ROEs of 18.1% in FY14E. After revising our estimates and assigning P/ABV multiple of 2.0x, we have arrived at revised price target of Rs 294 (earlier target of Rs 327).
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