| STOCK UPDATE HDFC Bank
Recommendation: Hold
Price target: Rs868
Current market price: Rs828 Earnings growth affected by lower non-interest income Key points - For Q1FY2015 HDFC Bank reported a net profit growth of 21% YoY (to Rs2,233 crore), which was lower compared with the PAT growth of over 25% seen in the past several years. The quarter's performance was partly driven by lower treasury and forex gains (compared with Q1FY2014) and higher provisions (Rs40 crore towards unhedged forex exposure and special mention account-2 accounts). The margin remained stable at 4.4% on a sequential basis.
- The asset quality remained healthy though the gross NPA inched up marginally to 1.1% (0.98% in Q4FY2014) contributed by the agriculture and CV segments. The management does not foresee any challenge on the asset quality front.
- HDFC Bank has underperformed the BSE Bankex by 11.2% (on a YTD basis) because of a lower earnings growth compared with the historical earnings growth rate and the uncertainty over FIPB approval for raising the foreign investment limit. The bank plans to raise equity capital which will improve its tier-I CAR by about 300BPS (11.1% in Q1FY2015). Though we expect the bank's return ratios and asset quality to remain superior compared with the other banks, but its growth rate has clearly moderated. We maintain our Hold rating on the stock with a price target of Rs868.
- Risk: Since the bank's proposal to raise foreign investment limit is pending, an approval of the same is a risk to our call.
Housing Development Finance Corporation
Recommendation: Hold
Price target: Rs1,042
Current market price: Rs1,011 Operating performance improves, pressure on spreads likely Key points - For Q1FY2015 HDFC reported a net profit growth of 14.6% (a 21% growth excluding deferred tax liability provision of Rs74.4 crore) led by a strong 19.7% growth in the operating profit. The spread remained stable on a sequential basis at 2.29%.
- The loan growth in individual segment remained strong at 23% (ex loans sold) while it improved slightly in case of developer loans. With some recovery in the economy, the company expects its high-yielding developer book to grow at higher rates (ie about 15% in FY2015). The asset quality remained largely stable as the gross NPA stood at 0.7%.
- Led by a recovery in the economy and government initiatives, the housing sector is likely to post a better growth which will benefit the HFCs. However, recent RBI guidelines on issue of long-term bonds by banks (for affordable housing) will increase the competition in the mortgage space, which is already quite competitive. This may affect the spreads in the long term. Currently, the stock is trading at a premium valuation (4.4x FY2016E stand-alone book value). We maintain our SOTP-based price target of Rs1,042 and Hold rating on the stock.
Reliance Industries
Recommendation: Buy
Price target: Rs1,190
Current market price: Rs997 Higher refining margin and E&P volume lifted earnings Key points - For Q1FY2014 Reliance Industries Ltd (RIL) reported an earnings growth of 6% YoY to Rs5,649 crore. The growth was largely driven by a significant jump in the profit from the refining business and an improvement in the E&P business led by a volume growth in the Panna-Mukta fields and the US shale gas business. It also got a helping hand from a lower interest cost and depreciation in the rupee against the dollar. Consequently, the net profit grew by 5.5% to Rs5,649 crore, which was ahead of our as well as the Street's estimate for Q1FY2015.
- The key positive about the Q1FY2015 results was the healthy refining margin of $8.7/bbl (against our estimate of $8.6/bbl) which was at a premium of $2.9/bbl over the benchmark Singapore GRM. Further, the profitability of the oil & gas segment surprised us positively with a volume improvement in the Panna-Mukta fields, apart from a sustained healthy volume growth in the US shale gas business. On the negative side, the petchem business underperformed due to a weak polyester chain margin.
- We believe the potential recovery of the refining margin and the commissioning of the expansion project in the petchem business (at a cost of $12 billion) coupled with a new gasification plant and a refinery off-gas cracker would drive the earnings over the next two to three years. Any positive development on the deferred decision of a gas price hike by the government would also positively influence the stock. Currently, it is trading at 14x and 12x the FY2015E and FY2016E earnings respectively and the valuations are lower than its historical average. Given the recent positive developments, we maintain our positive stance on the stock and continue to recommend it as a Buy with a price target of Rs1,190.
UltraTech Cement
Recommendation: Buy
Price target: Rs2,868
Current market price: Rs2,524 Higher power and fuel costs dent volume growth Key points - For Q1FY2015 UltraTech Cement (UltraTech) reported a revenue growth of 13.9% YoY to Rs5,649.5 crore largely driven by higher volume (up 15.2% YoY). However, the realisation declined marginally to Rs4,725 per tonne (down 1.1% YoY). Higher input cost (an increase in pet coke prices and high freight cost) and lower realisation dented the OPM, which declined by 331BPS to 17.8%. In spite of a higher other income (up 35% YoY) the reported PAT for the quarter stood at Rs625.6 crore (down 7% YoY), which included lower depreciation (adjusting for the same the earnings for the quarter declined by 11.6% to Rs594.9 crore).
- During the quarter the company completed the acquisition of the Gujarat units of Jaypee Cement and with this the total capacity of the company increased to 58.8MMT (4.8MMT of capacity added from two plants of Jaypee Cement). The company also commissioned a 25MW thermal power plant in Karnataka and a 6.5MW heat recovery system in Maharashtra taking the total power generation capacity to 709MW (80% of the total requirement).
- UltraTech is our preferred stock in the cement space due to its strong balance sheet and pan-India presence. A higher volume growth supported by a better realisation can lead to an improvement in the operating performance leaving room for the re-rating of the valuation. For now, we have marginally reduced our earnings estimates for FY2015 and FY2016 to factor in the higher power and freight costs. We maintain our Buy rating on the stock with a price target of Rs2,868.
Supreme Industries
Recommendation: Hold
Price target: Rs620
Current market price: Rs592 Volume growth picks up; but already priced in Key points - Supreme Industries' volume growth of 9% in Q4FY2014 (it follows a June ending fiscal), though lower than the management's guidance of a 20%-plus growth, has come in as a relief, given the disappointments in the previous two quarters. Apart from the revival of volume growth in the plastic business, the revenue growth of 21% was aided by Rs21.7 crore of revenues booked in the real estate business (in line with expectations). The buoyancy in the revenue growth (and the high-margin real estate business) was also reflected in a 460-BPS sequential improvement in the OPM, though the margin was still down as compared with Q4FY2014 (on an annual comparison basis).
- In terms of outlook, the earnings growth could get affected in the near term by the continued margin pressure in the plastic business (sustained high raw material cost and lower subsidy) and higher depreciation charge (due to changes in the Companies Act 2013). However, the management expects to gradually improve the margin (with a higher proportion of sales from the value-added products, composite cylinders and recently introduced bathroom fittings) and has guided for a 15-20% average growth in the revenues in the core plastic business over a period of the next three years.
- Though we continue to believe in Supreme Industries' secular growth story with the best in class return ratios and quality of management, but the valuation at 19x FY2016 estimate largely factors in most of the positives (including a revival of volume growth in the plastic business going ahead). Hence, we maintain our Hold rating on the stock with a revised price target of Rs620. We advise waiting for better price points to enter the stock for fresh investments.
Bajaj Holdings & Investment
Recommendation: Buy
Price target: Rs1,531
Current market price: Rs1,303 Revival expected in life insurance business, outlook stable for rest Key points - Bajaj Holdings and Investments Ltd (BHIL) holds the Bajaj group's investments in two flagship companies, Bajaj Auto (a 31.49% stake) and Bajaj Finserv (a 39.16% stake). In addition, BHIL also has an investment portfolio with a market value of close to Rs2,830 crore in cash and liquid assets (fixed income and fixed deposits).
- Bajaj Auto is the key investment of BHIL and has been facing a market share slide in the domestic motorcycle segment especially in the executive segment. The company has recently launched Discover 125, which will be followed by Discover 150. While the other business segments are doing well for the company, its OPM has contracted over the past two quarters. As for Bajaj Finserv, a sustained performance by the lending and general insurance businesses as well as a revival in the life insurance business will drive its earnings. Our price target for Bajaj Finserv is based on the sum-of-the-part valuation method.
- Given the strategic nature of BHIL's investments (namely Bajaj Auto and Bajaj Finserv), we have given a holding company discount of 50% to BHIL's equity investments. The liquid investments have been valued at cost. We have revised our price target largely to reflect the increase in our price target for Bajaj Finserv. Our price target of Rs1,531 for BHIL implies an 18% upside for the stock. We maintain our Buy recommendation on BHIL.
- Key concerns: In the union budget 2014-15 the government approved a 49% composite FDI in the insurance sector which is negative for Bajaj Finserv due to the call option given to its joint venture partner; though the company derives comfort from an RBI circular that suggests the transfer of stake will take place at market value. Additionally, the proposal to hike the tax rate on debt mutual funds would increase the effective tax rate for BHIL, which has significant debt investments.
MUTUAL GAINS
Debt Mutual Fund Picks
Bond / Debt market round up - Bond yields rose during the month due to higher crude oil prices, which in turn increased concerns that inflation rates may move up. Initially, bond yields fell after the Central Bank indicated at its second bi-monthly monetary policy review that it would not raise interest rates in the near term provided inflationary pressure eases. However, the trend reversed soon on the back of rise in crude oil prices which hit the demand of bonds. The possibility of issuance of a new 10-year paper later in June also hit bond prices. The Finance Minister's comments that the Government is not considering a rise in the current investment limits for foreign investors hit investor sentiments. Foreign investors have exhausted 94.46% of their available investment limit in Government debt as on June 30, 2014. This hit the demand of Government bonds and is expected to increase demand of the corporate bonds where Foreign Institutional Investors have exhausted only 37.43% of their investment limit as on June 30, 2014. However, bond yields found some support later on the back of strong buying interest from state-run banks following a recovery of the Indian rupee and decline in global crude oil prices.
- The 10-year benchmark bond yield closed up 10 bps at 8.74% compared to the previous month's close of 8.64%. Bond yields touched its lowest level of 8.51% during the month on June 6.
Bond / Debt Outlook - The bond market is likely to remain range bound to absorb the supply of papers both by Central and State Governments. The market is likely to take cues from the forthcoming Union Budget where it is expected that Government will stick with its budgeted fiscal deficit numbers. The liquidity in the system is adequate thanks to the timely term repo auctions by RBI and dollar inflows by foreign institutional investors. Next month, the RBI will conduct the auction of 91-days, 182-days and 364-days Government of India Treasury Bills for an aggregate amount of Rs. 75,000 crore. The RBI will also conduct the auction of dated securities for an aggregate amount of Rs. 58,000 crore.
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