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Brokerage Recommendations

Wednesday, December 22, 2010

K. R. Choksey calls a ‘Buy’ on HDFC Bank
CMP: Rs 2213   Target Rs 2466

Key Investment Rationale: Robust margins to be maintained at ~4.0%- During Q2FY11, NIM remained flat at 4.2% on y-o-y basis however it has been trending down since Q4FY10 and has declined by 20bps since then due to rising cost of funds. NII grew by 29% y-o-y and 5% q-o-q mainly driven by loan growth which increased 38% y-o-y and flat net interest margins which declined marginally on sequential basis. Loan yields declined by 143bps y-o-y while cost of funds declined only by 78bps y-o-y. Yield on investment however improved by 36bps.

Flat non- interest income due to treasury losses– Non- interest income declined by 4.6% q-o-q however increased by 2.2% sequentially to Rs 961 crore.
Healthy capital adequacy and superior return ratio- Capital adequacy stood at 17.0% (without considering half yearly profits) against 15.7% a year ago while tier I stood at 12.7%. The bank reported RoA of 1.6% during the quarter.

Our View & Valuation–: At Rs 2,172, the stock is trading at 21.3x FY12 earnings and 3.7x FY12 adjusted book. RoA and RoE to remain healthy at RoA 1.6% and RoE over 16-17% by FY12E. We believe quality franchise theme to be played out in a rising interest rate scenario. Strong capital adequacy, stable margin outlook, better asset quality and robust earnings growth continue to remain key fundamental drivers for the stock. In the last one month, it has corrected by over 8%. Considering improvement in macroeconomic scenario, Sectoral growth outlook and recent correction in the stock, we recommend BUY on the stock while maintaining our target price of Rs 2,466 based on our residual income model.

Fairwealth calls a ‘Buy’ on SAIL
CMP: Rs 195   Target Rs 214

Ranked amongst the top ten public sector companies in India in terms of turnover, Steel Authority of India Limited (SAIL) is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets.

Key investment rationale: Capacity Expansion will ensure volume growth: SAIL is all set to bank on the domestic consumption of steel primarily driven by the ongoing infrastructure development in the country with its ambitious expansion plans which will increase its crude steel capacity to 23.2mt from 14mt currently. Value-added Segment: SAIL is banking on the robust demand witnessed for finished and premium steel segment by expanding its value added steelmaking capacity. The value added or premium segment commands 20-25% premium over semi-finished or crude steel.

Strong demand led by domestic consumption: India’s finished steel demand is expected to grow at 12% CAGR over FY 10-13, led by strong demand from Automobiles, consumer durables and Engineering sector. India will remain a net steel importer over FY11-13, as demand is likely to outpace supply.
Valuation: At the current price of 188, the stock is trading at just 11.96x and 10.84x times of our estimated FY11E & FY12E earnings. We thus recommend a ‘Accumulate’ with a Price target of Rs 214.

Angel Broking calls a ‘Buy’ on United Phosphorus
CMP: Rs 159    Target Rs 228

United Phosphorus (UPL) has announced the acquisition of RICECO (RC) LLC of USA. We believe that the estimated acquisition cost of Rs 225cr is in line with UPL’s historic average of 2x EV/Sales. Given UPL’s strong cash position (~Rs 2,000cr at the end of 2QFY2011), the acquisition would be funded through the same. RC, a key pesticides player for rice crop in the US, is beefed up with a strong herbicides product portfolio. USA contributes a major 70–80% of its sales, while the balance comes from the EU, Lat-Am and RoW. RC, a profit-making entity at the net level, posted revenue of US $25mn–30mn in CY2009. RC is also a debt-free company. Prolonged rainfalls extending into October–November across key agriculture states have resulted in crop destruction in the country. As a result, we expect UPL’s 3QFY2011 performance to take a knock. We have pruned our sales and margin estimates to factor in the likely lower sales from India in 3QFY2011. However, the acquisition of Mancozeb products from DuPont and RICECO are likely to cushion the sales. We estimate UPL to post 8.8% and 13.3% CAGR in sales and PAT respectively, over FY2010–12. At current levels, post the recent correction, the stock is trading at attractive valuations of 10.1x FY2012E EPS. Hence, we upgrade the stock from Accumulate to Buy with a revised Target Price of Rs 198 (Rs 228).

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