| Summary of Contents STOCK UPDATE Housing Development Finance Corporation
Cluster: Evergreen
Recommendation: Hold
Price target: Rs2,866
Current market price: Rs2,524
Results in line with expectations Result highlights -
Housing Development Finance Corporation (HDFC) reported a bottom line of Rs671.3 crore for Q3FY2010, indicating a 22.8% year-on-year (y-o-y) growth, largely in line with our expectation of Rs677 crore. -
The net interest income (NII) came in at Rs854.4 crore, which was up 8.8% year on year (yoy) and 16% quarter on quarter (qoq). The improvement in the top line performance compared to the previous quarter was primarily due to expansion in the net interest margin (NIM). -
The calculated NIM for the quarter stood at 3.27%, indicating an expansion of 54 basis points qoq. The expansion in the NIM, despite a 16-basis-point quarter-on-quarter (q-o-q) decline in yields on advances, is a result of sharp drop in the cost of funds (85 basis points lower sequentially). -
The other operating income witnessed a spike (on a y-o-y basis) and stood at Rs146.9 crore, helped by a robust growth in the fee income, surplus from deployment in mutual funds and dividend income. -
In line, the cost-to-income ratio improved to 9.1% from 10.9% a year ago. Further, the operating expenses were flattish on a y-o-y basis, thereby leading to a healthy 22.3% y-o-y growth in the operating profit. More importantly, the core operating profit growth (of 16.2% yoy) is better than the 11.7% in the previous quarter. -
The approvals for the quarter stood at Rs12,692 crore (up by 31.7% yoy but down by 20% qoq), while disbursals grew by 18.7% yoy. Sequentially, the incremental loan mix growth was driven by the corporate segment followed by the individual segment. -
The demand environment for residential mortgage space has witnessed some improvement recently as a result of low property prices and attractive financing rates. However, HDFC continues to face stiff competition from the banks in the residential mortgage space. -
The asset quality situation at the end of Q3FY2010 remains quite comfortable with the non-performing loans (+90 days overdue) at 0.94% and +6 months overdue loans forming 0.60%. The accumulated provisions stood at Rs684.2 crore, which implies provision coverage ratio of 80.3%. -
Recently, there has been some pick-up in the residential housing space, which augurs well for major mortgage players like HDFC. However, with banks getting more aggressive in this space, HDFC faces tough competition and will have to maintain a fine balance between growth and profitability. At the current market price of Rs2,524, the stock trades at 22x FY2011E earnings per share (EPS) and 4.2x FY2011E book value (BV) per share. We have fine-tuned our estimates for FY2011 and introduced FY2012 estimates. We maintain our price target (Rs2,866) and Hold recommendation on the stock. Wipro
Cluster: Apple Green
Recommendation: Hold
Price target: Rs768
Current market price: Rs725
Price target revised to Rs768 Result highlights -
Wipro Technologies (Wipro)?s Q3FY2010 earnings (under Indian GAAP) were above street as well as our expectations with the net income growing by 4.8% sequentially. The growth was broad-based and spread across geographies and business verticals. The management?s commentary was positive in terms of demand environment and volume growth. The company?s Q4FY2010 guidance of a 3-5% growth in information technology (IT) services? revenues to $1,161-1,183 million is also quite robust and better than the guidance given by its peers. -
The consolidated revenues grew by 0.5% sequentially to Rs6,926.9 crore. The IT services division?s revenues grew by 3.4% sequentially to Rs5,163.6 crore. The revenues in dollar terms were up by 5.8% sequentially to $1,126.8 million?better than its guidance of $1,092-1,113 million?driven by volume growth (4.7% quarter on quarter [qoq]) and improved price realisation (up by 1% sequentially mainly due to cross-currency benefits). -
The operating profit margin (OPM) improved by 92 basis points to 19.1% on the back of operational efficiencies (with the general and administrative expenses declining by 15.4% qoq) partially offset by appreciation in the Indian Rupee. Despite appreciation in Indian rupee and lower working days during the quarter, the company was successful to maintain IT services business? OPM at 23.8%. -
The net income grew by 4.8% sequentially to Rs1,217.4 crore?above our estimate of Rs1,131 crore?mainly on account of improvement in the OPM. -
Talking of Q4FY2010 guidance, the IT services division?s dollar-term revenues are guided to grow by 3.2-5% to $1,163-1,183 million?higher than that given by its peers (Infosys Technologies has given Q4FY2010 revenue growth guidance of 0.6-1.5%). -
The management sees positive demand environment especially in the banking, financial services and insurance (BFSI) vertical and is optimistic about the volume growth going forward. However, it remains cautiously optimistic about the technology and telecommunications (telecom) verticals. In terms of geographies, the company has mentioned that Europe has bottomed out and is likely to witness growth going forward. Further, the company expects the IT budgets to be flat to marginally positive in 2010. In terms of pricing, it expects a stable price scenario going forward. -
We have increased our earnings estimates on assumption of a higher volume growth and better-than-expected Q3FY2010 results. We have revised our Indian Rupee/US Dollar exchange rate assumption to Rs46.5 and Rs46 for FY2010 and FY2011 respectively. Consequently, our revised FY2010 and FY2011 earnings per share (EPS) estimates stand at Rs32 and Rs36.4 respectively. We have also introduced our FY2012 estimates in this note and expect FY2010 EPS of Rs41.2. -
We have revised our price target to Rs768 (20x its average FY2011 and FY2012 earnings estimates). Though Wipro has provided better Q4FY2010 revenue guidance compared to its peers, it has relatively higher exposure to technology, telecom and manufacturing verticals (which have posted sluggish growth in Q3FY2010). Moreover, the stock has run up sharply post Infosys Technologies? Q3FY2010 results. Hence, we maintain our Hold recommendation on the stock. At the current market price, the stock is trading at 19.9x FY2011 earnings estimate and 17.6x FY2012 earnings estimate. BASF India
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs465
Current market price: Rs426
Put on Hold Result highlights -
BASF India?s stand-alone Q3FY2010 performance stands above our expectation. The net profit for the quarter came in at Rs11.3 crore as against the meagre Rs0.4 crore reported in the corresponding quarter of the previous year. The same is significantly above our estimate of Rs4.7 crore too. The company reported a healthy profit growth during the quarter on the back of higher sales as well as margin expansion. -
The total income from operations grew by 41.5% year on year (yoy) to Rs292 crore, largely in line with our estimate of Rs281.4 crore. All the segments, viz agriculture (up 59.1% yoy), performance (up 41.3% yoy) and plastics (up 24.6% yoy), supported the growth with the exception of chemicals, which saw a 16.5% year-on-year (y-o-y) decline in the revenues. Due to the seasonal nature, the agriculture sales saw a sequential drop of 52.3% while all the other segments registered a sequential improvement. -
Importantly, the operating profit surged by more than 2.5x yoy to Rs23.6 crore as against Rs6.6 crore in the corresponding quarter of the previous year. The overall operating profit margin (OPM) improved by 486 basis points yoy to 8.1% in Q3FY2010. On a segmental basis, the margin expansion primarily stemmed from a turnaround in the plastics and performance divisions that reported 3.9% and 8% profit before interest and tax (PBIT) margin respectively for the quarter, as against losses reported during Q3FY2009. -
Further, a lower tax incidence (32.5% in Q3FY2010 vs 71.3% in Q3FY2009) too helped boost the bottom line of the company during the quarter. -
For the nine months ended December 31, 2009, the stand-alone revenues increased by 13.9% yoy to Rs1,045 crore mainly driven by a strong 34% y-o-y increase in the revenues from the agricultural solutions segment. The OPM witnessed a 210-basis-point expansion yoy to 14.3% on the back of a decline in the raw material cost. The stand-alone net profit increased by 36.6% yoy to Rs86.3 crore for M9FY2010. -
During December 2009, the shareholders of BASF India approved the amalgamation of Ciba India (a speciality chemicals company) with BASF India. This is expected to take place by February 2010. -
We have revised our earnings estimates for FY2010 and FY2011 upwards to factor in the higher OPM on stabilisation of the raw material prices. Consequently, our revised earnings per share (EPS) estimates now stand at Rs32.3 and Rs38.7 for FY2010 and FY2011 respectively. -
BASF India with its diverse product portfolio, catering to a variety of user industries ranging from automotive, electrical industries, leather and textiles, is likely to see a revival in demand going ahead on the back of renewed growth prospects for several of its user industries. Further, the company is in the process of building a new engineering plastics compounding plant with a capacity of 9,000 tonne per annum at its existing Thane facility which will primarily cater to the automotive, electrical and electronics industries. We believe that the company is likely to benefit from the new capacity additions, as it would be able to cater to the growing demand from its user industries. At the current market price of Rs426, the stock is trading at 13.2x FY2010E and 11x FY2011E consolidated earnings. As a result of a significant run-up in the stock price of the company (up 24%) since our last update (dated November 6, 2009) and the absence of any significant trigger going ahead, we are revising our recommendation on the stock from Buy to Hold while raising our price target to Rs465 (12x FY2011E earnings).
MUTUAL FUND: INDUSTRY UPDATE Strong redemption pressure hurts MF's AUM The total AUMs of equity MFs in December 2009 stood at Rs218,114 crore, 2.3% higher than that in November 2009. On adjusting for the net inflows/outflows, the growth stood at 3.4%, which was in line with the market growth of 3.2% in the same period.
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