HDFC Bank Cluster: Evergreen Recommendation: Hold Price target: Rs2,240 Current market price: Rs2,177
Valuation remains on the higher side We recently interacted with the management of HDFC Bank to get a view on the bank?s growth prospects in the emerging environment. We believe the bank will continue to grow its advances by 25-26%, led by a strong uptick in credit demand from the retail segments. With a capital adequacy ratio (CAR) of 16.3% and tier-I CAR of 12.1%, the bank is adequately capitalised to support its strong growth targets. However, the premium valuation (3.5x FY2012 book value) factors the positives leaving little room for upside. We, therefore, maintain our Hold recommendation on the bank with a price target of Rs2,240.
SECTOR UPDATE
Construction
Is the worst behind us?
Key points
Problems persist at both ends?lack of new orders and slowdown in execution: Order slowdown, delay in execution, rising input costs and rising interest rates are the key concerns playing a havoc in the infrastructure sector since the start of the fiscal.
Slowdown in award of projects: Poor macro fundamentals (high fiscal deficit and inflation) along with various scams hitting the government have adversely impacted the announcement and awarding of new projects. The problems at the UPA government?s end are getting complicated day by day and are having direct repercussions on the infrastructure spending. The project awarding activity has been continuously declining since the last three quarters. The fourth quarter until now has been no different. Further, five states are likely to go for state assembly elections in Q1FY2011. Thus the order slowdown is likely to continue over the next three-six months.
Execution delays: To make matter worse, companies faced various execution hurdles on their existing projects, which resulted in time and cost overruns. Delays in execution were caused by delays in land acquisition, delays in getting environmental clearances and delays in getting other procedural approvals. This can be corrected only by changing and strengthening various government policies, which looks unlikely to happen in the short term given the current macro environment. Thus problems persist at both ends, thereby hampering the growth of the companies and blurring future visibility. A pick-up in order inflow and execution remain the key monitorables for a re-rating of the infrastructure stocks.
However, we see positive signals amidst negative environment
Land acquisition?states show the way: Though land acquisition has been one of the key reasons for delay in execution of projects, state governments are coming up with innovative ideas which are likely to speed up the land acquisition process. The Haryana government was the first one to come out with a policy wherein it offers annuity for 33 years in addition to upfront market-rate-based compensation for the land acquired by the state. This has been implemented by some other state governments as well and the central government is also considering to implement it at the national level.
Softening stance of MoEF?clearances have started coming in: The environment minister Jairam Ramesh is softening his earlier hard stance by lifting the moratorium on development projects in 25 areas of the 43 areas in order to strike a balance between economic growth and environment. In the recent few weeks, a few key large projects have been given environmental clearances. Further he is planning to raise the comprehensive environment pollution index (CEPI) threshold score from 70 to 75 which will result in 16 coal projects getting approval.
23% higher allocation towards infrastructure spending?shows the intent of the government: As the broader growth gets constrained due to lack of infrastructure in the country, the budget has increased the allocation for the infrastructure sector by 23% to Rs2.14 lakh crore as compared to an overall increase of just 3.4% in total spending. This shows the supportive intent of the government towards the sector as a whole. Further FY2012 being the last year of the XIth Plan, infrastructure spending is expected to pick up which will improve the order inflows for the sector. Further, a recovery has been witnessed in foreign direct investment (FDI) which will have a trickledown effect on the new projects getting announced. In addition, the easing of the foreign institutional investor (FII) limit in the budget too is a positive step towards increasing the investment in the infrastructure segment as it will fuel growth in the medium to long term time horizon.
Attractive entry point for long term investors
Given the above mentioned concerns, the whole sector has underperformed significantly and corrected by 30-40% in the past three months. Further they have corrected by ~50% year till date (YTD) as compared to 3% upside witnessed by the sensex. Infact the stocks are down 70-80% from their peaks witnessed in January 2008 vis-?-vis a 14% fall witnessed by the Sensex for the commensurate period. After the steep correction, the valuations have turned attractive and most of these stocks are trading at a 30-40% discount to their long-term average valuation. The sharp correction and the on-going underperformance in the infrastructure stocks offer very attractive entry points for the long term investors with a horizon of one to two years.
We like IL&FS Transportation Networks (India) Limited (ITNL) and IRB Infrastructure among the larger players as new project awarding activity is likely to pick up from the NHAI end. Further we like Pratibha Industries among the smaller players, given its strong order inflow in FY2011 so far compared to other players and its strong financials.
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