Investor's Eye
[February 17, 2012] | | | Summary of Contents
| THEMATIC REPORT Switch from HDFC Bank to HDFC Key points -
Tactical switch from HDFC Bank to HDFC: In the past one year, HDFC Bank has appreciated by close to 30% as compared to the 14% appreciation in HDFC in the same period. This has usually been the case in a rising interest rate scenario due to HDFC's dependence on bulk/wholesale deposits and corporate loans. On the other hand, HDFC Bank benefits from its strong retail deposit (current account/savings account) and asset base. However, it is the other way round when the interest rate cycle reverses. HDFC tends to outperform relative to HDFC Bank in a declining interest rate scenario. The empirical evidence from the past interest rate cycle supports our argument. Thus, we expect the discount in the valuation of HDFC Bank (vs HDFC) to revert to a mean of 20% plus (from around 6-7% now) over the next one year. -
HDFC-relatively better placed to gain from the reversal in the interest rate cycle: As the interest rates ease out, HDFC's cost of funds is expected to decline relatively faster due to its dependence on wholesale funds that constitute 75% of its funding. Even on the assets side (advances), the bulk of its mortgage loans are on a floating rate. Plus, the advances under the dual rate home loan scheme (Rs22,000 crore of teaser loans with a lower interest rate for the initial two years) are scheduled to get re-priced over the next one year). Going ahead, as the operating environment improves the performance of the subsidiaries (insurance, asset management etc) should also improve, boosting the overall valuations and leading to a re-rating of the stock. In this note, we have revised our sum-of-the-parts (SOTP) based price target for HDFC to Rs785 per share (valuing the subsidiaries and investments at Rs235 per share) and upgraded our recommendation on the stock to Buyfrom Hold earlier. -
HDFC Bank-the best operational metrics among private sector banks but offers limited upside: While HDFC Bank is among the best private sector banks but tactically it can underperform HDFC in the next 6-12 months as seen in the past. This is due to the relatively slower rate of repricing of its assets and liabilities. The bank is essentially current account and savings account (CASA) funded for which the cost is fixed (4% for savings deposits) and is facing increased competition from the other private sector banks that are offering higher rates on saving deposits. The bank has also raised its deposit rates recently by 50-100 basis points to catch up with its peers; this will also affect its margins. In addition, 70% of its non-CASA deposits are from the retail segment where the cost is stickier. Further, the valuations have run up over the three-year mean and further upside seems limited from these levels.
STOCK UPDATE Shiv-Vani Oil & Gas Exploration Services
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs283
Current market price: Rs214 Price target revised down to Rs283 Key points -
A disappointing performance: The net sales of Shiv-Vani Oil & Gas Exploration Services (Shiv-Vani) largely remained unchanged at Rs379.2 crore (increased by 0.9% year on year [YoY]) during Q3FY2012. The sales figure also includes Rs28 crore from trading activity. However, on a sequential basis, the company reported a 13.2% growth in its net sales during the quarter. At the operating profit level the company registered a decline of 15.1% YoY to Rs153.8 crore on account of contraction of 765 basis points in the operating profit margin (OPM) to 40.6% due to higher raw material and lubricant prices, and expenses of Rs27 crore booked on trading activity. Sequentially, the OPM contracted by 269 basis points. -
Earnings deteriorated despite tax benefit: The interest cost during the quarter increased by 10.5% YoY to Rs70.1 crore. Hence, the profit before tax (PBT) of the company declined by 44.4% YoY to Rs45.9 crore as compared to a decline of 15.1% at the operating level. However, due to the tax benefit (a tax write-back of Rs10.3 crore in Q3FY2012), the adjusted profit after tax (PAT) declined by 30.8% YoY but increased by 22.1% on a quarter-on-quarter (Q-o-Q) basis. Further, on account of currency fluctuation, the company had a huge foreign exchange (forex) loss to the tune of Rs39.2 crore. Hence, the reported PAT declined to just Rs16.9 crore as compared to the reported net profit of Rs70 crore in the corresponding quarter of the previous year. -
Order book remains at Rs2,600 crore (1.7x its FY2011 revenue): Currently, the company's order book is around Rs2,600 crore, which is close to 1.7x its FY2011 revenues. Out of the current order book, Rs100 crore of orders are for seismic study, around Rs400 crore worth of orders are from CBM and Rs600 crore worth of orders are from Oman. Based on this, the management expects to record revenue of around Rs1,600 crore in FY2013. In terms of order inflow, the company has not bagged any big-ticket order during M9FY2012 due to a lack of orders announced by the upstream companies like ONGC and Oil India. The company bagged a few small orders worth Rs500 crore in October and November 2011. The live bid of the company is around Rs3,000 crore and the management is optimistic about winning around Rs1,000-1,200 crore worth of orders in the next two to three quarters. -
Downgrading earnings estimates for FY2012 and FY2013: We are downgrading our earnings estimates for FY2012 and FY2013 mainly to factor in the lower than expected revenue growth and higher than expected OPM. Consequently, the revised earnings per share (EPS) estimates for FY2012 and FY2013 now stand at Rs44.3 and Rs47.2 respectively. -
Limited downside risk but lacks upside triggers; Buy retained: As a result of the cut in the estimates, the revised earnings growth estimate is likely to get reduce. Consequently, we reduce our price target to Rs283 from Rs300. The current market price discounts the FY2012 earnings by 4.8x and the FY2013 earnings by 4.5x. The stock is available at enterprise value (EV)/EBIDTA of 4.9x on FY2013 estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs283. Provogue India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs62
Current market price: Rs33 Deep value-maintain Buy; price target revised to Rs62 Q3FY2012 weak results; below expectation: Provogue India posted a weak performance for Q3FY2012 and the same was below our expectation. Though the revenue grew by 20.5% year on year (YoY), a sharp erosion in the operating profitability (led by an increased cost of goods sold) resulted in a 41.7% contraction in the operating profit and a 48.3% year-on-year (Y-o-Y) contraction in the net adjusted earnings for the quarter. Valuation and view
Taking cognisance of the poor Q3FY2012 performance and the general slowing economy we have reduced our FY2012 earnings estimate by 18% and FY2013 estimate by 12%. Our revised EPS estimates for FY2012 and FY2013 stand at Rs2.8 and Rs3.6 respectively. Despite weak results and reduction in our estimates, we remain positive on Provogue India as we believe that the company provides an exciting opportunity to play the buoyancy in the domestic consumption space, with the brand Provgue and the retail-centric real estate business Prozone. We value Provogue India on a sum-of-the-parts (SOTP) basis. We value the core business on a PE basis at 10x FY2013 (Rs36 per share). Based on the net asset value (NAV) the share of the real estate business (Prozone) works out to Rs26 per share (we are discounting the NAV by 30% of the actual Rs37). Thus, we maintain our Buy recommendation on the stock with a revised price target of Rs62. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | | | | Regards,
The Sharekhan Research Team | myaccount@sharekhan.com | | | |
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