ShareKhan Investor's Eye:Thematic Report (Piping hot); Update - HDFC Bank (Price target revised to Rs712)

Investor's Eye [December 07, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Piping hot Key points Global demand-supply gap to widen: CY2012 began with a production shortage of 12.5 million kg. With tea production down in the key black tea exporting countries, the demand-supply gap in the international market is expected to rise further at the end of the year. As per industry data, black tea production from key tea exporting countries for the first nine months of 2012 dropped by about 3% year on year (YoY; or 41 million kg) to 1,427.5 million kg. The industry expects CY2012 to end with a production shortfall of around of 50 million kg of black tea.  Domestic tea prices to remain firm, to benefit domestic tea companies: The supply shortage in the domestic and international markets has led to a spike in the tea prices in the domestic market. The raw tea prices in India are currently trading at Rs15-20 per kg, higher than last year's price. However, with a lower yield the sales volume has been affected for most. Hence, we don't expect any significant expansion in the margins of the domestic tea players in FY2013. With the demand-supply gap likely to expand further in the coming months, the tea prices are expected to rise higher in the next year. On the back of expectations of stable sales volume, we might see the profitability improve substantially in FY2014.  Maintain Buy on Mcleod Russel, recommend Jayshree Tea as a short-term trading idea: Indian tea is gaining preference in the international markets while the domestic tea market is growing at a steady pace of 2-3% YoY. The favourable demand-supply environment would keep the Indian black tea producers in a sweet spot, as tea prices are expected to remain firm in the domestic and international markets with no signs of easing of the deficit globally. We believe companies like Mcleod Russel, Jayshree Tea India Ltd (JTIL), Harrison Malayalam, Warren Tea and Goodricke are likely to witness an improvement in profitability in the coming years. We maintain our Buy recommendation on Mcleod Russel with a revised price target of Rs381 (10x based on average FY2014-15 earnings of Rs38.1). JTIL is another key domestic player that is likely to witness a handsome improvement in its profitability in the near term. Hence, we recommend it as a short-term trading idea (with a six-month time horizon).  STOCK UPDATE HDFC Bank Recommendation: Hold Price target: Rs712 Current market price: Rs693 Price target revised to Rs712 We interacted with the management of HDFC Bank to discuss the growth outlook in the evolving macro environment. The key highlights are as under: Operating leverage to play outDue to a sharp increase in the number of branches (819 branches added in the past three years) that too outside the top ten cities, the cost-to-income ratio increased to 49.0% from 48.0%. Of the total 2,620 branches, around 895 branches are around 24 months old and are close to break-even. Generally, it takes around two to three years for these branches to break-even and slightly lesser in case of branches located in top cities. Further, the average branch addition is likely to slow down to around 250 per year, which would aid in lowering the cost-to-income ratio to 46% levels (50-70 basis points/year) over the next two to three years. Corporate lending book to grow at ~15% while retail to remain a key driver Though the bank's loan book grew by ~23% year on year (YoY) in Q2FY2013, the bank expects the FY2013 loan growth to be around 22% YoY. Within this, the corporate loans are expected to grow at a slower rate of 10-15% YoY, whereas the retail loans will continue to grow at a healthy rate of 26-28%. As the bank penetrated in newer geographies, the components within the retail (vehicle loans, gold loans etc) are showing a strong traction. Further, the revised priority sector norms will facilitate lending in the sector and the bank expects to meet the requirement of the sub-heads (within overall limit of 40%) in the next 18 months. NIMs likely to remain stable The bank's 70% of the liabilities are retail in nature and are expected to get re-priced over Q3FY2013 and Q4FY2013. This is likely to ease the pressure on the net interest margins (NIMs) due to a decline in yield on asset book. Moreover, the bank has one of the highest current and savings account (CASA) ratios in the sector (45.9% in Q2FY2013), while 70% of the non-CASA deposits are from the retail customers. Therefore, the NIMs are likely to be maintained at 4.2-4.3% level. Outlook and valuationHDFC Bank stands out from other banks as it delivered a consistent growth in its profits coupled with an impeccable asset quality. Going forward, the steady margin and a strong growth in the retail segment will drive the operating performance while the lower slippages are expected to moderate, keeping credit costs under check. Consequently, we expect the bank's earnings to grow at a CAGR of 21.6% over FY2012-15. On the valuation front, the stock currently trades at 4x its FY2014 and 3.4x its FY2015 book value. We are rolling over the price target on an average book value of FY2014 and FY2015 by keeping the multiple same. Thus, our revised price target stands at Rs712 (3.8x average of FY2014/FY2015 book value). Given the limited upside, we maintain Hold rating on the stock . Click here to read report: Investor's Eye

Management Interaction Takeaways PLNG :: Centrum

Management Interaction Takeaways

PLNG

Buy

Target Price: Rs191

CMP: Rs162

Upside: 18.1%

We recently interacted with the management of Petronet LNG to get their feedback on ongoing projects and business environment. The key highlights are:

Reliance Capital Buy Target Price: Rs585:: Centrum

Reliance Capital

Buy

Target Price: Rs585

CMP: Rs436         

Upside: 29%

Phoenix rising again

Difficult business environment for equity linked businesses; sweeping regulatory changes in insurance (life & non-life) and a generally weak macro have led to significant erosion in return ratios of RCAP. However, the tide is gradually turning as individual business segments overcome sector specific challenges and macro is on the mend leading to improved outlook for capital market linked businesses. Current market price disregards long term value seen by strategic investors and under-appreciates a potent banking platform in making. We initiate coverage with a Strong Buy recommendation with an upside of ~30%.

FII DERIVATIVES STATISTICS FOR 10-Dec-2012

FII DERIVATIVES STATISTICS FOR 10-Dec-2012
	BUY		SELL		OPEN INTEREST AT THE END OF THE DAY
	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores
INDEX FUTURES	20919	622.77	17429	519.67	387598	11365.57	103.10
INDEX OPTIONS	354999	10499.80	358342	10608.02	1489927	44068.61	-108.22
STOCK FUTURES	33271	954.15	44904	1352.94	1113783	32427.94	-398.78
STOCK OPTIONS	35736	1009.17	38086	1080.38	68637	1912.93	-71.21
						Total	-475.10

 

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FII & DII trading activity on NSE and BSE 10-12-2012

Category		Buy	Sell	Net
		Value	Value	Value
FII		2561.71	1863.48	698.23
DII		678.91	1265.49	-586.58

 

 

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IPO, Grey market premium - 10 Dec

IPO	Opening Dt	Closing Dt	Band	Retail Discount	Grey Market Premium
Veto			48-50	0	Discount
CARE	07-Dec-12	11-Dec-12	700 - 750	0	150
PC Jeweller Limited	10-Dec-12	12-Dec-12	125 - 135	5	10
BHARTI INFRATEL	11-Dec-12	14-Dec-12	210 - 240	10	Discount
Rural Electrification (REC) NCD	03-Dec-12	10-Dec-12	1000	0	80

Havells’ electrifying rise :: Business Line

10 Dec, IPO, Grey market premium

IPO	Opening Dt	Closing Dt	Band	Retail Discount	Grey Market Premium
Veto			48-50	0	Discount
CARE	07-Dec-12	11-Dec-12	700 - 750	0	150
PC Jeweller Limited	10-Dec-12	12-Dec-12	125 - 135	5	10
BHARTI INFRATEL	11-Dec-12	14-Dec-12	210 - 240	10	Discount
Rural Electrification (REC) NCD	03-Dec-12	10-Dec-12	1000	0	80

Should you go for gold funds or ETFs? :: Business Line

Where is the rupee headed? :: Business Line

Stock Strategy: Consider short strangle on JP Associates :: Business Line

JP Associates (Rs 104.8): Despite the strong recovery in recent times, the long-term outlook for JP Associates remains negative still it stays below Rs 125. The stock is currently ruling at crucial level. It finds immediate resistance at Rs 108 and support at Rs 96 and the crucial one at Rs 85. In the near-term, JP Associates is likely to see some moderation.

F&O pointers: The JP Associates December futures witnessed an accumulation of 6.44 lakh shares in open interest. However, most of the accumulation seems to be on the short side as both current month and January futures are ruling below the spot price. Option trading indicates Rs 95-100 is crucial level, where both put and call shed open interest position.

Strategy: Consider short strangle on JP Associates using 110 call and 95 put that have closed at Rs 1.95 and Rs 1.20 respectively. The market lot is 4,000 units/ contract.

As the maximum profit is the premium collected, we advise traders with high risk appetite to consider this strategy. Besides, the loss could be unlimited if JP Associates swings wildly in one direction (up or down). In other words, only a swing of more than 10 per cent from current levels in one direction will start pinching the position. Also, writing option involves higher margin commitments. Maximum profit occurs if JP Associates closes in the range. Hold this position for at least 2 weeks.

SGX Nifty 5,950.50 +16.50; Markets to open UP

SGX Nifty 5,950.50 +16.50;
Singapore Exchange
8:30 AM India time
10 Dec 2012
Markets to open UP