HDFC Bank
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,355
Current market price: Rs1,127
Price target revised to Rs1,355
HDFC Bank has announced it plan to raise additional equity capital of Rs4,200 crore or $1 billion, whichever is higher. The additional capital is required to strengthen its capital base under the new Basel II guidelines and also fund the future growth plans. We had earlier factored in our valuations a minor equity dilution of 5% during FY2008, based on the historical trend of capital raising programmes of the bank. However the bank's recently announced capital raising plan is expected to lead to a dilution of 13.3% of the existing equity base and the same is much above our estimate. After the capital raising exercise the Tier-I ratio of the bank is expected to be at 11.6%.
Key points
- The present promoter's (ie the HDFC group) stake stands at 21.6%. With a view to maintaining the stake of the promoter group at or about 23% of the enhanced capital base, the bank would make a preferential offer of 13,582,000 equity shares of Rs10 each to the promoter group at a price of Rs1,023.49 per share determined by the SEBI formula. Thus the promoters would infuse Rs1,390 crore to maintain their stake at 22.8% of the enhanced equity base. The balance amount of the proposed equity capital may be raised either as a domestic public offering or as public or private offerings in one or more international markets. The bank already has 18.9% of its existing capital as American depository shares (ADS).
- We have assumed a follow-on offer price (FOP) of Rs1,000 per share for HDFC Bank which would result in a fresh issue of 2.81 crore equity shares to raise the remaining amount of Rs2,810 crore. The FOP is significantly higher than the bank's FY2007 year-end book value of Rs201 per share. Hence the issue would significantly add to the book value of the bank. The book value is expected to go up by 62% to Rs327 per share by March 2008 if we factor in a stable 31% earnings growth in FY2008.
- We have revised our FY2008 earnings estimate upwards by 1.8% to Rs1,503 crore from Rs1,475 crore. But after factoring in the higher dilution, the earnings per share (EPS) estimate has reported a decline of 7.3% to Rs41.6 from Rs44.9. We have also introduced our FY2009 estimates and at the current market price of Rs1,127 the stock is quoting at 20.7x FY2009E EPS, 8.0x FY2009E pre-provision profits and 3.1x FY2009E book value. The historical one-year forward price-to-book value chart indicates that the HDFC Bank stock consistently trades around the 3.7x price-to-book value band. So maintaining the same price-to-book multiple of 3.7x for HDFC Bank we uphold our Buy recommendation on the stock with a revised price target of Rs1,355.
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs3,110
Current market price: Rs2,750
Price target revised to Rs3,110
Key points
- Aban Offshore Ltd's (AOL) earnings estimate for FY2009 has been revised upwards by 15.8% to factor in the higher than our assumption of day rates for the six existing assets that are scheduled for renewal over the next three quarters. The revised estimate also factors in the steep appreciation of the rupee and the exchange rate assumption has been revised to Rs41 against the US Dollar (USD) for FY2008 and FY2009.
- In addition to the net positive impact of the re-pricing of its assets at higher day rates and the change in the foreign exchange (forex) rate assumption, the sentiment towards the stock would be boosted by the flow of positive news related to the delivery of two newly built jack-up rigs and the contracts for the same. Moreover, the delivery of its drill ship, Aban Abraham, is also scheduled in August 2007.
- At the current market price the stock trades at 21.8x FY2008 and 7.5x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs3,110 (8.5x FY2009E earnings).
Sharekhan Investor's Eye dated June 06, 2007