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Saturday, May 19, 2007
Edelweiss - HDFC Bank - Mr consistent; event update; upgrade to Buy
HDFC Bank (HDFCB IN, INR 1,043, upgrade to Buy)
HDFC Bank, following the footsteps of ICICI Bank and SBI, has approved fund raising plans for USD 1 bn ( 12.7% dilution at current levels) in FY08E. It has announced preferential issue of 13.6 mn shares at INR 1023 per share to HDFC Group, to maintain the parent's stake at or above 23%,. For the balance, it may resort to public offering or private placement in domestic or international markets.
The capital raising is likely to help the bank meet capital adequacy requirements under the Basel II norms and aid rapid loan book growth. We consider this fund raising exercise a positive for the bank, as it would be significantly book accretive, raising money at ~5.0x FY07 book. We expect the book value per share to grow 64% Y-o-Y to INR 330 by March 2008.
We are raising our credit growth forecast by 2% points to 32.5% CAGR over FY07-09E, Due to equity infusion, NIMs would improve by 8-14bps during FY08-09E, We are increasing our profit forecast by 4% for FY08E and 5% for FY09E to factor in higher credit growth and equity money. However, due to equity dilution in FY08E our EPS for FY08E at INR 43 stands reduced by 7%, while FY09E EPS at INR 58 is 12% higher than earlier estimates.
The stock has underperformed its peers by 10-20% in the last one year and has returned just 10% in the last six months, despite strong operating performance. Post the capital issue, the stock will be trading at 3.2x FY08E, 2.9x FY09E book (diluted), and 18.0x FY09E earnings.
Amongst rising concerns on asset quality and margins in higher interest rate scenario, we believe HDFC bank would be fare well compared with its peers on the back of its stable and predictable growth.
HDFC Bank has always traded at a premium to peer banks due to its steady growth, earnings quality, and M&A premium. We expect the bank to generate 27% EPS CAGR over FY07-09E and ~17% ROE in FY08-09. Using our 3-stage DDM, we arrive at a target value of INR 1320 per share, which would value the stock at 3.5x FY09E book and 23x FY09E EPS, implying 25% upside in 18 months. We upgrade the stock to 'BUY' from 'ACCUMULATE'.
Edelweiss - HDFC Bank - Mr consistent; event update; upgrade to Buy
Edelweiss - Dr. Reddy's Laboratories - betapharm: still holding on; result update Q4FY07; maintain Accumulate
Dr. Reddy's Laboratories (DRRD IN, INR 666, maintain Accumulate)
Dr Reddy's (DRL) Q407 results were better than our expectations, with Y-o-Y sales growth of 125%, mainly on account of Ondansetron revenues. For the year, it reported a growth of 165% in revenues, 360% growth in EBITDA, and 472% growth in net profit.
DRL reported Ondansetron revenues of INR 2.9 bn. We believe these higher revenues could be on the back better-than-expected market share and some inventory build up during the quarter. Since Ondansetron have much higher margins (as it is sold under 180 days exclusivity) EBITDA margins at 35% were higher than expectations.
On the positive side, Betapharm has performed much better than expected in spite of significant pressure on pricing in the German market. The company recorded EBITDA of EUR 30 mn, translating into 21% margin for the whole year. DRL has managed to renegotiate manufacturing contracts and now it will be able to transfer manufacturing of 10 products to India by the end of FY08E. We believe this is likely to result in significant cost savings and could prevent margin erosion in the highly competitive German market. The company seems to have managed to improve volumes by new product introductions. With its new initiative of transferring manufacturing back to India, we believe Betapharm will perform much better than expected.
As expected, there was significant improvement in the base business with API revenues growing by 44% and CPS revenues growing by 133%, albeit on a lower base. API revenues were boosted by significant revenues from Sertraline and Rabeprozole. In US markets, DRL managed to gain ~62% market share in Ondansetron and it continues to hold on to its double digit market share in Fexofenadine, which contributed significantly to US generics revenues.
We are not changing our earnings estimates for FY08 or FY09. Everybody, including us, had concerns about the German market. But as the company has managed to address these concerns upfront, there is a possibility that Betapharm may surprise on the positive in Germany. We would like to wait and watch this space more closely till we get more clarity on future developments in the German market before we change our assumptions.
At CMP of INR 666, the stock trades at a P/E of 18.1x on our FY08E earnings with possible upside triggers from monetizing of Para IVs. Hence, we maintain our 'ACCUMULATE' recommendation on the stock.
Edelweiss - Dr. Reddy's Laboratories - betapharm: still holding on; result update Q4FY07; maintain Accumulate
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