HDFC Bank : HOLD

Margins Maintained

HDFC Bank registered net profit of Rs 1,115 cr (up 33% YoY) in Q4FY11, marginally above our estimate, driven by 21% YoY growth in net interest income and lower provisioning. Though advances grew 27% YoY (vs. 33% YoY in Q3FY11), they witnessed muted sequential growth at 1%. Despite a 20 bps YoY decline, margins remained healthy at 4.2% supported by its strong CASA franchise. Core fee income impressed with a 23% YoY increase. HDFC bank reported treasury gains of Rs 8.6 cr in Q4 (vs. Rs 30.7 cr loss in Q3FY11). Provisioning expenses were under control and coverage ratio improved to 83%. Asset quality remained sound and continued to improve; Gross NPA ratio improved sequentially by 6 bps while Net NPA ratio remained unchanged at 0.2%. Restructured assets were at 0.4% of the loan book.

Key highlights

ü  CASA ratio remained impressive at ~51% with savings deposits rising 4% QoQ; while, current a/c deposits declined by 29% QoQ.

ü  The Bank is carrying counter cyclical provision of Rs 750 cr as of FY11, which can be used for any asset quality related provisions going forward thereby reducing the volatility in earnings.

ü  HDFC Bank has announced sub-division (split) of one equity share having nominal value of Rs 10, into five equity shares having nominal value of Rs 2 each which will be subject to approval.

Maintain Hold, with revised TP of Rs 2,300 (2% downside)

Despite slower advances growth, HDFC Bank has been able to maintain margins (~4.2%) QoQ and record improved profitability. Asset quality remained extremely healthy. Hence, we have revised our EPS estimates upwards by 6% and BV estimates by 3% for FY12E to factor in improved performance. At CMP of Rs 2,355, the stock is trading at 24x FY12E EPS of Rs 99.2 and 3.8x FY12E ABV of Rs 621.

IPO Update: FVIL

Future Ventures India Ltd

Price band: Rs10-11 per share

Issue opens: April 25, 2010

Issue closes: April 28, 2010

Bid Lot : 600 shares

Company and Promoters

Future Ventures India Ltd. (FVIL) is part of the reputed Future Group, led by eminent Mr Kishore Biyani. FVIL is regulated by RBI as a systemically important non-deposit accepting NBFC which invests in businesses with prime intentions to participate in consumption-led sectors in India, defined as sectors whose growth and development will be determined primarily by the growing purchasing power of Indian consumers and their changing tastes, lifestyle and spending habits.

G. N. Bajpai, is the Chairman of FVIL. He holds Master degree in Commerce and Bachelors degree in law. He has previously been the Chairman of SEBI, LIC of India and the Chairperson of the Insurance Institute of India.

Issue Highlights

ü  At an earlier stage, India has entered a virtuous long term cycle in which rising incomes lead to increasing consumption. India’s GDP is expected to double within 2015; favorable demographic conditions (32% of population between 20-39 years; having high consumption potential) and exploding city populations are propelling consumption. Players focusing on such growth stories like FVIL; are expected to significantly benefit going forward.

ü  FVIL is expected to significantly benefit from its rich parentage. Synergy benefits from the group companies are expected to aid the business ventures in strategizing and chartering growth plans.

ü  FVIL has seen exponential income growth over past 3 years. Total Income has grown at a CAGR of 487%; during the period FY08 - FY10. Moreover the company has turnaround its operational performance and has reported EBITDA of Rs 13.8 cr as on 9M FY 2011 as compared to losses during past 3 years.

ü  CARE has assigned a grade of 3/5 for the FVIL IPO indicating average fundamentals.

Positives

·         Riding on the consumption story: Consumption has played a bigger role in India’s growth story than in other developing countries in Asia. At an earlier stage, India has entered a virtuous long term cycle in which rising incomes lead to increasing consumption, which, in turn, creates more business opportunities and employment, further fueling GDP and income growth.

Factors that will drive Private Consumption:

a.    India’s GDP is poised for an average growth of 8-9% which will fuel private consumption. GDP is estimated to be US$ 1,777 bn and consumption is set to double by 2015.

b.    72% of Indian population constitutes of people below 39 years, with 32% between 20- 39 years having high consumption potential.

c.    By 2021, there may be more than 125 cities having population in excess of 1 mn and another 500 having population between 5,00,000 and 1 mn which will offer significant opportunities in the consumption space.

·         Synergies with Future Group will aid business growth and improve operational efficiencies

·         Business Ventures are not just pure financial investments; it provides access to a wide range of resources within the Future Group.

·         Exponential income growth; EBITDA turnaround in 9M FY 2011

Risk factors

·         FVIL’s revenue, net income and cash flow will be highly variable because financial results will be affected by the timing of their exit from any of the Business Ventures, which may make it difficult for them to achieve steady earnings growth and may cause the price of equity shares to fluctuate. The timing and receipt of income and gains generated by the sale of Business Ventures is event-driven and thus highly variable which will contribute to the volatility of FVIL’s revenue.

·         A significant proportion of FVIL’s investments in the Business Ventures will involve acquiring securities that are not publicly traded. In some cases, FVIL may be prohibited by contract or by applicable securities laws from selling such securities for a period of time. Company’s ability to dispose of investments in these Businesses is also dependent on the financial markets. If FVIL is unable to liquidate investments on a timely and opportune manner; company may be unable to participate in other more lucrative opportunities, which may have a material adverse effect on its business strategy and results of operations.

For additional information & risk factors please refer to the Red Herring Prospectus

20th April, 2011

The markets opened on a flat note amidst weak global cues and slipped into the red before bouncing back into the green. The markets traded sideways in the mid session and again slipped into the red in the late session before recovering to end the day on a flat note. Among the Sectoral indices FMCG & Power were amongst the losers while IT and Oil&Gas were among the gainers. Among the Sensex stocks Bharti Airtel (2.18%), RCOM (2.08%) were amongst the gainers while Hero Honda (4.64%), BHEL (2.37%) and HUL (1.20%) were the major losers. The Sensex gained 30 points or 0.16% to close at 19,122 while Nifty gained 12 points or 0.20% to close at 5,741.

Total traded turnover stood at Rs 1,57,524 cr. In equities both FIIs & DIIs both were net buyers of (Rs 1693 cr) &(Rs 208 cr) respectively. On the derivatives side, FIIs were net sellers in Index Futures (Rs 557 cr), Stock Futures (Rs 212 cr) and Stock Options (Rs 22 cr) while they were net buyers in Index Options (Rs 263 cr).

The US markets ended higher as stocks gained after encouraging results from health care and materials companies though amidst concerns due to weak earnings reported by Goldman Sachs. The Dow Jones gained 65 points or 1.14% to close at 12,267 while NASDAQ gained 10 points or 0.35% to close at 2,745.

The Asian markets are trading positive. Nikkei is trading higher by 1.43% while Hang Seng is currently trading higher by 0.76%.

The market breadth was indecisive with advance decline at~1:1; the market s managed to close on a flat note. The markets may open on a positive note tracking cues from global peers.

The trend deciding level for the day is 5735; If NIFTY trades above this level then we may witness a further rally up to 5770-5810-5840 levels. However, if NIFTY spot trades below 5735 levels then we may see some profit booking to initiate in market, it may correct up to 5705-5670-5650.

Stocks to focus for intraday long: IDEA, Mundra port, BGR Energy.

JBCPL : BUY

JB CHEMICALS & PHARMACEUTICALS

Dual Bonanza: Reigniting Domestic business and Russian business continues to blossom continually

Company Background

JB Chemical and Pharmaceutical (JBCPL) is an export oriented company (with over 50% revenues from exports) equipped with strong brands such as Nicardia, Rantac, Dicloran amongst others.

Investment Argument

ü  Enhanced focus to reignite previously languishing domestic business: Despite having strong brands; JBCPL was under-performing in the domestic market with revenue growth lower than industry average.

ü  With renewed focus; increase in Medical Representative (MR) strength from 550 in FY10 to 2,000 in FY12E; new product extensions and aggressive marketing; JBCPL is expected to pump in new life in this sagging business. Management is targeting to double its revenues over next 3 years. We believe, with the renewed zest, domestic business will flourish and deliver better than industry average growth over next 3 years.

ü  Russia/CIS region will continue to reap rich dividends- JBCPL will continue to consolidate its position in this region. Strong and successful brands and focused marketing approach will aid consistent growth for JBCPL. Moreover, Russia/CIS pharmaceutical region is expected to grow at double digits over medium term. High receivable days are not a concern for the company as quality of receivables is very high.

ü  JBCPL on the verge of explosive growth via Rest of World (ROW):- ROW although currently a smaller contributor to overall growth; is expected to register stellar growth in the medium term especially led by robust growth from South Africa, US/Canada and others. Moreover, equipped with state of art facilities with regulatory approvals from the likes of US FDA, MHRA UK and others, niche lozenges expertise and available capacity; JBCPL is expected to further make inroads in this high margin CRAMS segment.

ü  Triple Treat: De-leveraged Balance Sheet, low capex plans and increasing CFO: A virtually debt free company with steadily increasing cash from operations coupled with low capex plans for next 2 years; JBCPL is expected to built a cash war-chest in the medium term. This will support its plans for venturing into newer territories and also pursue inorganic growth going forward. Average ROCE and RONW are regaining from the slump of last 2 year.

Valuation

BUY on JBCPL with a target price of Rs 175.5 by assigning a P/E of 10x FY2012 EPS of Rs 17.55; which provides a potential upside of 16.2% over a period of 12-15 months.