Housing Development Finance Corporation Cluster: Evergreen Recommendation: Buy Price target: Rs2,912 Current market price: Rs1,721
Price target revised to Rs2,912
Result highlights
Housing Development and Finance Corporation (HDFC) reported a bottom line of Rs468.1 crore in Q1FY2009, indicating a growth of 25.6% on a year-on-year (y-o-y) basis and a decline of 23.4% on a quarter-on-quarter (q-o-q) basis. The profit after tax (PAT) was below our estimate of Rs529 crore.
The top line (net interest income) for the quarter came in at Rs651.6 crore, up 36% year on year (yoy) buoyed by a 27.6% growth in loan disbursals and a healthy improvement in the net interest margin (NIM).
The healthy top line growth could not trickle down fully to the net total income due to the moderate growth (16.4% yoy) in the other operating income. Besides this the company did not report any capital gains during the quarter. The net total income stood at Rs750.3 crore, up 28.2% yoy.
The operating expenses were up by 26.6% yoy to Rs86.7 crore, primarily driven by a significant increase in the other expenses (up 44.8% yoy) and the staff expenses (up 35.8% yoy).
Loan approvals during the quarter stood at Rs9,996 crore, up 29.6% yoy from Rs7,713 crore in the corresponding period of the last year. In line, the disbursements during the quarter rose to Rs7,204 crore from Rs5,645 crore in the corresponding quarter of the last year, indicating a 27.6% y-o-y growth.
We have fine-tuned our numbers to factor in the additional information. Importantly, we have raised our cost of equity assumptions in line with higher 10- year G-Sec yields. At the current market price of Rs1,721, the stock trades at 19.8x FY2009E earnings per share (EPS) and 3.6x FY2009E book value/share. We maintain our Buy recommendation with a revised price target of Rs2,912.
TCS results for Q1FY2009 were largely in line with our expectation.
The revenues grew by 6.0% quarter on quarter (qoq) to Rs6,410.7 crore in Q1FY2009, boosted by the depreciation of the rupee (5.1%). In the dollar terms, the revenues during the quarter grew at a muted 0.4% qoq, driven by a volume growth of 1.3% and a favorable service mix (50 basis points). However, the revenue growth was partially mitigated by a 90-basis point decline in the pricing during the quarter.
The earnings before interest and tax (EBIT) margin declined by 26 basis points to 23.9%, primarily due to decline in pricing (294 basis points), wage hike (196 basis points) and higher on site revenue contribution (17 basis points). However, this was partially offset by the positive impact of the rupee depreciation (263 basis points) and the reduction in SG&A expenses (217 basis points) due to cost containment programme.
The reported net income during the quarter declined by 1.0% qoq to Rs1,243.6 crore. The company mentioned that there was a tax reversal of Rs33.5 crore during the quarter. Adjusting for this, the company's net income declined by 3.6% qoq to Rs1,210.1 crore, which is in line with our expectation of Rs1,212 crore.
The decline in the net income during the quarter was largely due to a lower other income (Rs33.2 crore in Q1FY2009 v/s Rs117.9 crore in Q4FY2008) due to foreign exchange (forex) losses of Rs75.3 crore in Q1FY2009. However, this was partially mitigated by lower depreciation expenses, as the company increased the average life of the computers from two years to four years.
The company also highlighted that two of its clients in the banking, financial services and insurance (BFSI) vertical, which led to a sequential decline in the vertical's revenue, are now ramping up and the business from these clients is expected to the pick up from Q2FY2009 onwards. However, the revenues from one more European client in the BFSI vertical is expected to come down due to its de-merger.
TCS closed 12 large deals during the quarter. Out of the 12 deals, three deals were in the range of $75-100 million. The company also highlighted that the large deals are ramping up especially in the manufacturing, retail, and utilities verticals. Currently, the company has a deal pipeline of 20 qualified large deals.
TCS also highlighted that the pricing scenario has remained stable during the quarter and it has not seen any cut in the price re-negotiation even for the large clients. However, the company did mention that it is cautiously optimistic due to the deteriorating macro environment.
We have revised our exchange rate assumption to Rs42 for FY2009 and Rs41 for FY2010. However, we have lowered our other income on account of the rupee depreciation leading to forex losses. We have also increased our effective tax rate for FY2009 to 14%. These factors have led to downward revision in our earning estimates for FY2009 by 1.9% and for FY2010 by 1.5%.
At the current market price, the stock is trading at attractive valuation of 12.4x FY2009 and 10.8x FY2010 earning estimates. We maintain our Buy recommendation with price target of Rs1,121.
Aban Offshore Cluster: Emerging Star Recommendation: Buy Price target: Rs4,829 Current market price: Rs2,610
All's well
Key points
We highlight that Aban Offshore would not be affected in any way by the recent decision of the shipping ministry to bar operations of all categories of vessels that are more than 25 years old during periods of foul weather. We clarify that this ban does not pertain to rigs.
Aban Offshore, in its board meeting to be held on July 21, 2008, would consider a proposal to raise capital through the issue of any of the following: Redeemable non-convertible preference shares, foreign currency convertible bonds (FCCBs), global depository receipts (GDRs), American depository receipts (ADRs) etc. We view this development as a major positive since it would bring down the high debt levels of the company (the debt-equity ratio of the company stands at 12:1 currently); the placement too is likely to be done at a higher price, which would be a positive trigger for the stock.
We expect the company to receive three new jack-up rigs in the next couple of quarters, which would not only drive its earnings and cash flow in future but also lead to a reduction in its debt-equity ratio.
We also highlight the potential of the company to generate strong cash flow going forward, on account of the re-pricing of its assets at higher rates and the deployment of its new rigs. We expect the company to generate an average cash flow of about Rs2,100 crore per annum over the next four years. The net present value of the cash flow generation from the operating activities over FY2009-12 is estimated at Rs6,560 crore. This itself works out to Rs1,684.8 per share for Aban Offshore, indicating the attractiveness of the stock at the current market price.
At the current levels, the stock is trading at 5.4x FY2010E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.7x. We feel the valuations are extremely attractive and maintain our Buy recommendation on the stock with a price target of Rs4,829.
