Angel Broking neutral on TVS Motors

Net Sales up 9.6%:

TVS Motor reported a turnover of Rs 919.9 crore (Rs 839.3 crore), a yoy growth of 9.6% for Q4FY2007. Turnover in FY2007 stood at Rs 3,855 crore compared to Rs 3,235 crore, a growth of 19.7%.

OPM declines 580bp:

For Q4FY2007, the company’s Operating Margins declined 580bp yoy. High material costs especially of steel, aluminum, rubber, copper, etc., continued to impact margins of the company substantially. Raw material costs during the quarter were 78.7% of sales increasing from 72.9% in Q4FY2006. Intense competition especially in the highly price sensitive Entry-level segment where the company has a significant presence, restricted the company from passing on the cost increases to its customers. Also, the company incurred higher adspend on its various brands including the Apache and Scooty Pep, among others.

Profit significantly down:

For Q4FY2007, the company clocked a significant 68.9% yoy decline in Net Profit to Rs 9.1crore. TVSM reported Net Profit substantially below our estimate of Rs14.2 crore. Erosion of operating margin and rise in Interest costs by 148% to Rs11.3 crore yoy impacted the growth in Net Profit. Profit before Tax during FY2007 stood at Rs 66.6 crore as against Rs117crore recorded in FY2006. Interest costs for the year were higher due to increased cost of borrowing on account of several new projects in the pipeline.

Key Highlights

During FY2007, motorcycles clocked sales of 9,22,936 units compared to 8,05,740 units in FY2006, a growth of 14.5%. This growth was in line with the industry growth rate of 14.3%. During the same period, overall two-wheeler growth of 13.9% by TVS Motor was higher than the industry growth of 11.8%. The company recorded sales of 15,26,289 twowheelers during the year. Motorcycles sales however, declined marginally by 3.5% during Q4FY2007 compared to Q4FY2006.

TVS clocked a 29% growth in Exports to 103,013 units (79,679) in FY2007. Going ahead, the company will continue to focus on exports. During FY2007, seven new countries were added to the company's global presence. The company is now exporting its products to over 44 countries.

During the year, the company launched several new products. The most recently launched product was StaR Sport, a style variant under the StaR brand. Apart from StaR Sport, the company also launched StaR City ES, India's first electric start motorcycle in the 100cc segment. The company also launched a variant of the two-stroke Scooty Teenz. The Scooty brand continues to maintain its leadership position in the sub 100cc scooter segment. The company has just launched an upgraded version of the Apache, a 160cc motorcycle with 15.2bhp. This high performance motorcycle is targeted at the youth looking for both style and latest features, normally seen in international high-end motorcycles.

To enhance its presence in the Executive segment, TVS has developed a motorcycle, which will be launched in the second half of the current year. The company is confident that this motorcycle will redefine the segment by setting a new benchmark in the industry in terms of technology, performance and style. Apart from that, the company will also launch a new variant under the TVS StaR brand. This product is expected to be launched during the festive season.

The company has already started operations at its Himachal Pradesh plant. The plant has an annual capacity of 400,000 units scalable up to 6,00,000 units. This will help the company to improve its service level to the vast dealer network in North India thereby increasing sales and leverage on the fiscal benefits.

The company’s three-wheeler project is on schedule and will have a capacity of 90,000 units per annum. The proposed three-wheeler products post the various tests have provided encouraging results and are expected to be launched shortly.

The Indonesian project is on schedule and the new product TVS Neo, a high tech innovation packed Bebek exclusively developed for the Indonesian market, will be launched in July 2007 by PT TVS Motor Indonesia, subsidiary of TVS Motor Company.

The company expects the pressure on margins to continue in the first half of FY2008 due to high cost of raw materials and intense competition. However, in the second half of the year, the company expects the pressure on margins to ease with the launch of new products and the other cost cutting initiatives adopted taken by the company.

TVS Motor Company is aggressively expanding its national sales and service footprint through expansion of its national network. Currently, the company’s products can be purchased and serviced from over 3,000 points.

Valuation

At the CMP of Rs 64, the stock trades at 22.4x FY2008E and 18.1x FY2009E Earnings. However, the pressure on margins continues to be a key concern as TVS has not been able to tackle the rising material costs and pricing pressure. We remain Neutral on the stock.




Buy Deepak Fertilisers; target Rs 123: Emkay Research

Deepak Fertilisers & Petrochemicals (DFPCL) is expected to be one of the key beneficiaries from the commissioning of Dahej Uran Pipeline (DUPL), a gas pipeline which will increase the availability of LNG for the DFPCL along with other players in the region. DFPCL at present suffers from lower operating levels at its DNA plant (capacity utilisation 71%), Methanol plant (64% capacity utilisation) and ANP plant (24% capacity utilisation) due to inadequate gas availability. Commissioning of DUPL will result in better capacity utilisation, since increased production can be easily absorbed by the market. As per our estimates on annualized basis, DFPCL can improve its topline by Rs 2.7 billion (33% over FY07 revenues) and EBITDA by Rs 539 million (37% over FY07 EBITDA) which should result in incremental PAT of Rs 291 million and an incremental EPS of Rs 3.3. We expect DFPCL to report APAT of Rs 1.2 billion and an EPS of Rs 13.4, which does not factor in expected benefits from this pipeline. At present, the stock trades at 6.7x FY08E eps. We maintain our BUY recommendation with a price target of Rs 123.

What is DUPL?

DUPL is 489 km gas pipeline from Dahej (Gujarat) to Uran (Maharashtra), having a capacity of 24 mmscmd to carry LNG. This pipeline is laid GAIL with an estimated project cost of Rs 1.8 billion. The pipeline has been continuously delayed, previously due to problem in laying the pipeline and later on faced commissioning problem at receiving terminal at Ratnagiri. DUPL finally commissioned on 25th June’07 (Source GAIL) however before DFPCL could reap the benefit, it has to wait 25-30 days more (source – DFPCL) since branch pipeline and connecting pipeline have yet to be commissioned.

How it will benefit to DFPCL?

Presently DFPCL get gas from GAIL under the administered price mechanism (APM) but availability is limited to 0.6-0.7 mmbtu as against its total requirement of approx 1 mmbtu. Inadequate gas availability has led to underutilization of plants like methanol, ammonium nitrate phosphate (ANP), DNA etc. Increased gas availability should improve capacity utilisation at methanol plant from 64% to 130%, DNA plant from 71% to 100% and ANP plant from mere 24% to 113%. DFPCL will also benefit by switching from high cost naphtha based power to gas based power, which will result in further savings. We expect increased gas availability should result in annual incremental revenue of Rs 2.7 billion (33% over FY07 revenues), incremental EBITDA of Rs 539 million (37% over FY07 EBITDA) and incremental PAT of Rs 291 million resulting in an incremental EPS of Rs 3.3, which does not include expected benefit from savings on power cost.

Concerns

Even though DFPCL has commissioned it will take another 25-30 days, before LNG is available to the company for the use. Work is still going on branch pipelines and connecting pipelines. Pricing of gas is another issue to be addressed. Company expects prices to remain in the range of 5-7 USD mmbtu. Company’s profitability will depend on the prices of gas at which it will be negotiate with the supplier.

We maintain BUY recommendation

We maintain our ‘BUY’ recommendation on the stock with a price target of Rs 123, based on our FY08E EPS of Rs 13.4, which does not include expected benefit of Rs 3.3 (annualized) from this pipeline. In FY07 DFPCL reported revenues of Rs 8.3 billion and APAT of Rs 945 million, resulting in an EPS of Rs 10.7. We expect, along with commissioning of DUPL, stabilization of IPA plant and commissioning of ‘Ishanya’ mall in Pune, Maharashtra should also have favourable impact on company’s financials in FY08.





Sterlite Ind an outperformer; target of Rs 690: HDFC Sec

Key Investment Arguments

Strong Performance of Zinc

Zinc business contributed around 66.1% of the consolidated operating profit of Sterlite Industries Ltd. We expect the performance of Hindustan Zinc (HZL) to remain strong, going forward on the back of CAGR volume growth of 27% over the next 2 years. Further, as production volume rises, the cost of production for Zinc business, excluding royalty, would decline to USD 525 per tonne in FY09E, compared to USD 606 per tonne in FY07.

Benefits of Backward Integration – Vedanta Alumina

Sterlite holds 29.5% stake in Vedanta Alumina Ltd. The benefits of backward linkages in terms of alumina availability and stabilisation of new Korba facility would help reduce the cost of production from $1510 per tonne in FY07 to USD 1000 - USD 1100 per tonne in FY09E. Hence, the operating margins would increase from 38.4% in FY07 to 44.2% in FY08E and 52.0% in FY09E.

Flush with Funds Through ADS issue

The successful completion of the ADS issue helped the company raise $2bn by diluting 21.2% of its post issue equity capital. This has provided the company with adequate funds to set up 3600MW of thermal power plants. In addition, it has given the company funds to consolidate its businesses where the government holds a substantial stake. The value of liquid investments in the balance sheet in FY09E is expected to be Rs114bn, which translates into cash per share of Rs161.

Consolidation of Zinc and Aluminium Business

Consolidating its holding in HZL from 64.9% by exercising the call option granted by the Government of India will help the company strengthen its consolidated financial position. We have assumed the company will either acquire 26% at the current market capitalisation or 15% at a premium of 42%. Based on this, the fair value for the stock stands at Rs 690 and Rs770 per share.

Valuations

Based on the sum of parts valuation, which is on an Ev/EBDITA basis, Sterlite is an Outperformer with a 19% upside and a target price of Rs 690 per share. This is after excluding the minority interest in Hindustan Zinc of 20% (Post acquisition of 15% stake from the Government of India) and 49% for Bharat Aluminium Company Ltd. Based on the diluted equity capital, the stock trades at a P/E of 9.1x and 7.4x its FY09E and FY08E EPS of Rs 78.9 per share and Rs 63.5 per share, respectively which is at a discount to its international peers.




Buy Tourism Finance Corp; target Rs 30: Sharekhan

For Q4FY2007 Tourism Finance Corporation of India (TFCI) has reported a 33.1% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs 9.6 crore, which is ahead of our estimate of Rs 8.6 crore. The quarter-on-quarter (q-o-q) PAT growth stood at 281.3% but since the earnings are back-ended (the fourth quarter earnings comprise 60-65% of the total annual earnings) the q-o-q PAT growth figure is not relevant.

In FY2007 TFCI's PAT stood at Rs14.3 crore, up 20% year on year and ahead of our estimate of Rs13.3 crore.

The net interest income was up by 8.2% to Rs15.4 crore for Q4FY2007 and by 1.2% to Rs 28.9 crore for FY2007.

The operating profit was up by 6.3% to Rs13.7 crore for Q4FY2007 but down 3% to Rs 24.9 crore for FY2007.

Provisions and contingencies declined by 43.4% for Q4FY2007 and by 27.5% for FY2007, reflecting the lower provisioning requirement due to lower incremental non-performing assets (NPAs). We expect TFCI's net NPAs as percentage of loans to have improved from 2.5% in FY2006 to 1.8% in FY2007.

As per our expectations the company has resumed dividend payment and declared a 5% dividend, which gives a 2.5% dividend yield. At the current market price of Rs 20.65, the stock is quoting at 5.8x its FY2009E earnings and 0.6x FY2009E book value. We maintain our Buy recommendation on the stock with the price target of Rs 30.





Sell Hindalco Industries: Merrill Lynch

Merrill Lynch has recommended sell rating on Hindalco Industries as the research house is expecting the stock to fall when the M&A frenzy begins to die out and investor focus returns to earnings.

Merrill Lynch report on HINDALCO:

Stock runs up on M&A activity, we reiterate Sell

Heightened M&A activity in global aluminum has supported Hindalco’s recent runup. Hindalco would be a difficult takeover target, in our view. We expect the stock to fall when the M&A frenzy begins to die out and investor focus returns to earnings.

Earnings fall sharply on Novelis consolidation

Our new consolidated EPS estimate for FY08 is Rs8.2, a fall of 67% yoy. Novelis hits sharply with interest burden and sub-optimal earnings owing to beverage can price caps. Taking normalized Novelis EBITDA of US$700m and spot ally and Cu prices, our EPS for FY08E would be Rs19, a lower y-o-y decline of 24%.

Ex-Novelis too, earnings outlook is negative

Ignoring Novelis, we also forecast a sharply declining earnings trajectory given an absence of internal growth drivers and our negative commodity outlook. We forecast aluminum, led by rising Chinese production, to move from deficit to a
surplus from FY08 onwards. Add to it the Rupee appreciation which leads to falling domestic realizations. In copper smelting, TCRC have halved in FY08 and while this is now old news, we do not see a turnaround in the next few quarters.

Valuation rich on EPS; but replacement cost basis is tricky

Consolidated Hindalco in FY08E is trading at P/E of 21x and EV/EBITDA of 7.2x. Ex-Novelis, it is at P/E of 11x and EV/E of 6.7x. Global peers are at P/E of 12.2x and EV/E of 6.5x. Given our view that Hindalco should not get an M&A premium, these valuations look rich. Even if we do consider a takeover possibility and look at replacement cost ex-Novelis, the stock is at just a small 6% discount. Adding Novelis, the stock appears to be at 38% discount, but given that a potential bidder may not be interested in Novelis, we attach little importance to this discount.

Valuation: limited upside given our sharp forecast earnings decline

We look at Hindalco’s valuation on the traditional P/E and EV/EBITDA basis. Given the current M&A theme, a replacement cost analysis is also helpful. But the complexities increase with Novelis in the picture. On an earnings basis, Hindalco’s valuation appears full. On a replacement cost basis, Hindalco does not appear expensive. But given our view that a takeover is unlikely, we believe investors’ focus will eventually move back to earnings, which we forecast will decline sharply in FY08.





Sell NALCO: Merrill Lynch


Merrill Lynch has recommended sell rating on NALCO despite increased Nalco’s estimated earnings by 20% in FY08 and FY09.

Merrill Lynch report on NALCO:

Upgrading estimates but maintain Sell

We have increased Nalco’s estimated earnings by 20% in FY08 and FY09 on account of higher aluminum prices. However earnings trajectory remains negative as we believe both aluminum and alumina prices have peaked.

Earnings forecast to decline 28% in FY08 and 22% in FY09

Despite our upgrade, we forecast EPS to fall 28% in FY08 to Rs26.6 and another 22% in FY09 to Rs 20.7. This is owing primarily to lower commodity prices, which is further exacerbated by Rupee strength. In the current year, we forecast avg. realizations for Nalco to fall 11% in Aluminum and a huge 34% in Alumina.

Aluminum headed lower, in our view

Aluminum has so far exceeded our expectations. But we believe risk looms large with rising Chinese production. Overall we expect aluminum to move from a deficit in CY2006 of 700kt to a surplus of 300kt in CY2007 and this surplus rises beyond 2007. For Nalco our LME aluminum price estimate in FY08 is USD 2552/t versus spot at USD 2646/t.

Alumina realization to fall sharply in FY08

We estimate spot Alumina realization in FY08 will range from USD 300-400/t. However, contract realizations for Nalco fall sharply as it moves from average 15% of LME in FY07 to average 10% in FY08. The next event to look forward to is new contracts likely to be signed in September 2007.

Valuations – limited upside

At P/E of 9.8x FY08E and 12.6x FY09E, Nalco is trading higher than its 10-yr avg. Vs global peers at EV/EBITDA of 6.5x FY08E, Nalco appears cheap, but we note global peers carry an M&A premium which in the case of Nalco is unlikely given the govt’s stake of 87%. Vs replacement cost it is trading at a small 4% discount.





Buy Garware Offshore; target of Rs 321: IDBI Capital

Garware Offshore Services (GOSL), is all set to ride the boom in offshore E&P (Exploration & Production) sector with its expansion plans. The company provides logistics services to offshore oil and gas sector and is planning to increase its fleet size from 6 in FY06 to 14 in FY09.

Going forward, we expect, better charter rates along with increasing fleet size to drive growth for GOSL. Topline is expected to post 64% CAGR over the next 3-years. EBIDTA margin is expected to surge to 65%. Boosting topline and surging margin is expected to lead to robust bottom line performance. PAT is expected to showcase CAGR of 69% in the next 3-years.

The current market price is 10.3x the fully diluted FY08E EPS of Rs.20 and 6.4x the fully diluted FY09E EPS of Rs.32.3. We recommend ‘Buy’ with a target price of Rs 321.

Investment highlights:

Expansion plans

GOSL is betting big on its expansion plans. GOSL is expanding its fleet size from 6 in FY06 to 14 in FY09. The company will be acquiring 2 Platform Supply Vessel (PSV), 3 Anchor Handling Tug cum Supply Vessel (AHTSV) and 2 Accomodation Work Barge (AWB) scheduled to be delivered over the period of next 3-years.

Contracted revenue

GOSL has secured stream of revenues from its long-term contracts. With the fleet expansion and better day rates, revenues from AHTSV’s are expected to post CAGR of 41% over the next 3-years. PSV revenues are expected to showcase CAGR of 74% over the next 3-years. AWBs expected to be delivered in FY09 will earn around US$ 15,500/day. The vessel will produce revenues of around Rs.464m by FY10. GOSL's EBIDTA margins are expected to rise steeply from around 56% in FY06 to 65.7% in FY09.

Tie-up with Havyard

GOSL has signed a Memorandum of Understanding (MoU) with Havyard Leirvik A. S., for sale of ships and designs produced by Havyard group to Indian companies. It is expected to earn revenues in the form of commissions. GOSL is also setting up ‘Workshop Design Center’ as a KPO (Knowledge Process Outsourcing) center in India in collaboration with Havyard Leirvik A. S.

Lower dry docking charges

Dry docking charges are expected to be minimal in next 2-3 years, as all the four AHTSV’s have undergone dry-docking in end 2006. PSV’s are newly built and are expected to require minimal maintenance.





Angel Broking neutral on Jet Airways

Performance Highlights Top-line increased 23% yoy:

Jet Airways’ operating revenue yoy increased by 23% to Rs 1,978cr (Rs 1,606cr) for Q4FY2007. EBIDTAR margin expanded by 404bp to 23% (18%) on the back of better international operations and lower aircraft maintenance costs and administration costs. Net Profit declined 58% yoy to Rs88cr (Rs 208cr), but Profit less Other Income came in at Rs 77cr vis-a-vis a loss of Rs 137cr in the corresponding period of the previous year. System-wide ASKMs at 4,679mn (3,906 mn) witnessed a growth of 20% for the quarter. The load factor was also higher by 56bp at 72.6% (72.0%) and yields increased by 15% to Rs 6,445 (Rs 5,623).

Domestic operations:

Domestic operations accounted for 76% (87%) of revenue. Topline increased by 8% to Rs1,509cr (Rs1,393cr). EBIDTAR Margin expanded 220bp to 24.1% (21.9%) although employee cost increased by 31% on account of higher staff costs. ASKMs increased marginally by 1% as a result of lower capacity addition in domestic operations. The load factor declined by 350bp to 70.3% (73.8%) whereas yields rose by 5% to Rs5,455 (Rs5,194).

International operations:

International operations contribution to overall topline increased to 24% (13%) which is in-line with the company’s strategy. Improvement in the quarter was witnessed as a result of better international operations where EBIDTAR margin improved 20.5% vis-àvis 1.1% yoy on the back of improved yields and higher load factor. Yields increased 17% to Rs15,118 (Rs12,982) and the load factors substantially improved by 10.1% to 76.6% (66.5%). ASKMs increased 78% to 1,694mn (949mn) which was on account of growing scale of international operations.

Key Initiatives

Jet Airways currently operates a fleet of 62 aircraft and plies over 340 daily flights to 50 destinations. The international routes that the company currently caters to includes London, Heathrow in U.K, Singapore, Kuala Lumpur in Malaysia, Colombo in Sri Lanka, Bangkok in Thailand and Kathmandu in Nepal. The airline plans to extend its international operations to North America, Europe, Africa and Asia going ahead with the induction of wide-body aircraft. - The company expanded its network with the introduction of new routes like Ahmedabad – London, three times a week. - The company will launch the Mumbai – Newark flight via Brussels in August, Delhi – Toronto (via Brussels) and Mumbai – San Francisco (via Shanghai) in October.

Outlook and Valuation

The last quarter turned out to be the most profitable quarter for the company. Jet witnessed increased contribution from its international operations to 24% during Q4FY2007, which is in line with its strategy targeting 50% contribution from its international operations by FY2010. Recent consolidation in the industry is a positive, which we believe will lead to rationalisation of fares and improved operating performance. Going ahead, the company would be increasing capacity in its international operations adding new aircraft. However, profitability in FY2008 would witness pressure since a new route takes 12-18 months to mature. We believe Jet Airways with its enhanced focus on international operations would see better times going ahead. The company’s expansion plan is as per schedule, which targets having 97 aircraft by March 2009. Overall, we expect Jet Airways to deliver EBIDTAR margins of 16% in FY2008 and 20% in FY2009. Going ahead, we expect the company to improve its performance sequentially. On a standalone basis, the stock trades at 6.1x FY2009E EV/EBIDTAR, which we believe is fair valuation. Nevertheless, any delay in Jetlite’s expected turnaround could impact the company’s consolidated performance. We remain Neutral on the stock.





Buy United Phosphorus; target Rs 380: Citigroup

Citigroup Research has recommended buy rating on United Phosphorus with target price of Rs 380 based on average of FY08Eand FY09E FD EPS estimates.

Citigroup Research report on United Phosphorus:

Strengthening product basket

UPL’s acquisition of 2 brands from Dupont is another step to augment its product basket by inorganic means. We expect the deal to be accretive from the outset; while the financial upside would be limited given UPL’s high scale of operations, we expect such efforts to broaden the product basket will improve the company’s positioning with customers.

The deal

UPL has acquired 2 brands from Dupont, viz. Super Tin (Triphenyltin hydroxide/TPTH; contact fungicide for potatoes, sugar beet & pecans) and Vendex (Fenbutatinoxide miticide/TNTO; largest tin acaricide used in citrus & pome fruit) – with sales primarily across N America, Latin America and Rest of the World markets. Under the arrangement, UPL would commence sales on its own from Oct 2007, while Dupont would act as its agent during this transition period.

Accretive, but small

The deal strengthens UPL’s position in the fruit, nut, vegetable & row crop markets. While UPL has not disclosed the size, it has indicated that it is quite small relative to UPL’s scale of operations. The deal would however be accretive from the first year, as gross margins are higher than UPL’s gross margins even with the current manufacturing arrangement.

Maintain Buy/Low Risk

We believe that the suppressed profitability in FY08E is a timing issue and does not arise from any fundamental negative in the business. With rapidly growing scale and global presence in crop protection and the 49.9% stake in Advanta adding an element of innovation to the business, we believe that UPL’s best years lie ahead.

Company description

UPL is the only Indian play on the global generics opportunity in crop protection products. It has focused on the generics opportunity in the regulated markets of the US and Europe, and has achieved success over the past decade. Apart from fully integrated manufacturing facilities, UPL also has strong distribution infrastructure across its targeted markets. UPL's growth strategy is built around filing its own registrations and acquiring tail-end brands of global majors in regulated markets. With 80% of its revenue coming from global markets and a strong direct presence in the targeted markets, UPL has emerged as the third largest generics company in the world.

Investment thesis

We rate the stock Buy/Low Risk (1L), with a target price of Rs 380. UPL is the only Indian play on the global crop protection market, with around 80% of revenue coming from global markets. The global crop protection market looks attractive and is highly consolidated, with limited generics penetration, due to the high entry barriers that generate pricing discipline. UPL has reached critical scale in the regulated markets of the EU and US through a series of acquisitions over the past two to three years. We believe that UPL's growing free cash flows give it the ability to step up growth initiatives - both organic and inorganic. We expect this to lead to a pickup in the rate of growth and forecast FY07-10E revenue and net profit CAGRs of 21% and 35%, respectively.

Valuation

The generics crop protection segment is likely to witness healthy growth, with leading companies such as UPL expected to be among the key beneficiaries. We therefore believe that P/E vs. earnings CAGR or EV/EBIDTA vs. EBIDTA CAGR is the correct metrics to value companies such as UPL. Our target price is based on 16x P/E, which is within its trading range of 9-21x since January 2004, when the stock got re-listed post the reverse merger. Our price target of Rs 380 is based of average of FY08Eand FY09E FD EPS estimates. We believe that FY08 estimates do not reflect the true earnings power of UPL, especially in the acquired Cerexagri business, where margins are expected to witness a sharp improvement in FY09 over FY08. We therefore believe that using an average of FY08E and FY09E earnings would normalize Cerexagri's earnings and provide a more accurate base for valuations.





Buy HDFC; target of Rs 2246: Angel

HDFC is a leading financial service conglomerate with a sound track record of robust performance and superior quality of asset portfolio. The company is growing at a rapid pace to sail the India growth story. Considering the favourable macro-economic factors, we expect HDFC’s loan book to grow at a CAGR of 25% over FY2007-09E.

Leader in Housing Finance:

HDFC is a leader in the mortgage finance business in India holding a marketshare of 25% with loan book growing at a CAGR of 27% over FY2003-2007. We remain positive on the company’s growth prospects which would receive a boost following strong macro-economic factors and expect the loan book to grow at a CAGR of 25% over FY2008-2009E.

Lower defaults; NPAs at 0% level:

Management is also confident of maintaining consistent asset quality and keep NPAs at significantly lower levels. HDFC’s Net NPA for FY2007 stood at 0.2% (0.1%), which we believe the company will contain at current levels. We do not expect any negatives creeping in on the asset quality front.

Equity placement to augment capital and would be book accretive:

HDFC has made a private placement to Carlyle and the Citi Group for Rs 3,114cr, which would add Rs115 to HDFC’s post dilution book value and add significant value for the shareholders. The additional capital would facilitate HDFC to increase leverage and attain higher growth in business, which in turn would boost its FY2008E and FY2009E earnings.

Valuation

HDFC alongwith its associates is creating lucrative value for it investors. We have valued HDFC’s core business at 4.4x its Book Value based on the dividend discount model (DDM) to arrive at a Target Price of Rs1,755. We have valued HDFC’s subsidiaries viz., HDFC Bank, HDFC Life Insurance and AMC at Rs622. We have valued HDFC at Rs2,246 considering a 21% holding company discounrt. We initiate coverage on the stock with a Buy recommendation.