Sharekhan Investor's Eye dated July 14, 2006

[Sunil]

 

Investor's Eye [July 14, 2006] Please see the attachment for details Share khan www.sharekhan.com

Summary of Contents STOCK UPDATE UTI Bank Cluster: Emerging Star Recommendation: Buy  Price target: Rs400 Current market price: Rs273 Strong operational performance Result highlights UTI Bank has reported a 30.2% year-on-year (y-o-y) growth in its net profit for Q1FY2007 to Rs120.6 crore. The growth in the net profit is in line with our expectation.  The net interest income (NII) grew by 44.7% year on year (yoy) backed by a strong growth in the advances. However, the bank resorted to higher cost term deposits to fund the growth in the advances. As a result the net interest margin (NIM) declined by 28 basis points quarter on quarter (qoq). The fee income too grew by a strong 50% yoy backed by a strong growth in the fee income from the cash management and retail businesses. The operating profit for the quarter grew by 51% yoy to Rs307 crore. The operating profit excluding the treasury profits grew by 58.7% yoy. The net profit growth was a tad lower at 30.2% due to a higher provisioning for investment depreciation and a higher loan provisioning. The net non-performing assets (NPAs) as a percentage of the bank's customer assets improved markedly by 46 basis points yoy and by 2 basis points quarter on quarter (qoq). The NPAs now stand at 0.73% of the net customer assets. UTI Bank's Tier-I capital adequacy ratio (CAR) stood at 6.7% at the end of Q1FY2007 whereas its overall CAR stood at 10.3%. The bank plans to raise its Tier-I capital by the end of FY2007 to fund its growth plans. At the current market price of Rs273 the stock is quoting at 10.4x its FY2008E earnings per share (EPS) and 2.1x its FY008E book value (BV). We reiterate our Buy recommendation on the bank with a price target of Rs400. HDFC Bank Cluster: Evergreen Recommendation: Buy  Price target: Rs900 Current market price: Rs729 Another quarter of 30% growth  Result highlights HDFC Bank's net interest income (NII) grew by 56.1% year on year (yoy) for Q1FY2007 on the back of a 41.5% year-on-year (y-o-y) growth in its gross advances.  The net interest margin (NIM) remained stable over Q4FY2006 as well as Q1FY2006 at 4%. The ability to get a higher yield on loans has helped the bank to manage costs in a rising interest rate scenario. The fee income grew by 38.2% for Q1FY2007. The growth was lower than the 50%+ growth achieved over the last few quarters because of a lower income from the distribution of third party products and the high base effect of last year. The operating profit grew by a strong 43.4% yoy despite a 54.4% y-o-y jump in the company's operating expenses. The operating profit excluding the treasury gains grew at an even higher rate of 52.3%. The net profit for the quarter grew by a lower 30.4% to Rs239.3 crore as the provisioning for the loan loss went up substantially in the quarter. At the current market price of Rs729 the stock trades at 15.5x its FY2008E earnings per share (EPS) and 3.2x its book value (BV). We maintain our Buy recommendation on the stock with the price target of Rs900. HCL Technologies Cluster: Ugly Duckling Recommendation: Buy  Price target: Rs670 Current market price: Rs558 Another large deal in bag HCL Technologies (HCLT) has bagged an outsourcing deal worth $70 million from Teradyne, a leading automatic test equipment company. The order is spread over a five-year period. The management has indicated that the contract size could actually exceed $125 million over the five years and expects revenue of $25 million from the order in FY2007. This is the fourth order worth over $50 million that has been announced by HCLT in the past two to three quarters. Some of the notable order wins announced earlier by the company include those from AutoDesk ($50 million), DSG ($330 million) and EXA ($100 million).  According to the management estimates, the four outsourcing deals cumulatively are expected to contribute around $120 million of revenues during FY2007. MUTUAL GAINS Sharekhan's top equity fund picks We have identified the best equity-oriented schemes available in the market today based on the following parameters: the past performance as indicated by the returns, the Sharpe ratio and Fama (net selectivity). The past performance is measured by the returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager. MUTUAL FUNDS: WHAT�S IN�WHAT�S OUT  Fund Analysis: July 2006 An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of June 2006. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 17 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc. SECTOR UPDATE Automobile Soaring high  The automobile sector saw a robust growth in June 2006 with almost all the segments posting a double-digit growth in sales. The overall automobile sales volume rose by 23.7% with the domestic and export sales rising by 23.7% and 23.2% respectively.

Regards, The Sharekhan Research Team myac...@sharekhan.com