Alternative Research: Ratio Trade: Buy HDFC and Sell HDFC Bank
Rajesh Desai
We recommend initiating a pair trade: Buy HDFC (HDFC.IS) @ 768-770 and Sell HDFC Bank (HDFCB.IS) @ 644-646. The current price ratio is 1.1922 and the target price ratio is 1.3115. The strategy has to be a rupee neutral strategy.
The chart below indicates the spread prevailing between returns of HDFC vis-à-vis HDFC Bank in a one year data window. Since 11th February, 2013, HDFC has moved down by around 3.75% while HDFC Bank has declined by around 1.67%, resulting into a negative spread of around 2%. In last 1 year data window, the pair has shown convergence at around the spread of -2% to -5% on several occasion (as shown in chart below). We believe a similar situation to occur.
Following are the key statistics in a one year data window.
|
HDFC Vs |
Current Spread |
Mean |
Standard Deviation |
Z Score |
Percentile |
|
HDFC Bank |
-2.03 |
2.02 |
2.89 |
-1.40 |
8.48 |
|
Thanks & Regards, |
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Emkay Equity Advisory | Emkay Global Financial Services Ltd. | www.emkayglobal.com |
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CA. Rajesh Desai