THEMATIC REPORT
Piping hot
Key points
Global demand-supply gap to widen: CY2012 began with a production shortage of 12.5 million kg. With tea production down in the key black tea exporting countries, the demand-supply gap in the international market is expected to rise further at the end of the year. As per industry data, black tea production from key tea exporting countries for the first nine months of 2012 dropped by about 3% year on year (YoY; or 41 million kg) to 1,427.5 million kg. The industry expects CY2012 to end with a production shortfall of around of 50 million kg of black tea.
Domestic tea prices to remain firm, to benefit domestic tea companies: The supply shortage in the domestic and international markets has led to a spike in the tea prices in the domestic market. The raw tea prices in India are currently trading at Rs15-20 per kg, higher than last year's price. However, with a lower yield the sales volume has been affected for most. Hence, we don't expect any significant expansion in the margins of the domestic tea players in FY2013. With the demand-supply gap likely to expand further in the coming months, the tea prices are expected to rise higher in the next year. On the back of expectations of stable sales volume, we might see the profitability improve substantially in FY2014.
Maintain Buy on Mcleod Russel, recommend Jayshree Tea as a short-term trading idea: Indian tea is gaining preference in the international markets while the domestic tea market is growing at a steady pace of 2-3% YoY. The favourable demand-supply environment would keep the Indian black tea producers in a sweet spot, as tea prices are expected to remain firm in the domestic and international markets with no signs of easing of the deficit globally. We believe companies like Mcleod Russel, Jayshree Tea India Ltd (JTIL), Harrison Malayalam, Warren Tea and Goodricke are likely to witness an improvement in profitability in the coming years. We maintain our Buy recommendation on Mcleod Russel with a revised price target of Rs381 (10x based on average FY2014-15 earnings of Rs38.1). JTIL is another key domestic player that is likely to witness a handsome improvement in its profitability in the near term. Hence, we recommend it as a short-term trading idea (with a six-month time horizon).
STOCK UPDATE
HDFC Bank
Recommendation: Hold
Price target: Rs712
Current market price: Rs693
Price target revised to Rs712
We interacted with the management of HDFC Bank to discuss the growth outlook in the evolving macro environment. The key highlights are as under:
Operating leverage to play outDue to a sharp increase in the number of branches (819 branches added in the past three years) that too outside the top ten cities, the cost-to-income ratio increased to 49.0% from 48.0%. Of the total 2,620 branches, around 895 branches are around 24 months old and are close to break-even. Generally, it takes around two to three years for these branches to break-even and slightly lesser in case of branches located in top cities. Further, the average branch addition is likely to slow down to around 250 per year, which would aid in lowering the cost-to-income ratio to 46% levels (50-70 basis points/year) over the next two to three years.
Corporate lending book to grow at ~15% while retail to remain a key driver Though the bank's loan book grew by ~23% year on year (YoY) in Q2FY2013, the bank expects the FY2013 loan growth to be around 22% YoY. Within this, the corporate loans are expected to grow at a slower rate of 10-15% YoY, whereas the retail loans will continue to grow at a healthy rate of 26-28%. As the bank penetrated in newer geographies, the components within the retail (vehicle loans, gold loans etc) are showing a strong traction. Further, the revised priority sector norms will facilitate lending in the sector and the bank expects to meet the requirement of the sub-heads (within overall limit of 40%) in the next 18 months.
NIMs likely to remain stable The bank's 70% of the liabilities are retail in nature and are expected to get re-priced over Q3FY2013 and Q4FY2013. This is likely to ease the pressure on the net interest margins (NIMs) due to a decline in yield on asset book. Moreover, the bank has one of the highest current and savings account (CASA) ratios in the sector (45.9% in Q2FY2013), while 70% of the non-CASA deposits are from the retail customers. Therefore, the NIMs are likely to be maintained at 4.2-4.3% level.
Outlook and valuationHDFC Bank stands out from other banks as it delivered a consistent growth in its profits coupled with an impeccable asset quality. Going forward, the steady margin and a strong growth in the retail segment will drive the operating performance while the lower slippages are expected to moderate, keeping credit costs under check. Consequently, we expect the bank's earnings to grow at a CAGR of 21.6% over FY2012-15. On the valuation front, the stock currently trades at 4x its FY2014 and 3.4x its FY2015 book value. We are rolling over the price target on an average book value of FY2014 and FY2015 by keeping the multiple same. Thus, our revised price target stands at Rs712 (3.8x average of FY2014/FY2015 book value). Given the limited upside, we maintain Hold rating on the stock
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