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STOCK UPDATE Hindustan Unilever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs242
May underperform in the near term
While the broader market has retraced the lows registered in October 2008 (at 8429 levels the Sensex is currently below October 2008 low of 8509), HUL trades 30.5% higher than its October 2008 low of Rs185. We believe this increases the chances of the stock underperforming in the near term. The same is also evident that shows that HUL trades at a stark premium of 182.6% to the Sensex which is at historic highs considering a mean premium of 44% since March 2000.
SECTOR UPDATE Banking Knowns and Unknowns Key points Knowns (largely factored in) -
Fiscal-profligacy led market borrowings have tightened bond yields, thereby largely ending the public sector banks (PSBs)'s chances of recording healthy treasury gains. -
Earnings growth seems to have peaked for now—moderating credit growth, anticipated pressure on the net interest margins (NIMs), likely weaker fee income growth and higher credit costs will limit the bottom line growth. Private players are better placed compared with the PSBs in defending their bottom line growth. Unknowns -
While the above factors were largely known, the risk arising from the Indian banks' international operations remains a major "unknown" due to the scanty disclosure in this regard by the banks. -
Besides, the ongoing negotiation over offering a second round of pension to the uncovered employees is another potential risk to the PSBs. If the banks agree to abide by the demand raised by the employee unions, they may have to face a significant additional pension liability, over and above the AS-15 provisions being made currently. -
PSBs may face capital constraints (Tier-I capital) as the Government of India (GoI)'s fiscal position may not permit capital infusion and lack of appetite in primary equity market currently. Private players are comfortably placed in this respect on the back of their recent capital raising. We had raised the red flag on the issue in our note on February 21, 2009, cautioning investors about the expected weakness in investor sentiments towards the Indian banking stocks. Though cheap, Indian banks are likely to remain cheap in the near term as the world struggles with the after-effects of the credit squeeze on real economy. Despite the near-term weakness, we remain optimistic about the Indian banks from the long-term perspective. Hence, we suggest investors utilise the better opportunities that may present themselves over the next two to three months to accumulate banking stocks. The weak gross domestic product (GDP) growth data for Q3FY2009 and the lack of the government's fiscal freedom should lead the Reserve Bank of India to cut the key policy rates further. Investors can use this short-term sentiment booster as an opportunity to exit and re-enter at lower levels later. Cement Mixed volume growth
After witnessing a strong revival in dispatches growth for the last three consecutive months (November-January 2009), the top four cement players have posted mixed volume growth for February 2009. The average volume growth of top four domestic cement players for the month came in at 8.8% year on year (yoy) to 6.3 million metric tonne (MMT). The growth in cement consumption during the month was mainly on account of demand from personal home building and government infrastructure projects. Though these top domestic players posted an 8.8% volume growth yoy, the dispatches dropped by 2.4% on sequential basis. The slowdown in the volume growth is on the back of poor demand from real estate sector. However, the recent cost moderation in terms of softened coal and crude oil prices is likely to benefit these cement makers going ahead.
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