Friday, June 17, 2011 Analysts` take on auto, bank & realty sectors Source: IRIS (17-JUN-11) Analysts` take on auto, bank & realty sectors Source: IRIS (17-JUN-11)

In an interview with, Siddharth Sedani, AVP, Microsec Capital and Prashanth Tapse, AVP Research, Mehta Equities, shared their insight on real estate, banking and auto sector post 25 bps hike in key rates by the RBI. The same is as follows:

Real Estate

Siddhartha Sedani: We are underweight on sector due to most real estate companies have huge levels of debt on their books with a big underline issue of corporate governance. As interest rates have gone up, so has the interest burden for the companies. In fact, cost of interest has gone up by 200-300 bps for some companies. The increase interest burden has pressurized margins. This combined with higher prices for materials, labour, etc; margins for most real estate companies have been squashed. This has led to a severe crunch in the cash flows for many companies. In addition, lack of corporate governance in the sector due to which banks are now becoming reluctant to lend money to the real estate sector. This situation would compel the companies is to cut down the prices of their inventory of homes and create demand push amongst the consumers. This would improve the cash flows of the companies though impacting the margins further going forward. Hence, it would be wise to avoid the sector for now and keep a watch on the interest rate scenario.

Prashanth Tapse: With the recent RBI action towards tightening its hands by increasing rates and decreased in fresh home sales we expect sector to underperform the broader markets in medium term. It has been seen that Skyrocketing prices have put off buyers, leading to a piling up of unsold inventory which yet another cause of concern in current market scenario. No wonder the market is slowing down perceptibly now but the interest rate factor with RBI 10th hike in policy rates in last 15 months resulting home loans more costly. The 25 bps (basis points) repo rate hike and a similar hike in the reverse repo rates to 6.5% may not result in an immediate increase in bank interest rates, but it definitely comes as a further cause of worry for the distraught realty sector. We expect that following to the RBI move, prices may rise further.

Recommendation from Mehta Equities:

DLF: We like DLF in the real estate space however the disappointing performance on the operating side, and weak results should temper stock performance in the near term. Investors with medium-term perspective can consider buying the stock with stop-loss at Rs 212. Technically the stock is expected to take support near Rs 210-220 level which we feel this could be a bottom for the short term.


Siddhartha Sedani: The outlook for the banking sector in coming quarters appears neutral to marginal negative on the back of probable credit growth slowdown (seasonal + cyclical) and expected margin pressure. However, most of the probable bad events are now factoring into the prices and risk reward ratio slowly but steadily turning in favor of reward. We are more bullish on private banks than its public peers and some select NBFCs in the current scenario. We prefer 1) HDFC Bank, 2) Axis Bank, 3) YES Bank, 4) LIC Housing finance. Any correction post the RBI credit policy, should be looked at as an investment opportunity with staggered buying at every lower level.

Prashant Tapse: We maintain our stable outlook on banking space for next 6 to 12 months. The sector`s growth is likely to be healthy but inflationary pressures, increased competition, and evolving risk on asset quality will be key challenges for the sector. We expect rising funding costs could put Indian banks` margins under pressure and the challenges will drag down net interest margins by 25-50 basis points across the board as lenders are unlikely to pass on all funding costs to borrowers in a high interest rate environment. This means banks could need additional capital to support their growth plans which stand out to be negative as of now.

Recommendation from Mehta Equities:

SBI: Technically the stock has taken support near 2,161-2,200 level which we feel this could be a bottom for the short term. State Bank of India has been in a recovery note over the last few sessions however traded mixed and settled near 2,200 hence with the current scenario we advice investors to trade for a target of Rs 2,600 with 2,100 as a stop loss. With all the volatility that the bank index is showing, SBI is one of the better charts in the banking sector and in the broader universe.


Prashanth Tapse: Indian auto industry is likely to see a healthy 10-12% sales growth over last year 20-25% growth in 2010. We expect lower than expected growth after Reserve Bank of India action in raising key interest rates by 25 bps, automobile industry captains feel the move will further dampen demand in the auto sector of the country but one has to see how much banks pass the burden (on to customers). We expect consumers will be the biggest beneficiary than the manufacturers. Looking at the current demand and supply auto companies are intended to offer huge discounts to maintain market share in particular segments which will directly hit the bottom-line. With a slew of new players entering the Indian small car market, segment leaders like Maruti Suzuki India (MSIL) Tata Motors (TML) and Hyundai Motor India (HMIL) will face challenges to their domination. The increasing number of new players as well as the higher number of new product launches from existing players are likely to increase competitive intensity over the medium term€¦ this could lead to increased price competition and consequently margin pressures.

Recommendation from Mehta Equities:

Mahindra & Mahindra: We like M&M in the auto space, a conglomerate which enjoys leadership position in India`s tractor and utility vehicle segments. M&M`s is poise to strengthen its position in tractors and SUV`s not only in domestic markets but also in the international markets. This can be seen from to become an international player in tractors and SUVs is reflected in its acquisition of Chinese tractor companies and Korean SUV manufacturer Ssangyong. M&M`s recent foray into 2-wheelers.electric cars and acquisition of Ssangyong are in line with company`s strategy to strengthen its position in the auto market. We remain positive on M&M`s prospects, driven by dominance in core business of UVs and tractors. Technically we believe that the stock is likely to outperform the broader market and expect 10%-15% more upside from current level. Fresh position should be traded with a stop loss near Rs 625 near term target Rs 697.

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