Stock Views on GRASIM INDUSTRIES, HDFC BANK

MORGAN STANLEY on HDFC BANK

Morgan Stanley maintains `Overweight' rating on HDFC Bank. HDFC Bank reported profit of Rs 1,110 crore. Profits were up 2% Q-o-Q / 33% Y-o-Y while EPS grew by 31% Y-o-Y. The key trends from the results include:

1) NII grew by 2% Q-o-Q and 21% Y-o-Y. Margins were stable Qo-Q at 4.2% but were down 20 bps Y-o-Y. Loans grew by 27% Y-o-Y while deposits grew by 25% Y-o-Y.

2) Core fee income grew at 23% Yo-Y - picking up from 22% Y-o-Y in the previous quarter.

3) Asset quality trends were benign. Two-thirds of the provisions made in this quarter were floating. Reported coverage ratio was 83%.

4) Given the strong profitability, HDFC Bank has made additional contingent provisions to the tune of 50 crore for potential future issues related to its microfinance sector exposure.

5) HDFC Bank has announced a 5:1 stock split. HDFC Bank is trading at 20.3x F12E earnings and 15.4x F13E earnings and 3.7x F12E BV and 3.1x F13E BV. Morgan Stanley believes the valuation could hold in the context of the strong profitability that the bank is delivering.

BANK OF AMERICA on GRASIM INDUSTRIES

Bank of America recommends 'Sell' rating on Grasim Industries. VSF (viscose staple fibre) prices in China have fallen 10-15% over the past few days. In contrast, Grasim hiked domestic VSF prices by 8/kg (+5%) at the start of April '11. BoA's FY12 estimates already assume lower VSF prices and remain unchanged. Their long-term stock rating stays at `Neutral' reflecting relative preference for Grasim over pure cement plays due to steep valuation discount and fewer risks to VSF outlook. Grasim reportedly hiked prices of viscose staple fibre by 8/kg (+5%) in April '11. The gap between local and international VSF prices has therefore narrowed to about 7% versus 15-20% earlier. This creates a possibility of Grasim having to roll back some of the recent hikes. Longer-term, however, we do not see significant drop in VSF prices unless cotton prices drop sharply. Currently, VSF is priced on par with cotton compared with about 40% premium historically.