Recommendations

HDFC Bank Report : First Global (May 17,2007) Rating : Outperform CMP : Rs.1072 First Global had moderated its rating on this stock a few quarters ago due to concern on branch expansion and sustainable growth, especially in the context of the stock’s valuations. The stock has just been a market performer since then. First Global thinks that the worst of the interest rate cycle is behind us. In any case, HDFC Bank is not too leveraged to the rate cycle, given its low duration investment portfolio. HDFC Bank currently trades at a forward P/E multiple of 22 of its FY08 earnings. The stock continues to be valued higher compared to the average P/E multiple of 19.9 at which Indian private sector banks are trading on their FY08 earnings. The stock trades at a forward P/B multiple of 4.4 its estimated FY08 book value, against 3.6 for private sector banks. However, considering the bank’s high asset quality, above-average return on equity and strong management. First Global expects the premium valuations to sustain. Hence, First Global is upgrading its rating on the stock to ‘moderate outperform’. State Bank of India Report : CLSA (May 14,2007) Rating : Buy CMP : Rs.1326 SBI’s Q4 FY07 reported earning grew 75% YoY to Rs.1,490 crore, but this included certain one-time adjustments like write-back of Rs.950 crore excess amortization on investment, Rs.170 crore interest on CRR balance, Rs.260 crore interest paid to the income tax department and early booking of dividend income. Adjusting for these (and one-time income booked in Q4 FY06), net income has grown 26% YoY led by 24% YoY topline growth and improvement in operating efficiency. Despite a moderation in retail credit growth, SBI’s loan growth was stable at 29% YoY, driven by corporate and agricultural credit demand. SBI (consolidated and adjusted for life insurance subsidiary), trades at 1.0x FY09E adjusted book. CLSA believes the stock, with its strong earnings growth trajectory (estimated to grow 18% p.a. for the next two years) and rising return on equity (estimated at 17% in FY09) could re-rate to 1.2x one-year forward. Its insurance subsidiary is valued at Rs.130 per share.