Research Notes – October 8, 2010

Hold on Reliance Industries – TP maintained at Rs.1077

 The stock continues to be an underperformer. After upgrading the stock to ‘hold’ in February 2010, the stock moved up by 1.2% as the Sensex gained 25.1%.
 It seems that the underperformance started with the company’s foray into telecom, weighed further on the stock due to Rs.10.21 billion investment in EIH Ltd and delays in KG –D6 gas production.
 Second quarter earnings are expected to be lower by around 4% at Rs.15.10 as a result of shut down in gas production at the Panna – Mukta fields and slight decline in refining margins.
 The stock is expected to be range bound in the near term and ‘hold’ recommendation is maintained in the stock. Long term investors may also accumulate the stock when there are minor dips.

Sector Watch – Banking; Time to book profit selectively

 We advise to book profit in banking stocks selectively, as the price in certain cases has discounted the expected outlook in terms of loan growth, margin expansion and declining credit cost.
 Many stocks in our coverage universe are trading at extremely rich valuations and the sector as a whole has outperformed the broader market.
 Bank of India is downgraded from ‘buy’ to ‘sell’ as the positive effects of credit cost turnaround has fully priced in the current valuation.
 PNB, Bank of Baroda, Union Bank are downgraded from ‘buy’ to ‘hold’as the valuations are rich.
 Recommendation on HDFC Bank has also changed to ‘hold’ from ‘buy’.
 It seems that upside potential is still there in ICICI Bank and Axis Bank. Hence, buy call is reiterated in these stocks with target price of Rs.1270 for ICICI Bank and Rs.1750 for Axis Bank.

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