DSIJ Mindshare

9 Stocks To Beat Inflation

The whole of the economic machinery with the central banker (RBI) in the lead have been trying to combat the inflationary monster for more than a couple of years now. From boardrooms to drawing rooms, it has been agonising each and every person in the economic system rather harshly. Having remained stubbornly above the comfort levels of the RBI for most part of the last couple of years prompting it to hike key policy rates, inflation was seen to be cooling off providing the much needed respite for the economy as a whole.

But is it really cooling off? At least the RBI's recent actions suggest so. It has brought down the repo rate by 50 basis points in its annual policy review meet in a bid to fuel growth. In fact the Governor Dr Subbarao in an interaction with analysts and researchers (in the post policy conference call) said “the second consideration that shaped our policy decision was the decline in inflation. Headline WPI inflation which remained above 9 per cent for nearly two years has moderated significantly to below 7 per cent by March 2012, last month. More importantly non-food manufactured products inflation had dropped from a high of 8.4 per cent in November to 4.7 per cent in March this year, actually coming below 5 per cent for the first time in two years.” While the  RBI continues to believe that the best possiblescenario will emerge, there are worries on this front as Dharmakirti Joshi, Chief Economist of CRISIL puts up. According to Joshi, “inflation is a major problem. Despite having come down it remains much higher than the comfort level of policy makers. No matter how you measure it. Clearly there is a pressure of inflation and in last few years it has remained one of the major macroeconomic challenges.”

So, will inflation continue to come down? Can you really expect the economy to take off from here and once again record that scorching pace of growth it used to? More so, how do you as an investor build strength into your portfolio to take care of a U-turn in the inflationary trend that we see is the most probable thing to happen?

Dalal Street Investment Journal has always been at the forefront when it comes to helping investors invest, nurture and book profits from their investments. In yet another instance we are providing you with the much needed insights on what can be expected on the inflation front along with a few stock recommendations to ensure that your portfolio withstands the unwanted shocks that are likely to come your way going forward due to inflationary pressures and help you generate a much better return even in trying times.

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Before we get to the table and recommend the sectors and stocks that are bound to help you build a strong inflation-proof portfolio or rather build strength into your portfolio to withstand inflationary tremors here is why we see inflation remaining sticky or rather moving up going forward. The first of the questions that needs to be addressed in this context is whether inflation really came down to a level of comfort. The answer to this is a resounding no. Headline inflation as measured by the WPI has never come down to a comfortable level. In fact from 9.74 per cent in April 2011, inflation as measured by the WPI went up to as high as 10 per cent in September 2011. It has since come down considerably and was up by only 6.89 per cent in March 2012 against last year. But is this a fair level of inflation? Not at least in a zone comfortable for the RBI.

The Governor has put up a rather brave face while unveiling the annual policy by stating that the measures of an easy monetary policy which have been initiated now are likely to ensure three things; stabilisation of growth, containment of risks of inflation and inflation expectations resurging and enhancement of the liquidity cushion available to the system. While we appreciate and sincerely expect that all the three outcomes come true, our take on the inflationary issue is somewhat different. There are enough indications for one to see, why inflation will remain at the same level or rather go up. Joshi shares the same sentiment as well. “Looking ahead we see lot of upward pressure on both CPI and WPI as fuel prices have not been revised and MSP will be increased which again will put a further pressure on
food inflation. Overall, inflation is in a very uncomfortable zone and is likely to remain at this level for the rest of the year” says Joshi.[PAGE BREAK]

The Crude Effect

The first indication of where inflation is headed comes from the very obvious movement of crude prices. In fact for the first time in history crude prices have remained above USD 100 to a barrel for a stretch of more than 200 days at a go.
Nothing seems to be going right for this very critical commodity. Iran continues to haunt the supply side scenario and
even if the issue is resolved this supply constraint will remain for some time before it goes away.

Decontrolling Diesel and Hiking Petroleum Prices

As a continuing factor of the above, talks of decontrolling diesel prices have been becoming louder in government circles. This is a chicken and egg situation for the government. If it hikes diesel prices (which eventually it would have to do) the cascading effect of the higher diesel prices will be felt across the economy thereby fuelling inflation. Even if it does not then it would have to resort to higher borrowing in a bid to fund subsidies which is not too good a situation either. “There is no alternative to revising petroleum product prices and it better be done. Otherwise, there will be suppressed inflation that anyways people will expect to go up. Inflationary expectations will remain high if you do not revise petroleum product prices and in the course of the year we will definitely see this” feels Joshi.

The Depreciating Rupee

Another most important factor that will contribute to inflationary pressures is the depreciating rupee. With the rupee getting cheaper, imports are likely to get costlier (including those of raw materials) thereby pushing up overall prices. From crude to coal, the falling rupee is likely to hurt prices across the board. According to Joshi “the Rupee has depreciated and hence imports have become costly. The fiscal deficit that is remaining on the higher side also impacts inflation. Government spending has also been inflationary.”[PAGE BREAK]

Policy Flaws

We have stated this earlier too and would like to reiterate that one of the factors that has kept headline inflation higher is food inflation that constitutes 14 per cent in the overall WPI basket. Food inflation lingered above eight per cent almost throughout the whole of last year, declining only in December 2011. It has once again started moving up.

Some of the government’s policy is directly responsible in fuelling food inflation. In FY12, on an average, the government has increased minimum support price (MSP), which actually is the price paid to farmers if they choose to sell their food grains to the government, of Kharif and Rabi crops by 13 per cent and 29 per cent respectively. There has been direct a correlation between rise in MSP and food inflation.

But some argue that a rise in MSP is a yearly phenomena so why should that be a reason for food inflation? The answer lies in the quantum of the rise. During 2002 to 2007 the average annual rise in MSP of Rice and Wheat was 1.8 per cent and four per cent respectively. However, during 2007 to 2012 the respective figure is a whopping 13.6 per cent and 11.9 per cent respectively. Such a kind of rise in the MSP is what has stoked inflation and will most likely continue to do so going forward. Remember, the general elections are not too far away and the government may want to use this vote bank feature to its benefit again.

Recent Budget Proposals

The recent budget proposal to hike the service tax has already started pushing up prices of almost all goods and services. This is something that is probably not getting noticed and talking about much but will probably be among the
important factors that are likely to keep inflation on a higher side going forward.

Impact of India Inc. And What To Do Now

All this is likely to hurt India Inc on both the cost as well as the revenue side. On one hand where costs are likely to go up, on the other demand, especially at the consumer level is likely to be impacted thereby hurting overall profitability. The inability of companies to pass on the rising costs by hiking product prices has already become visible in the past. This is likely to be exacerbate going forward.[PAGE BREAK]

So where do we see India Inc getting hurt the most? As we said earlier there will be a double whammy for corporate India. While on one hand costs are likely to go up on the other a tempered demand will hit revenues. We underline below the specific areas which are likely to be impacted by rising inflationary pressures:

Higher Raw Material Costs: One of the most important impacts on the cost side will be the brunt to be borne on
account of higher raw material prices. Prices of almost all materials including base metals are expected to go up.

Higher Power & Fuel Costs: Electricity boards have already hiked their tariffs and this will lead to higher power costs for companies. Coal is another important commodity from the fuel cost point of view which will add to the inflationary pressures faced by companies. Power & Fuel costs are a very large component in case of at least manufacturing companies and hence will impact them badly.

Employee Costs: Though this could be discretionary, it would certainly come to hurt margins. Rising costs would lead to rising aspirations of employees in order to meet them thereby impacting the profitability of companies.

Overall, rising costs will have an adverse impact on the performance of companies, especially in a situation where they would not be in a position to pass on the same to their customers. Assuming that companies try to pass on these costs to their customers, they would then be facing the prospects of a declining demand which would bring down overall profitability.

So what does one do in such a situation? As we said right at the beginning, our aim is to help you in shielding your portfolio from the vagaries of inflationary pressures. So, here are our picks which should help you build strength in your portfolio and breathe easy going forward. We have narrowed down on three sectors which are fairly insulated from inflationary pressures; Pharma, IT and Banking. From within these three sectors we have recommended three stocks each for our readers to pick. All the three sectors are considered to be defensive in character and the impact of a rising inflation is minimal or absent in case of them. There are other factors too, like a depreciating rupee being beneficial for the IT and Pharma sector which have prompted us select them. What follows is the rationale for our recommending these sectors.[PAGE BREAK]


PHARMACEUTICALS

One of the first sectors that come to anybody’s mind when considering safety and security against uncertainty in the market is Pharma. Whether the RBI raises interest rates once again or sucks out liquidity from the system, it hardly matters to players in this sector. Inflation or no inflation, Pharma as a sector is bound to do well. This is why we have put this sector right on top of our list of recommendations. The Pharmaceuticals sector has always been the most preferred sector during trying times. On a year to date basis the BSE Healthcare index witnessed a gain of 16 per cent as compared to a 11 per cent gain in the benchmark BSE Sensex which speaks about the robustness of this sector.

Why do we expect the sector to do well? Growth in the Indian pharmaceutical space is likely to come from the robust product pipeline that Indian companies have. FY13 is likely to witness a slew of interesting product launches in the US market by Indian players. All this will be value accretive for the companies as far as their financial performances are concerned. The patent expiry in the US that began in the last fiscal is likely to gather steam as we approach FY15. Indian companies are all geared up to launch generic versions of the patented drugs as and when they go off-patent. The six month exclusivities that will be granted post patent expiry remain a key growth driver for larger Indian generic players. On the domestic front, companies are poised to recover from the growth blips that have been witnessed in the FY11. The Indian pharmaceutical sector can act as a hedge against inflation as it ensures growth under any circumstances. So which are the companies that you should put your money in? DSIJ recommends the following three stocks where a meaningful exposure could help in creating good value sans any hiccups that can be induced by rising inflationary pressures.

Dr Reddy’s Laboratories (DRL) is one of the most prominent names in the Indian pharmaceutical space. The company has an integrated business model which spans across three segments, namely; generics, API’s & custom services, and proprietary products. It clocked revenues to the tune of USD 1.7 billion in FY11 witnessing a CAGR of around 21 per cent over the last decade. The management has set a target to earn around USD 2.6 to 2.7 billion by the end of FY13.[PAGE BREAK]

DRL is one of the few companies that have attractive pipeline of ANDA’s (Abbreviated New Drug Applications) in the industry. It has in the recent past launched some complex molecules which speak a lot about the underlying research and development capability that it possesses. It is also one of the most competent players in the biosimilars space globally.

On the financial front, DRL has reported a 29 per cent jump in its topline to Rs 7015 crore on a YoY basis for 9MFY12. Its net profit too increased sharply by 44 per cent to Rs 1107 crore on a YoY basis. As of December 2011 it had a debt of Rs 3850 crore on its balance sheet which translates into a comfortable debt to equity ratio of 0.42 times. On the valuations front, its EV/EBITDA stands at 12.6 times and the stock discounts its trailing twelve month earnings by 21 times. DRL with its certainty in its earnings as well as a decent pipeline of regulatory approvals is poised to grow going forward too. We believe that the company is a perfect candidate for your portfolio as the upside is clearly visible and the reverse isn’t.


Based out of Mumbai, Lupin has created a niche for itself and witnessed a CAGR of 29 per cent and 45 per cent in its topline and bottomline respectively for the last six years on a consolidated basis. The business of the company can be segmented in two broad categories with formulations contributing 89 per cent and API contributing 11 per cent to its topline. One important fact that needs to be mentioned here is that the company has been able to build an interesting non-US/India business which is still in the early stages of growth but is likely to be value accretive going forward.

The company has a strong presence in the oral contraceptives segment (OC). With three drugs in this category already being sold in the US market, it is all set to launch ten more OCs in FY13 including Yaz and Yasmin. The issue with the FDA regarding Suprax Drop has been responded to and the company is all set to launch it there in the present fiscal. It has filed 156 ANDAs, which include more than 20 Para IVs and FTFs. The management is targeting to launch 25 new products in the current fiscal in the US market.[PAGE BREAK]

On the financial front it has performed well with the topline growing at 18.65 per cent on a YoY basis to Rs 5076 crore and the bottomline growing at 12 per cent on a YoY basis to Rs 712 crore for 9MFY12. On the valuation front the stock discounts its trailing twelve month earnings by 25.79 times and the EV/EBITDA stands at 21.18 times. The debt to equity ratio of the company too looks to be comfortable at 0.37 times. All these factors make the stock a must-have in ones portfolio.


With strong skills in chemistry and good relationships with innovator pharma companies, Divi’s Laboratories (Divi’s) is well poised to grow in the custom synthesis segment. An expected turnaround in the CRAMS market provides it with the required edge needed to succeed. The company has expertise in peptides and its possible entry into specialty areas like steroids and the oncology segment makes it an interesting pick among companies in the CRAMS basket.

Mature products currently account for 30 per cent of its revenue, providing stable cash flows. With a pipeline of more than 20 products and looming patent expiries the company is all set to witness a good growth in the generic API space in the coming years. It has been able to maintain its EBITDA margins steady at 40 per cent even in the worst of the years for CRAMS companies which speaks volumes about the sustenance of its profitability.

On the financial front for 9MFY12 the topline witnessed a growth of 37 per cent on a YoY basis and stood at Rs 1148 crore. The growth in the topline was driven by both the generic API and custom chemical synthesis businesses. The Generic API business grew at around 40 per cent while CCS was up 27 per cent on a YoY basis. Net profit witnessed a healthy growth at 21 per cent on a YoY basis. The Divi’s management expects a 20-25 per cent sales growth in FY12 and FY13 driven by a traction in custom synthesis. This growth will be driven by the rampup of capacities including the one at the SEZ for generics. The management has indicated that its EBITDA margin will be sustainable at current 38-39 per cent over the next two years. On the valuation front the stock discounts its trailing twelve month earnings by 26.48 times and the EV/EBITDA stands at 21.04 times. It looks to be a soundly safe bet if you looking at safeguarding your portfolio against inflation.[PAGE BREAK]


Information Technology

High inflation has always played spoilsport for the economy, and this gets accurately captured in the stock market. Last year (CY2011), the Sensex declined by 25 per cent, when inflation remained above nine per cent on an average. Nonetheless, the IT index showed better resilience among the various sectors, down by 15.8 per cent during the same period. This is not an exception. When inflation remained at a high level during the March-October 2008 period, the IT index saw a downfall of 25 per cent as compared to a 43 per cent fall in the Sensex during the same interval.

The reason why the IT sector is able to withstand the pressures of inflation much better than many other sectors is that most of the factors that impact other sectors during inflationary times generally do not harm the IT sector. For example, rising commodity prices hardly impact the sector directly. On the contrary, high inflation helps IT companies in a way. Inflation generally leads to the depreciation of the rupee, and since software companies earn most of their revenues in foreign currency, it helps them to generate extra income through foreign exchange revaluation. However, there is no linear relation between the depreciation of the rupee and the benefit that accrues to companies in the IT sector, as this also depends upon the rate and on the percentage of earnings that have been hedged by the companies. Nonetheless, it helps companies to post better margins. The rupee has already depreciated by seven per cent in the last one month, and this may help the IT companies to post better financials going forward. Hence, we advise our readers to add these companies to their portfolio.


It is always better to stick to leaders when the going is tough. TCS, which pioneered IT services exports from India and is India’s largest software exporter, will be a key beneficiary of increased global sourcing. It is expected to grow at a rate faster than what NASSCOM estimates for the entire industry, which is around 11-14 per cent. It stands out for all round growth across verticals, geographies and service lines. That is reflected in its Q4FY12 results where retail & distribution, manufacturing and hi-tech, revenue grew by 4.1 per cent, 3.7 per cent and 4.1 per cent respectively on a sequential quarter basis.[PAGE BREAK]

Although the BFSI sector remained flat on a QoQ basis, it was able to win three large deals in this segment. If we look at the geographic segmentation, USA that contributes 53 per cent of revenues grew by one per cent sequentially and for the entire year it grew by 29.6 per cent. The future growth of the company is ensured by its improving client pyramid with client additions on the higher side of the revenue brackets. It added four clients in the USD 50-100 million bracket and five in the USD 10-20 million bracket. Also, one client was added in the USD 5-10 million bracket.

What further infuses confidence in the growth of the company is its hiring plan. In Q4FY12, the company added a massive 19156 gross employees and 11832 net employees, taking its total employee base to 238583. During the fourth quarter, its attrition rate (Last Twelve Month basis) declined to 12.2 per cent, which is the lowest in last eight quarters from 12.8 per cent in Q3FY12. For FY13, the management is looking at hiring 50000 employees, which is very encouraging. Further, the company has given offers to 43600 campus graduates for FY13 and expects a 70 per cent conversion ratio. Shares of TCS are currently available at a PE of 24, which looks expensive compared to its peers. However, looking at the expected growth of the company and its dividend yield of 2.2 per cent, it makes sense to take exposure in this counter.


Most of our readers will be surprised that we are recommending Infosys that has been recently hammered out of shape due to its bad quarterly performance and even worse guidance for the next year. Nonetheless, looking at the history of this company, we believe that this is more of an aberration than any trend and that this company is habituated to under-promising and over-delivering. Moreover, barring a few exceptions the entire IT industry globally is facing headwinds. Therefore, we believe that the company’s financial performance will once again bounce back sooner than later. Infosys added the highest number of clients among its peers in the last twelve months. Though it did so in smaller brackets, it definitely highlights the strength of the company. Ramp up of these clients will certainly throw up positive surprises going forward.

Additionally, there are some factors that will definitely help company to improve its bottomline. The wage hike for FY13 has been deferred. Although, the company has handed over promotions to almost 16000 professionals, these constitute only 10 per cent of the total workforce and the wage hike related to that component is not large. We do not believe that this will lead to any sudden surge in the attrition rate as a strong pipeline of trainees’ will take care of that aspect.

Regardless, what really calls for a buy on the counter is its attractive valuation. Infosys is currently trading at the cheapest valuation since the Lehman crisis. It is trading at the lowest valuation among its peers (almost a 15-30 per cent discount to HCL Tech and TCS). Shares of Infosys are currently trading at price to earnings ratio of 17 times compared to 24 and 22 of TCS and HCL Tech respectively. The situation does not look as dampening for Infosys and going forward with more clarity on macroeconomic factors emerging and a ramp up in projects happening, it certainly help the counter and one should enter it expecting a positive surprise and a decent return – not to forget that it is fairly insulated against the vagaries of inflation.[PAGE BREAK]


Wipro, the third largest Indian IT Services Company also happens to be the largest third-party R&D services provider globally and also the largest third-party BPO operator in India. In a weakening macroeconomic environment the world over, frontline companies providing niche IT/ITeS services with strong business models are better placed to face uncertainties in the near term. What also makes Wipro a “buy” currently is its diversified revenue base compared to other listed peers and its attractive valuation.

Infrastructure Management Services (IMS), one of the niche areas where Wipro operates and is the largest player in India, is the fastest growing service line for Indian IT companies and is a differentiator for Wipro. According to NASSCOM, it is estimated that by 2020 IMS can contribute more than a third of total IT services revenues for India. More clients experimenting on the cloud computing technology we believe will provide a growth impetus to Wipro. What also differentiates Wipro from other leading IT services companies is its lower dependence on developed countries. For example TCS draws 57 per cent of its revenue from America whereas Wipro derives around 52 per cent. In the current macroeconomic environment, where developing markets are doing better than developed markets, it provides a better cushion for any dip in revenues from the developed market.

Last year it went in for a restructuring and post restructuring the company has seen impressive client additions and a better mining of large clients to increase its number of customers in the higher contribution brackets. Just to give you a perspective, the number of clients contributing more than USD 100 million has gone up from one to seven in the last five quarters. This was phase one of realignment and the second phase of restructuring has kicked off and is expected to increase the company’s ability to differentiate its products and provide a further growth impetus.

Shares of Wipro are trading at a price to earnings ratio of 17.5 times, which is attractively priced, compared to its peers that are trading at PE of more than 22 times (except Infosys that too is trading at 17 times) and moreover growth prospects of the company make it a perfect fit for one’s portfolio.[PAGE BREAK]


Banking

The Banking sector remained one of the worst performers in 2011. The BSE Banking Index; the Bankex was down by 32 per cent compared to a 25 per cent fall in the Sensex in 2011. However, the trend has changed with the start of this year and the BSE Bankex is up by whopping 27 per cent till April 26th as compared to an 11 per cent rise in the Sensex during the same period. The reason for the Bankex’s underperformance during last year was the higher interest rates that were prevalent, problems with the quality of assets and the toughening of norms by the central banker. Nonetheless, 2012 bought some relief to the sector and we believe that the era of higher interest rates is about to reverse. The recent prediction by the Indian Met department about a normal monsoon this year will further help the central banker to continue with its loosening of the monetary policy.

There are other positive signals for the banking sector as well. A major among it is the pick up in credit. Non-food credit growth that had come down from 22.1 per cent at the beginning of 2011-12 to 15.4 per cent by February 2012 has once again picked up to 16.8 per cent in March, higher than the RBIs indicative projection of 16 per cent. In addition to this there are also indications of a pickup in investments by India Inc in the last quarter of FY12. Even the RBI in its policy statement has said that it sees “early signs of improvement in investment activities, resilience in the service sector, strong credit offtake in the last two months and prospects of higher capacity utilisation, going forward.” What is also encouraging for the banking sector is some of the Q4FY12 results, which indicate that quality of assets is not as bad as it was perceived to be and the deterioration has been largely contained.

Going forward with the recovery of the economy, banking stocks could be the best to park your funds. Here are three stocks which we see will deliver good returns going forward.


Federal Bank is among the oldest private sector banks, based out of Kerela which is trying to give a new look to its identity by restructuring itself under a new management. This involves revamping and improving products, business processes and strengthening risk management. This will definitely help the bank to post a better growth than the industry average going forward.[PAGE BREAK]

What will really help the bank is its high capital adequacy ratio. Federal Bank had the highest tier I capital ratios among its peers, at 15.91 per cent at the end of Q3FY12. This high ratio will enable the bank to grow at a faster clip as the economy recovers. A higher capital adequacy ratio also gives the bank the cushion against any increase in the risk weightage to gold loans that at the end of Q3FY12 accounted for 19 per cent of the total retail loans provided by the bank.

One of the biggest concerns for the banking sector currently is a likely deterioration in the asset quality, which is reflected in the annual default rate for CRISIL-rated entities that has hit a ten-year high of 3.4 per cent in 2011-12. These pressures are also reflected in the increase in banks’ gross non-performing assets (NPAs; to 2.9 per cent of advances from 2.3 per cent on a YoY basis). However, we do not see much pressure developing in the asset quality of Federal Bank. At the end of Q3FY12, NNPA its stood at 0.74 per cent compared to 0.81 per cent last year. Even its provision coverage ratio of 80.54 per cent is one of the highest in the sector and provides adequate cushion for the future.

Nonetheless, what favours the bank is a lower relative valuation at which its shares are trading. Federal Bank’s stock is currently trading at price to adjusted book value of 1.32 times which is lower than 1.6 times of South Indian Bank. This is one stock that should definitely add strength to your portfolio especially in trying times.


ING Vysya Bank (IVB) is a Banglore based midsized private sector bank and the only Indian bank where a foreign bank has such a large shareholding. The ING Group of Netherlands holds 43.77 per cent in IVB. Nevertheless, what makes the shares of IVB worth buying is the superior quality of the bank’s assets with a provision coverage ratio of little more than 90 per cent, a good credit growth and its improving returns.

The asset quality of the bank remains one of the strongest among its peers with net Non Performing Assets (NPAs) coming down to 0.18 per cent from 0.39 per cent at the end of FY12 and Gross NPAs during the same period coming down to 1.92 per cent from 2.30 per cent. Going forward a higher provision coverage ratio will help it to create a buffer for uncertain times. The improvement in its asset quality led to a sharp reduction in provisions & contingencies which stood at Rs 113.7 crore from Rs 151.60 crore in the previous year.[PAGE BREAK]

Such a good quality of assets is not achieved by forgoing growth. On the contrary the bank has clocked a loan growth of around 22 per cent compared to the 17 per cent growth achieved by the industry as whole and the management is confident of such outperformance even in FY13. A good credit growth and asset quality is already showing in the financials of the bank. It’s Net Profit (PAT) for the year ended 31st March 2012 increased by 43.2 per cent to Rs 456.3 crore from Rs 318.7 crore reported in the corresponding period of the previous year. All this is reflecting in the good return ratios of the bank. There was a sharp improvement in its Return on Assets to 1.09 per cent from 0.89 per cent for the previous year.

Despite such a stellar performance its shares are trading at price to book value of 1.4 times, which looks attractive given the higher return on assets and its better asset quality. It could well be a star performer in your portfolio going forward.


HDFC Bank is considered as one of the best private sector banks of India and the reason for this is not hard to find. It has exhibited a robust growth without compromising on its asset quality. Net advances of the bank increased by 22.2 per cent for the Q4FY12 on a YoY basis whereas its deposit build up was also healthy, growing by 18.3 per cent. The asset quality of the bank is also one of the soundest in the banking sector. The bank maintained its track record of having very good quality assets on its books during 4QFY2012 as well, with gross and net NPA ratios remaining stable at
one per cent and 0.2 per cent, respectively.

What is also important to note is that the Bank was able to improve its margins sequentially. Its net interest margin for the Q4FY12 stood at 4.2 per cent compared to 4.1 per cent during Q3FY12. The higher margins came in on the back of higher average CASA balances during the quarter as the bank was the collecting banker for issuance of tax-free bonds for some of the issuers in Q4FY12. What also supports the performance of the bank is its fee income that grew at 25.4 per cent on a yearly basis and is almost 21 per cent of its interest income. All this has helped the bank to improve upon its return on equity, which at the end of FY12 stood at18.9 per cent compared to 16.7 per cent for FY11.

On the valuation front the stock is available at a price to book value of more than four times and is trading expensively compared to its peers. However, the bank’s consistently strong performance even in challenging times reflects its strong and dynamic business model and justifies such high valuation. If you have the choice of adding only one banking stock to your portfolio, it should definitely be HDFC Bank.[PAGE BREAK]

We interacted with S Ramesh, President - Finance & Planning at Lupin to get a inside view of industry players on the various factors that could affect them in an inflationary situation.

What is your take on the inflationary scenario going forward?

With the continuing fiscal deficit, I think it will be pretty difficult to tame down the inflationary pressures. Going forward, we see a hike in oil prices which has been hinted by the Prime Minister himself. This will play a spoilsport for the efforts that are being made to tame down inflation. The electricity prices that have seen an upward revision across the country will also be one of the crucial factors that are more likely to take inflation northwards. If this kind of a scenario prevails it will certainly have an impact on interest rates. Overall a sticky kind of situation cannot be ruled out.

What impact will a higher inflation have on the sector that you are operating in?

Well what I can say is that, there is no direct impact of it on my sector, but it may face the ripple effects. For instance, high oil prices and higher electricity costs will certainly have a negative impact on my company and the sector.

You mentioned about higher crude oil prices as being a concern. How is it going to impact your operations?

Well if crude oil prices remain higher they will definitely have an impact on the inflationary scenario. If inflation hovers around the 10 per cent range then the overall prices will tend to move northwards in the range of 10 to 11 per cent.

Do you believe that the Government and the RBI is doing enough to control the situation?

Well, what I believe is that the RBI is doing a balancing act. This is like if you have higher interest rates prevailing in the country you are bound to face lower growth. It is actually trying to balance out growth vis-à-vis higher inflation. Obviously, higher interest rates bring down inflation but it has to manage growth also. I think at this point of time they are facing a tough task and we must acknowledge the decent job that they are performing. I cannot really say on whether they are doing enough as the global situation is also very dicey at the moment.

Do you see a hike in interest rates going forward?

If the situation turns out to be worse than what was presumed, a further hike in interest rates cannot be ruled out.

As a company how do you see the higher interest rate scenario?

Well, it will have less of an impact on me as a company as we are not that capital intensive in nature. But it will certainly have an effect on other industries and capital formation will indeed be difficult.

What according to you will be the right move by corporate leaders at the present scenario?

Well, what the corporate leaders have to do is that they should temper down their expectations. We need to understand that we are in the troubled waters and are not yet out of them. We have to take enough steps that will steer the ship out of the troubled waters. We must understand one thing that the long term still looks to be positive and the situation will certainly change in the next twelve to eighteen months.

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