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Alpha+Strategy

Alpha+Strategy

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Published by: Bharat on Nov 01, 2010
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India Alternative Research

ALPHA STRATEGY : LONG PFC – SHORT REC

Strategy Buy PFC and sell REC on a rupee-neutral basis in anticipation of pair reaching to the target price ratio of 1.075. The currently price ratio is at 0.978 We recommend booking part profits at a ratio of 1.026, keeping a stop loss of 0.919. Fundamental View: Long PFC: Long PFC: Disbursement growth momentum continues and at the current run-rate of INR 75-80 bn per quarter would easily beat the guidance provided earlier. Margin: PFC has reported close to 4.1% margin in last quarter and expects the same to continue with positive upside The company has unhedged forex borrowings; with rupee appreciation should result in MTM profit of INR 600 mn in Q2 Short REC: The near trigger in stock price for REC has been increase in FII limit from 20% to 35%. However, in PFC still the float is only 10%.

October 22, 2010 Yogesh Radke +91-22-6620 3199 yogesh.radke@edelcap.com Mehul Patel +91-22-4063 5556 Mehul.patel@edelcap.com

Margin: REC has seen margins improving from 4% in Q4FY10 to 4.6% in Q2FY10 and expect it to consolidate at these levels with negative bias. REC has access to capital gain exemption bond the benefit of which with new Direct tax Code will go away.

The traction is disbursements for REC is expected to be relatively lower compared to PFC. Valuation: Given the loan growth estimate of 28% CAGR over FY10-12 stock is trading close to 2.5x PB Vs PFC with similar operating matrix is trading close to 2.35x PB. PFC has approached RBI for infrastructure finance company status and funding access and advantage will be equal for both of them post this. Management has also indicated that it will tap capital markets in the early next year which would add to ~INR 20 in book value which will leads to further upside in valuation. Moreover FII window would be effectively utilized post this fund raising.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited 1

PFC has underperformed REC as REC is up by 22% where as PFC is up by 14%.00 1.974 (3.124 2.Pair Strategy:Mean Divergence Statistical View: Over the past 60 days.0) standard deviations below its 60 day mean price ratio.00 1.00) Edelweiss Securities Limited 2 .024 Z-Score (1. 60 Day Z-Stat P rice Ratio P FC/RECLTD P R 60 Day M ean PFC / RECLTD 3. As a result the basket is trading near (1.00 1.074 Price Ratio 1.00) 0.00) 0.924 9-Jul-10 23-Jul-10 6-Aug-10 20-Aug-10 2-Apr-10 16-Apr-10 30-Apr-10 5-Feb-10 11-Jun-10 25-Jun-10 3-Sep-10 19-Feb-10 19-Mar-10 14-May-10 28-May-10 17-Sep-10 5-Mar-10 1-Oct-10 15-Oct-10 (4.00) (2.

00 437.00 2.00 629.00 273.00 912.00 2.109.0% 7.0% 19.00 263.00 459.0% 5.00 Entry Ratio 0.95 845.00 236.0% -0.00 188.5% 0.419.0% 32.00 232.00 832.342 0.950.00 332.00 1.26% -6.51 1.04) (0.952.53 0.1% 11.586 Max Return Return Max Gain loss on on GEP* on AD# on GEP* GEP* 10.00 406.0% 0.00 244.223.0% 7.10% 2.434 1.00 Close 0.479 0.008.845 0.0% (0.9% 15.5% 16.50 249.410.622 Close Price 1.3% 4.18 1.00 163.5% 11.00 1.491 0.00 358.2% -6.0% 22.114 1.479 0.0% 11.5% 16.00 1.38 0.00 854.0% Status Closed Closed Closed Closed Closed Closed Closed Edelweiss Securities Limited 3 .00) -3.372.5% -12.00 1.00 404.1% 4.Pair Strategy:Mean Divergence Closed Trades No of Days trade open 26 28 16 9 7 4 3 ALPHA Strategy Update Start Date/ Closing Strategy Date Long LICHSGFIN 23-Jun-10 Short HDFC 28-Jun-10 21-Jun-10 Long ALBK 28-Jun-10 Short OBC 5-Jul-10 Long M&M 25-Jul-10 Short MARUTI 12-May-10 Long ITC Short HUL 24-Nov-08 Long Axis Bank Short Bank of India 18-Nov-08 Long AXIS BANK 21-Nov-08 Short HDFC BANK 17-Mar-09 Long HDFC BANK Short HDFC Entry Price 1.664 0.0% 10.05) (0.00 612.

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Neither Edelweiss nor any of its affiliates. Edelweiss is under no obligation to update or keep the information current. This report is not directed or intended for distribution to. for any purpose. any such restrictions. have long or short positions in. group companies. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. copied. persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Edelweiss Securities Limited 4 . 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Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.com Pair Strategy:Mean Divergence Vikas Khemani Nischal Maheshwari Head Head Institutional Equities Research vikas. portfolio management and brokerage group. This information is subject to change without any prior notice. Buy back. However. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. directly or indirectly related to specific recommendations or views expressed in this report. Mumbai – 400 021. Board: (91-22) 2286 4400. or use by. directors. its holding company and associate companies are a full service. availability or use would be contrary to law. where such distribution. Edelweiss. and no part of his or her compensation was. directors. We and our affiliates. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published. any person or entity who is a citizen or resident of or located in any locality. This information is strictly confidential and is being furnished to you solely for your information. is or will be. Express Towers. Our research analysts and sales persons provide important input into our investment banking activities. All rights reserved Edelweiss Research is also available on Bloomberg EDEL <GO>. of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. and employees may: (a) from time to time. and should consult his own advisors to determine the merits and risks of such investment.khemani@edelcap. Nariman Point. delisting) Date 30-Sep-10 06-Sep-10 15-Oct-10 Monthly Report Rollover Analysis hEDGE: The alternative insights monthly FA: Factor Analyser Edelweiss Fund Insight – EFI 24-Sep-10 Edelweiss Vital Insights (US stares at a million dollar question. employees. group companies.com This document has been prepared by Edelweiss Securities Limited (Edelweiss).com nischal. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Reuters and Factset. and buy or sell the securities thereof. The investment discussed or views expressed may not be suitable for all investors. Edelweiss Securities Limited generally prohibits its analysts.

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