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


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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