India Alternative Research

ALPHA STRATEGY : LONG PFC – SHORT REC

Strategy
October 22, 2010
Buy PFC and sell REC on a rupee-neutral basis in anticipation of pair reaching to Yogesh Radke
the target price ratio of 1.075. The currently price ratio is at 0.978 We +91-22-6620 3199
recommend booking part profits at a ratio of 1.026, keeping a stop loss of yogesh.radke@edelcap.com
0.919.
Mehul Patel
Fundamental View:
+91-22-4063 5556
Long PFC:
Mehul.patel@edelcap.com

¾ 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.

¾ Margin: PFC has reported close to 4.1% margin in last quarter and
expects the same to continue with positive upside

¾ The company has unhedged forex borrowings; with rupee appreciation

should result in MTM profit of INR 600 mn in Q2

Short REC:
¾ 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%.

¾ 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.

¾ The traction is disbursements for REC is expected to be relatively lower

compared to PFC.

¾ 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.

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 Pair Strategy:Mean Divergence

Statistical View:
Over the past 60 days, PFC has underperformed REC as REC is up by 22% where as PFC is up by 14%. As a result the
basket is trading near (1.0) standard deviations below its 60 day mean price ratio.

60 Day Z-Stat
PFC / RECLTD
P rice Ratio P FC/RECLTD 3.00
P R 60 Day M ean
1.124
2.00

1.00
1.074

-
Price Ratio

Z-Score
1.024
(1.00)

(2.00)
0.974

(3.00)

0.924 9-Jul-10 (4.00)

23-Jul-10

6-Aug-10

20-Aug-10
5-Feb-10

19-Feb-10

2-Apr-10

16-Apr-10

30-Apr-10

11-Jun-10

25-Jun-10

3-Sep-10

17-Sep-10
5-Mar-10

19-Mar-10

14-May-10

28-May-10

1-Oct-10

15-Oct-10

Edelweiss Securities Limited

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 Pair Strategy:Mean Divergence

Closed Trades ALPHA Strategy Update

Start Date/ Max
No of Days trade Entry Entry Close Return Return Max Gain
open
Closing Strategy Close loss on Status
Price Ratio Price on GEP* on AD# on GEP*
Date GEP*
26 23-Jun-10 Long LICHSGFIN 1,008.00 1,109.00
0.342 0.38 10.0% 19.9% 10.0% (0.04) Closed
28-Jun-10 Short HDFC 2,950.00 2,952.00
28 21-Jun-10 Long ALBK 163.00 188.00
0.491 0.53 7.5% 15.0% 7.5% (0.05) Closed
28-Jun-10 Short OBC 332.00 358.00
16 5-Jul-10 Long M&M 612.00 629.00
0.434 0.51 16.0% 32.1% 16.0% (0.00) Closed
25-Jul-10 Short MARUTI 1,410.00 1,223.00
9 12-May-10 Long ITC 263.00 273.00
1.114 1.18 5.5% 11.0% 0.0% - Closed
Short HUL 236.00 232.00
7 24-Nov-08 Long Axis Bank 406.00 459.50
1.664 1.845 11.10% 22.3% 11.1% -3.0% Closed
Short Bank of India 244.00 249.00
4 18-Nov-08 Long AXIS BANK 437.00 404.95
0.479 0.479 2.26% 4.5% 4.5% -0.2% Closed
21-Nov-08 Short HDFC BANK 912.00 845.00
3 17-Mar-09 Long HDFC BANK 854.00 832.00
0.622 0.586 -6.0% -12.0% 0.0% -6.0% Closed
Short HDFC 1,372.00 1,419.00

Edelweiss Securities Limited

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 Pair Strategy:Mean Divergence
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com

Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411

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