Product Idea

10 Months Spread Note HDFC Bank (Long) / Tata Motors (Short)

The Headquarters of HDFC Bank in Mumbai and the interior of the supermini hatchback Tata Bolt produced by Tata Motors since 2015. IMAGES HDFC BANK / TATA MOTORS

Over the years, India has established itself as one of the leading emerging market economies. It may come as no shock that many investors tend to have a positive view on many of its larger companies. Due to restrictions on direct foreign investment, many participants access the market using structured products and the liquid ADR’s, namely; HDFC Bank, ICICI Bank, Infosys Ltd and Tata Motors Ltd. There are 2 stocks in particular that are the main focus of this article.

A spread note provides an investor the opportunity to capitalize on the relative outperformance of one stock over the other. This investment idea focuses on being long the best performing ADR and short the worst performing ADR. Over the past 5 years, HDFC Bank Ltd has had an annualized return of +21.70% whilst Tata Motors Ltd has had an annualized return of -19.66%. Thus, if this trend is assumed to continue for the foreseeable future it would be ideal to be take a Long/Bullish view on HDFC Bank Ltd and a Short/Bearish view on Tata Motors Ltd.

Key figures

HDFC Bank Ltd (HDB UN) Tata Motors Ltd (TTM UN)
P/E Ratio 30.20 10.40
P/B Ratio 4.75 0.78
Dividend Yield (%) 0.50
3Y Revenue CAGR (%) 20.43 -3.73*
3Y Net Income CAGR (%) 20.37 -0.19*
3Y EPS CAGR (%) 17.97 -0.20*
Average Analyst Rating** 4.38 3.65
12M Return Potential (%)*** 3.60 29.00
Buy / Hold / Sell* 30 / 4 / 3 18 / 18 / 4

* As of 2018 FY end
** Indian Exchange Traded stock used as ADR not well covered by analysts
*** Calculated as Average 12M Analyst Target Price divided by the Spot Price
(Source: Bloomberg)

5 Years Performance of HDFC Bank & Tata Motors

Please note past performance is no guarantee of future performance and this graph does not represent our market expectation

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Christopher Kumpas

CEO Picard Angst MEA