Ratio Trade - Long HDFC; short HDFC Bank: Emkay

Alternative research report by Emkay

Strategy"Buy HDFC (HDFC.IS) @ 1127-1129 and Sell HDFC Bank (HDFCB.IS) @ 969-971 in anticipation of a reversion in the price ratio. The current price ratio is 1.1629 and the target price ratio is 1.2792. We recommend holding positions with a stop loss placed at 1.1047 on a closing basis. The strategy has to be a rupee neutral strategy."

"The chart (In the attached pdf) indicates the normalized spread prevailing between returns of HDFC vis-à-vis HDFC Bank in a one year data window. Since January 14, 2014, HDFC has surged by around 37% while HDFC Bank has increased by around 44%, resulting into a negative return spread of around 7%. Historically, in the last 1 year, the pair has shown convergence in the range of -13% to -10% on 4 occasions (as shown in chart below). The pair has already started converging in favor of HDFC as indicated by an increase in the spread to -7% from a low of -10%", says Emkay Global Financial Services research report.

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