EPS growth of 30% CAGR; Trades at 4x P/B FY12
Positives already in the price
HDFC Bank is set to deliver EPS CAGR of 30% over FY10-12 v/s 25% over FY05-10.
Our recent interactions with the management highlighted productivity gains, strong
growth in rural and semi urban areas and decline in credit cost to aid superior RoA of
1.5%+ and improved RoE to 19%+ by FY12. In CY10 YTD, the stock has seen strong
outperformance with 44% returns against Sensex returns of 14%. While we remain
positive on bank's business, we believe valuations at PBV of 4x FY12E and PE of 22x
are rich and offer no returns to our target price of Rs2,400. Downgrade to Neutral.
Management interaction reiterates our view of strong growth: Recently we met
the management of HDFC Bank for an update on business growth, margins, asset
quality and profitability. Key takeaways: (1) confident of achieving loan growth of
25%+ led by auto loans, home loans and corporate loans, (2) margins to remain
superior at 4-4.2%, (3) fee income growth to be 16-18% despite pressure on thirdparty
distribution income, (4) cost-to-income ratio will fall by 100-200bp over two
years, and (5) credit cost will fall sharply as (i) delinquencies have declined QoQ
across products, and (ii) the proportion of secured products is increasing.
Operating performance to remain superior: HDFC Bank is best placed in the
current environment with (1) CASA ratio of 50% (will help to stabilize margins even if
deposit costs rise), (2) strong loan growth outlook of 25-30%, (3) improving operating
efficiency, and (4) lower credit cost led by best asset quality.
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