We are downgrading HDFC Bank to HOLD (from BUY) as it has achieved our TP and looks richly valued from a FY12 perspective. Our FY11 & FY12 outlook is detailed below.
FY11 loan-growth estimate is 26% and
24% for FY12. We expect an average
NIM of 4.5% for FY11 and 4.4% for FY12,
compared to 4.3% for FY10. We are
factoring in loan loss provisions of 120bps
in FY11 and 110bps in FY12, compared
with 170bps in FY10.
Downgrade on rich valuations – We had turned positive on
HDFC Bank on October 12, 2009 with a TP 28% higher than consensus.
From its price of INR1675, the stock has moved up by 44% compared to
a 20% increase in Sensex and a 43% increase in Bankex. Our positive
stance was driven by our expectations that the integration of CBOP was
finally coming through and credit costs and opex will begin to decline.
Our thesis has played out over the last one year and now we recommend
investors to book profits as we see no significant re-rating catalysts to
propel the stock from the current levels. More importantly the stock is
currently trading close to 4x FY12 ABV. We recommend investors to
book profits.
Valuation – Our revised TP of INR 2400 is based on a 3- stage
residual income model, which assumes 8% risk-free rate, 6% equity-risk
premium, beta of 0.97, 4% terminal growth rate and 10% terminal CoE.
At our revised TP, the stock would trade at 3.9x BV for adjusted ROE of
18% on our adjusted FY12 estimates. Risks to TP: Continued inflow of
liquidity into the stock, better than expected loan growth, lower than
expected credit costs are the key upside risks to our thesis.
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