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We initiate coverage with an IN-LINE rating and price
target of Rs2,575 based on 4.1x P/BV.
The bank is likely to deliver strong earnings growth of
31% over FY11-13E, in our view.
Best in class CASA of 51%, lowest risks on corporate
loan book and high loan provisioning cover make HDFC
Bank the most defensive stock in the financial sector.
While we believe that HDFC Bank is a high-growth, lowrisk
stock, we find the stock fairly valued at 3.8x FY12E
P/BV.
Best in class on all parameters – Highest CASA of 51%,
low gross NPLs of 1.1% of loans, provisioning cover of
close to 100% including general provisions, and high
earnings CAGR of 36% over FY08-FY10 make HDFC Bank
the best in class among Indian financials. HDFC Bank is the
only bank with a consistent track record of 30% yoy
earnings growth, every quarter, over the past 25 quarters.
We believe that HDFC Bank’s premium valuation of 3.8x
FY12E P/BV already reflects these strong fundamentals.
Hence our IN-LINE rating.
Superior asset quality – HDFC Bank has the lowest
proportion of restructured loans at 0.3% and among the
lowest net NPLs of 0.2%. The corporate loan book is
skewed towards shorter tenor working capital loans, which
are less risky than term loans. Exposure to vulnerable
sectors is lower than industry averages. After a sharp
increase in credit cost over FY08-10, owing to the merger of
Centurion Bank, credit costs have come off sharply in 9M
FY11 to 1% of loans. We expect credit cost to stabilize at
1% over FY12-13E, lower than the historical average of 2%.
Valuation – We value HDFC Bank at 4.1x FY12E P/BV at a
steep premium to the sector and also at a premium to its
current trading multiple of 3.8x FY12E P/BV. Likely strong
earnings CAGR of 31% over FY11-13E with high earnings
visibility, justify a premium to the current multiple, in our
view.
Risks – Deregulation of savings rate, economic slowdown
and slower-than-expected growth in bancassurance
commissions.
Investment argument and valuation
Valuation
Our price target for HDFC Bank is Rs2,575 based on 4.1x P/BV. We have used sustainable RoE
of 26%, cost of equity of 12.5% and sustainable growth rate of 8%. Our target multiple is lower
than the five-year high of 5.2x but higher than the five-year mean multiple of 3.4x. We believe the
stock deserves to trade at a premium to the sector and to its average multiple due to high
earnings visibility in a volatile environment.
Company profile
HDFC Bank commenced operations in January 1995. In FY10, HDFC Bank ranked second
among private banks in terms of total assets. It is amongst the most profitable and well managed
banks in India. In addition to the core banking business, the bank has a fully owned subsidiary,
HDFC Securities, which is an investment bank. HDFC Bank operates through a network of 1,780
branches. The HDFC group holds 23.4% of HDFC Bank and is the principal shareholder.
Management team
Managing Director: Aditya Puri
Joined HDFC Bank in Sep ’94 from Citibank, where he headed operations in Malaysia. In addition,
he also serves as Deputy Chairman of the Indian Banks' Association. He holds a Bachelor of
Commerce degree from Punjab University and is an Associate Member of the Institute of
Chartered Accountants of India.
Executive Director: Paresh Sukthankar
Joined the bank in Dec ’94 and has been Head of Human Resources since Sep ’99 and is also
an Executive Director of the bank. He holds a Bachelor of Commerce degree and Masters in
Management Studies from Bombay University.
Executive Director: Harish Engineer
He heads the Financial Institution Group Corporate Banking and is also Executive Director of the
bank since Oct ’07. He holds a Bachelor of Science degree in Physics and Chemistry from the
University of Mumbai and a Diploma in Business Management from Hajarimal Somani College,
Bombay.
Head of Finance: Sashi Jagdishan
Has been with HDFC Bank since 1996 and initially served as Head of Finance and Administration
of HDFC Bank Ltd. He holds a Bachelor of Science degree in Physics from the University of
Mumbai and Masters in Economics of Money, Banking and Finance from the University of
Sheffield, UK. He is a Chartered Accountant from the Institute of Chartered Accountants of India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We initiate coverage with an IN-LINE rating and price
target of Rs2,575 based on 4.1x P/BV.
The bank is likely to deliver strong earnings growth of
31% over FY11-13E, in our view.
Best in class CASA of 51%, lowest risks on corporate
loan book and high loan provisioning cover make HDFC
Bank the most defensive stock in the financial sector.
While we believe that HDFC Bank is a high-growth, lowrisk
stock, we find the stock fairly valued at 3.8x FY12E
P/BV.
Best in class on all parameters – Highest CASA of 51%,
low gross NPLs of 1.1% of loans, provisioning cover of
close to 100% including general provisions, and high
earnings CAGR of 36% over FY08-FY10 make HDFC Bank
the best in class among Indian financials. HDFC Bank is the
only bank with a consistent track record of 30% yoy
earnings growth, every quarter, over the past 25 quarters.
We believe that HDFC Bank’s premium valuation of 3.8x
FY12E P/BV already reflects these strong fundamentals.
Hence our IN-LINE rating.
Superior asset quality – HDFC Bank has the lowest
proportion of restructured loans at 0.3% and among the
lowest net NPLs of 0.2%. The corporate loan book is
skewed towards shorter tenor working capital loans, which
are less risky than term loans. Exposure to vulnerable
sectors is lower than industry averages. After a sharp
increase in credit cost over FY08-10, owing to the merger of
Centurion Bank, credit costs have come off sharply in 9M
FY11 to 1% of loans. We expect credit cost to stabilize at
1% over FY12-13E, lower than the historical average of 2%.
Valuation – We value HDFC Bank at 4.1x FY12E P/BV at a
steep premium to the sector and also at a premium to its
current trading multiple of 3.8x FY12E P/BV. Likely strong
earnings CAGR of 31% over FY11-13E with high earnings
visibility, justify a premium to the current multiple, in our
view.
Risks – Deregulation of savings rate, economic slowdown
and slower-than-expected growth in bancassurance
commissions.
Investment argument and valuation
Valuation
Our price target for HDFC Bank is Rs2,575 based on 4.1x P/BV. We have used sustainable RoE
of 26%, cost of equity of 12.5% and sustainable growth rate of 8%. Our target multiple is lower
than the five-year high of 5.2x but higher than the five-year mean multiple of 3.4x. We believe the
stock deserves to trade at a premium to the sector and to its average multiple due to high
earnings visibility in a volatile environment.
Company profile
HDFC Bank commenced operations in January 1995. In FY10, HDFC Bank ranked second
among private banks in terms of total assets. It is amongst the most profitable and well managed
banks in India. In addition to the core banking business, the bank has a fully owned subsidiary,
HDFC Securities, which is an investment bank. HDFC Bank operates through a network of 1,780
branches. The HDFC group holds 23.4% of HDFC Bank and is the principal shareholder.
Management team
Managing Director: Aditya Puri
Joined HDFC Bank in Sep ’94 from Citibank, where he headed operations in Malaysia. In addition,
he also serves as Deputy Chairman of the Indian Banks' Association. He holds a Bachelor of
Commerce degree from Punjab University and is an Associate Member of the Institute of
Chartered Accountants of India.
Executive Director: Paresh Sukthankar
Joined the bank in Dec ’94 and has been Head of Human Resources since Sep ’99 and is also
an Executive Director of the bank. He holds a Bachelor of Commerce degree and Masters in
Management Studies from Bombay University.
Executive Director: Harish Engineer
He heads the Financial Institution Group Corporate Banking and is also Executive Director of the
bank since Oct ’07. He holds a Bachelor of Science degree in Physics and Chemistry from the
University of Mumbai and a Diploma in Business Management from Hajarimal Somani College,
Bombay.
Head of Finance: Sashi Jagdishan
Has been with HDFC Bank since 1996 and initially served as Head of Finance and Administration
of HDFC Bank Ltd. He holds a Bachelor of Science degree in Physics from the University of
Mumbai and Masters in Economics of Money, Banking and Finance from the University of
Sheffield, UK. He is a Chartered Accountant from the Institute of Chartered Accountants of India.
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