HDFC Bank reported another quarter of 30% y-o-y growth in core PPoP. This was driven by continued strong loan growth of 22% y-o-y, strong fees (24% y-o-y)and good cost control (14% y-o-y).
HDFC Bank reported another quarter of 30% y-o-y growth in core PPoP. This was driven by continued strong loan growth of 22% y-o-y, strong fees (24% y-o-y)and good cost control (14% y-o-y). On asset quality, GNPLs were broadly stable q-o-q (1.26% vs. 1.24% last quarter). Credit costs however were elevated given higher provisions against a project loan exposure — the exposure is standard and there are no overdues for HDFC bank as of now. However, the bank has made contingent provisions following certain RBI observations made around the implementation of JLF approved restructuring in this account. We stay Overweight on the stock given its strong balance sheet and PPoP growth. We expect earnings to improve going forward helped by moderation in credit costs. Valuation methodology and risks We derive our price target using a base case sum-of-the-parts model. We derive the value for the banking entity using a base case residual income model with three phases: a five-year high-growth period, a 10-year maturity period, and a declining period. We use a cost of equity of 11.7%, assuming a risk-free rate of 6.5%, a market risk premium of 5.5% and a beta of 0.95 respectively. We use a terminal growth rate of 5.5%.
We derive the valuation of the NBFC subsidiary entity assigning a P/E multiple to our earnings forecast. Downside risks to price target: Slower-than-expected loan growth; greater-than expected competition in retail hampers asset repricing/margin progression; savings deposit rates need to be taken up, owing to competitive pressures; sharp increase in provisioning owing to the RBI’s dynamic provisioning policy; significant deterioration in asset quality.
Our price target for the ADR is based on base case valuation model — based on the underlying stock, expected premium over local, and currency rate. We calculate the premium to the ADR at around 15%, in line with recent premium trends. On currency, we have used prevailing $/` rate of `65.15 to arrive at the ADR scenario values. Note, each ADR reflects three underlying shares, and the ADR price is adjusted accordingly.