Analyst Corner: ‘Buy’ on HDFC Bank, target price at Rs 2,458

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Published: January 22, 2019 12:21:57 AM

Growth in advances was led by both corporate and retail, each growing 24% y-o-y. The bank has received the divergence report from RBI, which is below the reporting threshold.

Analyst Corner: ‘Buy’ on HDFC Bank, target price at Rs 2,458

HDFC Bank reported a strong Q3FY19 led by its operating performance on the back of healthy loan growth across both the retail and wholesale segments, robust fee income growth aided by higher card acquisitions and spends, stable margins and improved treasury gains leading to a RoA of 2.0%.

Growth in advances was led by both corporate and retail, each growing 24% y-o-y. The bank has received the divergence report from RBI, which is below the reporting threshold.

During Q3FY19, CASA declined by 125bp q-o-q to 40.7% as the bank is focusing on balancing the requirement for funding loans with margins with greater reliance on term deposits. Given the rising yield environment, the higher funding costs have been passed on resulting in stable margins.

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Asset quality was stable with gross NPLs at 1.38% (+5bp q-o-q). However, the bank is cautious on prospects of its agri book citing the multiple loan waiver announcements in the states that underwent elections recently as well as the upcoming general elections. Considering possible slippages due to this, they have charged `3.2 bn towards contingency provisions. The bank had charged a similar provision of `2.5 bn in Q4FY18.

Excluding agriculture portfolio, GNPA of the bank stood at 1.1%. With no major deviations vs expectations, we fine tune our existing estimates trimming treasury gains and building in higher credit cost while increasing fee income resulting in 23% PAT CAGR over FY18-21E and RoA of 1.9% in FY21. HDBK trades at 3.7x P/ABV and 23x P/E on one year forward basis.

The opportunity of expanding profitability and robust growth is factored into our DDM-based target price of `2,458 (which includes `166 per share of its subsidiaries – HDB Financial Services, and HDFC Securities – about 8% of current market price) implying a 15% upside and meriting a ‘Buy’ rating on the stock. Our target price works out to a target P/ABV of 3.5x and target P/E of 20x on FY21E.

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