Valuation no bar, HDFC Bank could hit more highs, say market players

MUMBAI: HDFC Bank, which breached the Rs 6 lakh-crore market capitalisation threshold last week and ranks in the list of the planet’s most expensive lenders, provides investors an opportunity to buy into the stock now because of its increasingly low-cost liabilities, robust asset quality, and stable margins.

Although the stock has climbed 7 per cent in the past one month to Rs 2,251.5, analysts and fund managers expect it to touch Rs 2,500 in the short term, with medium-term prospects growth exceeding that for the broader Nifty benchmark.

“For any investor seeking a consistent return of 15-20 per cent in the next three to five years, this is the stock to invest irrespective of its valuations,” said Ajay Bodke, CEO-PMS, Prabhudas Lilladher.

Although the stock is trading at an all-time high with an expensive price-to-book value of 5.3 times, fund managers believe the stock could still outperform the benchmark over three to five years.

The bank has rallied 20 per cent in the past one year against the 17 per cent rise in Nifty Bank. On technical charts, HDFC Bank that was stuck in a narrow trading range for the past several weeks finally saw a price breakout last week, indicating a bullish trend.

“The stock has provided a breakout on the monthly chart,” said Jay Thakkar, AVP- Technical & Derivatives Research, Anand Rathi. “The daily as well as weekly momentum indicator MACD has provided a buy crossover, with higher tops and higher bottom formation….It is likely to inch toward the medium-term target of Rs 2,390 and above that Rs 2,500”.

HDFC Bank has registered consistent earnings growth of 23 per cent and profits growth of 27 per cent in the last 10 years with stable margins, low-cost liabilities and strong asset quality. The return on equity was 18 per cent plus for 3-year, 5-year and 10-year periods.

Pritesh Bumb, banking analyst, Prabhudas Lilladher, also said that the bank continues to deliver 20 per cent- plus CAGR earnings with stable margins, low cost liabilities and strong asset quality.

HDFC Bank has grown its deposit base at a CAGR of 27 per cent over the past 15 years. Stable-to-improving funding costs along with other operational improvements have enabled the bank to report constant improvements in its return on assets (RoA) — from 1.4 per cent in FY 2004 to 1.8 per cent in FY 2018.

“We like HDFC Bank for its robust retail presence and stable asset quality. We project strong revenue growth momentum, driven by healthy loan growth and stable margins,” said Siddharth Teli of CIMB. “Based on the sustainable return on equity of 17 per cent, the stock could touch Rs 2,500” he added.

HDFC Bank is the major gainer of the current crisis in the NBFC space as it has the best-in-class liability franchise along with superior customer outreach across business segments, according to analysts.

Recently, CLSA said that the NBFC crisis would be positive for loan growth at banks, improving pricing discipline.

“HDFC Bank is pushing Casa growth through new channels, including agents for retail loans, and this should address some concerns on weaker Casa growth, albeit at tad higher costs,” CLSA said in a recent note.