HDFC Bank - Initiating Coverage, CMP Rs.650, ACCUMULATE, Target Rs.775 - Sushil Finance

HDFC BANK LTD. (HDFCBK) - INITIATING COVERAGE - CMP Rs.650, ACCUMULATE, Target Rs.775

STRENGTH: Impressive Business Growth, Healthy NIM's, Better Asset-Liability Management, Fine Balance between Corporate & Retail Exposure, Stable Asset Quality & Robust Return Profile WEAKNESS: Higher Exposure to CV/Auto Segment OPPORTUNITIES: Aggressive Branch Expansion THREAT: Interest Rate Volatility, Prolonged Economic Slowdown may led to Higher Slippages.

Aggressive Expansion + Optimal Advances Mix to result in Strong Credit Growth

Strong brand equity, well-defined strategies coupled with aggressive branch expansion over FY08-13 is likely to result in strong growth momentum going ahead. Strategy towards aggressive branch expansion (~4x over FY08-13) coupled with higher focus towards Semi-Urban/Rural branches (~55%) is likely to pay-off/augur well not only in terms of advance-deposit growth but also by way of operating leverage (newer branches getting profitable). Moreover, increasing emphasis towards tapping unbanked areas (Nos. of cities covered ~6x in 5 years) offers huge opportunities over the long run. HDFCBK has been successful in maintaining fine balance between Retail/Wholesale (54:46) which not only enables it to maintain healthy margins but also facilitates in credit growth by mitigating slowdown risk in any particular segment.

Strong Liability Franchise, Stable Fee Income to keep Margins & Profit Growth Intact

HDFCBK has over a period of time created strong liability franchise resulting from aggressive branch expansion, focus on low-cost deposits, new products & innovation etc. This has resulted in higher CASA (~44%) & lowest cost of funds in the industry. Competitive yields along with lower cost of funds have led to better NIM's historically compared to its peers which we expect to remain stable going ahead (Mgmt guidance 4.0-4.4%). Greater emphasis towards core-fee income generation has resulted in significant contribution to the bottom-line. Non-interest income has grown at a CAGR of ~25% over FY08-13 (~30% of net total income) which we expect to grow at a CAGR of 18-19% over FY13-16. Improving C/I (~46%) on back of cost optimization & operating leverage to provide further impetus to PPP growth which we expect to grow at a CAGR of ~24% over FY13-16E.

Healthy Asset Quality & Best In-Class Return Ratios

Prudent risk management, well diversified credit portfolio along with low slippages has enabled the bank to maintain healthy asset quality over the last couple of years with GNPA & NNPA at 1.0% & 0.3% resp. Also the restructured book is amongst the lowest in the industry at ~0.2% whereas PCR stands at 74%. However considering the stress in the economy, we have factored in higher slippages & credit cost for FY15-16E & expect same to peak out by FY15E. Strong credit growth, stable NIM's & healthy asset quality has led to better return ratios with sustainable ROE & ROA's at ~21%+ & ~1.9% over the last many years.

OUTLOOK & VALUATION

HDFCBK is one of the leading private sector bank having strong parentage & brand equity created over many years. Strong advances growth, better than industry NIMs coupled with healthy asset quality has led to significant re-rating in the stock. Lower corporate bond exposure, higher focus on core-fee income generation along with upside risk of high operating leverage benefits offers huge scope for strong profit growth in long run. Minimal exposure to stress sectors & lower restructuring book is likely to keep asset quality intact. Hence considering the above investment arguments & strong growth prospects, we recommend 'Accumulate' on the stock with a price target of Rs.775 based on forward P/ABV of 3.1x.

Source : Equity Bulls

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