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HDFC Bank: Holding ground

Jun 19, 2001

The stock price of HDFC Bank, one of the defensive stocks, was near to its 52 week low yesterday. The stock appreciated at a compounded annual growth rate (CAGR) of 47% in the last five years. After touching a high of Rs 287 in July 00, the stock has come down by 28% to Rs 206 currently. During the same period the Sensex has fallen by 31%. As can be seen from the table, the bank’s assets and revenues have recorded similar growth rates in the past 5 years. This indicates its ability to generate the returns from every rupee it deploys in the business. Its returns on networth at 23%, is one of the best in the banking industry. The market has recognized HDFC Bank’s growth rates and accorded similar valuations. At price to book value ratio of 3.4x and P/E multiple of 18.4x on FY02 projected earnings, HDFC Bank valuations are highest in the banking sector.

A growth story
Particulars5 yrs CAGR
Market cap54.2%
Revenues67.0%
Operating profits61.4%
Net profits50.9%
Assets71.3%

The bank’s better quality of assets, strong management, technology absorption and aggressive retail foray has enabled it to maintain operating margins of 40%. Its profit margins are in line with global financial majors. To maintain the interest spread at higher levels HDFC Bank has recently reduced its deposit rates by around 100 basis points. The bank may not re-price the lending rates in proportion with the cut in deposit rates, giving it the higher spread.

Comparable returns
ParticularsHDFC
Bank
Barclays
Plc
CitigroupHSBC
Holdings
Bank of
America
OPM40.2%43.7%40.6%38.3%42.8%
NPM16.7%21.7%25.0%22.6%19.1%
ROE23.0%24.0%25.2%18.7%16.5%

Although, the bank has grown at scorching rates in the past few years, it will be difficult to maintain the pace in future. The sector is becoming competitive with other private sector banks offering products and services in line with the HDFC Bank. Public sector banks are also upgrading to the industry needs.

We have projected a CAGR of 25% in the bank’s earnings in the next four years. This is without considering any acquisitions. If the bank aims to maintain high growth rates, it will have to go for another buyout. In the medium term this seems slightly difficult considering the technology and cultural integration problems. In the near term the bank is planning to raise capital either through domestic or from overseas markets. This is expected to support its future growth plans.

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