• OUTLOOK ARENA
  • VIEWS ON NEWS
  • JUNE 19, 2001

HDFC Bank: Holding ground

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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407