Hdfc Valuation

8/2/2019 Hdfc Valuation

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Bajaj Capital Centre for Investment Researc

alyst: Anand Rawani

ne: +91 11 66161111 Ext: 580

ail: [email protected]

d of Research: Alok Agarwala

mail: [email protected]

l. 10/11-12 September 10, 20

uy CMP: Rs 483.7 Target: Rs 540/

HDFC BANK Upside potential: 11.6% Horizon: 6-8 month

y Data (Consolidated)

tor Bank

e value (Rs.) 2.0

week high/low (Rs.) 519 / 396.3

ket cap (Rs. cr.) 113135.9

k value (Rs.) 114

e / book value 4.3

ratio (TTM) 26.9

idend (%) 165

rage daily volume (1 Y) 1143.7 cr

a 1.1

ar return (%) 5.5

eholding pattern

res as on June 30, 2011

k performance

HDFC Bank has shown strong performance over the years and grown above industry gro

rate. Despite rising interest rates NIM is likely to remain stable due to high CASA rati

above 52%. NII is likely to grow at a CAGR of 21.7% between FY11 and FY13. Asset qua

remained intact. Further expansion is likely to help it continue its growth momentum.

Investment rationaleStrong core performance: HDFC Bank has demonstrated strong core performance during

past reflecting impeccable management competence. In terms of three year CAGR, NII grew

26.3% to Rs 10,543.1 cr. NII is expected to grow at a CAGR of 21.7% between FY11

FY13E. NIM has improved marginally in FY11 over FY10 and is likely to sustain at thlevels. Bottom line is estimated to grow at 23.3% and 26.2% to Rs 4,840.7 and Rs 6,108.5 c

FY12E and FY13E, respectively, with a positive bias.

Asset quality intact: Asset quality of the bank remained sound. Gross and net NPAs cam

Rs 1694.3 cr and Rs 296.4 cr in FY11. In percentage terms, they stood at 1.05% and 0.19

respectively. CAR of the bank was at 16.2% with tier 1 CAR at 12.2%. Over the next two ye

NPA ratios are expected to improve. Provision coverage ratio stood at 82.5% in FY11 as aga

78.4% in FY10. We have modeled a PCR of 82% over the next two years.

Rising market share: HDFC Bank has been continuously grabbing market share both

deposits and advances. By the end of FY11, its share in the total industry deposits and advan

stood at 3.9% and 4.13%. In FY11, advances and deposits of the bank grew by 27.1%

24.6% as against industry growth of 21.6% and 17.3%, respectively. We expect HDFC Bankcontinue to outperform industry growth going ahead.

High CASA proportion to help keep NIM intact: The bank enjoys very high CASA dep

proportion at 52.7% in the overall deposits. In a rising interest rate high CASA acts as cush

against margin erosion. We expect CASA % to remain more or less at this level over the n

few years helping it to keep its NIM intact.

Valuation: It is trading at a price of 473.3, which translates into trailing price to book valu

4.2. In terms of price to adjusted book value, it is available at 4.5x, 3.9x and 3.4x times

adjusted book value of FY11, FY12E and FY13E, respectively. Its current ROE is 16.7% an

likely to improve over the next couple of years. We give a 'Buy' recommendation on the st

with a target price of Rs 540 and an investment horizon of 6-8 months.

Summery of financials & valuations

Particulars FY09A FY10A FY11A FY12E FY

Advances 98883.0 125830.6 159982.7 194078.2 2370

Deposits 142811.6 167404.4 208586.4 253734.9 3097

NII 7421.2 8386.4 10543.1 12836.8 156

NIM (%) 4.85 4.26 4.40 4.40

PAT 2244.9 2948.7 3926.4 4840.7 61

Book value 68.9 94.0 109.1 124.7 1

Adj. BV 65.9 92.3 107.8 123.2 1

P / ABV 3.0 4.2 4.5 3.9

Source: BCCIR, Company data, Figures in Rs cr.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Key Investment arguments

Strong core performance: HDFC Bank has demonstrated strong coreperformance during the past reflecting impeccable management competence. In

terms of three year CAGR, NII grew at 26.3% to Rs 10,543.1 cr. During the same

period, interest income grew by 25.4% to Rs 19,928.2 cr. In terms of YoY growth,

interest income and net interest income grew by 23.3% and 25.7% in FY11. Goingahead, NII growth is likely to remain strong. We expect NII to grow at a CAGR of

21.7% between FY11 and FY13E. NIM has improved marginally in FY11 overFY10 and is likely to sustain at these level. PAT grew by 33.2% to Rs 3,926.4 cr in

FY11 on YoY basis. Bottom line is estimated to grow at 23.3% and 26.2% to Rs

4,840.7 and Rs 6,108.5 cr in FY12E and FY13E, respectively, with a positive bias.

Rising market share: HDFC Bank has been continuously grabbing market share

both in deposits and advances. By the end of FY11, its share in the total industry

deposit stood at 3.9% as against 3.67% in FY10. Its market share in FY10 declined

a bit as it grew below the industry growth rate. However, if one looks a long term

trend the graph is northward marching. On the advance side, its market share stood

at 4.13% in FY11 as against 3.95% in FY10. The rise in market share can beattributed to outperforming industry growth rate continuously. In FY11, advances

and deposits of the bank grew by 27.1% and 24.6% as against industry growth of

21.6% and 17.3%, respectively. We expect HDFC Bank to continue to outperform

industry growth going ahead.

Asset quality intact: Asset quality of the bank remained sound. Gross and net

NPAs came at Rs 1694.3 cr and Rs 296.4 cr in FY11. In percentage terms, they

stood at 1.05% and 0.19%, respectively. Capital adequacy ratio of the bank was at

16.2% much above the regulatory requirement of 9%. Tier 1 CAR stood at 12.2%.

Provision coverage ratio stood at 82.5% in FY11 as against 78.4% in FY10. Over

the next two years, NPA ratios are expected to improve. We have discounted a

PCR of 82% in our model.

Robust branch expansion: The bank has been expanding its branch network

aggressively. This helped it grow above industry growth rate. Branch network has

expanded from 535 in FY06 to 1986 in FY11. Sudden upward move in FY09 is

due to acquisition of CBoP. During the last year it added 261 branches.

Branch network

Source: Company data

535 684 761

1,4121,725

1,986

0

1000

2000

3000

FY06A FY07A FY08A FY09A FY10A FY11A


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High CASA proportion to help keep NIM intact: The bank enjoys very high

CASA deposit proportion at 52.7% in the overall deposits. Its not just in this yearbut HDFC Bank has been able to keep its CASA proportion higher during the past

as well. In a rising interest rate high CASA acts as cushion against margin erosion.

We expect CASA % to remain more or less at this level over the next few years

helping it to keep its NIM intact.

CASA proportion in total deposits


Concerns

Slowdown in economy: Indian economy has shown signs of slow down.Economic slowdown is likely to impact the overall credit growth in the banking

system. Being part of the same industry, HDFC Bank will also be affected if the

economy slows down significantly.

Financials and business metrics

Credit deposit mix: Total business of the bank grew at a three year CAGR of 31%to Rs 368,569 cr in FY11. The growth remained robust at 25.7% in FY11 on YoY

basis. Deposits and advances stood at Rs 208,586 cr and Rs 159,983 cr,

respectively in FY11. The C/D went up to 76.7% in FY11 from 75.2% in the

previous year.

Business mix of the bank (Figures in Rs cr)

Source: BCCIR, Company data

Deposit structure: HDFC Bank has been able to maintain healthy CASA deposits.

Its CASA deposits stood at around 52.7% in FY11 as against 52% in FY10. This

has been instrumental in keeping the cost of fund cheaper. We expect the CASA

proportion in the deposit to remain at around 52% over the next few years. During

55.4% 57.7% 54.5%

44.4%52.0% 52.7% 52.0% 52.0%

0%

20%

40%

60%

80%

FY06A FY07A FY08A FY09A FY10A FY11A FY12E FY13E

68.7%62.9%

69.2%75.2% 76.7%

76.5% 76.5%

0%

20%

40%

60%

80%

100%

0

100000

200000

300000

400000

500000

600000

FY07A FY08A FY09A FY10A FY11A FY12E FY13E

Total business (LHS) Deposits (LHS) Advance (LHS) C/D (RHS)


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the last three years, overall deposits grew at a CAGR of 27.4% to Rs 208,586 cr in

FY11. On YoY basis it registered a growth of 24.6% in FY11. During the same

period, both CASA and time deposits went up by 26.2% and 22.9% to Rs

109,908.3 cr and Rs 98,678.1 cr, respectively. Barring of a couple of years, it has

grown above the industry growth rate and likely to continue the trend. We expect

deposits to grow at around 21.9% between FY11 and FY13E on the back of strong

network expansion.

Deposit structure (Figures in Rs cr)


Advance mix: During the last three years, advances grew at a CAGR of

36.1% to Rs 159,982.7 cr in FY11. On YoY basis, it went up by 27.1%. The

banks advance growth has continuously outperformed the industry advancegrowth. However, the path ahead is expected to be patchy on the back of

slowing GDP growth. Banking credit growth as a whole is expected to come

down. HDFC bank is expected to grow at CAGR of 21.7% between FY11

and FY13E. Retail assets form a major chunk of the advances at 42%,followed by Banking and financial institutions (Excluding NBFCs) at 8%.

Road & ports and automobiles have a share of 5% each in the portfolio.

Constituent segments of advances as on March 31, 2011


Revenue & profit analysis: Interest income in FY11 grew by 23.3% to Rs

19,928.2 cr as against a decline of around 1% registered in FY10. It registeredstrong growth in the past as well and the three year CAGR comes at around 25.4%.

With the rise in the regulatory interest rates, banks have increased their lending

rates and the full impact of this should be seen in FY12. We expect yields on loans

of HDFC Bank to improve in the current financial year. Interest income is

estimated to grow at a CAGR of 22.9% between FY11 and FY13. In FY11, totalincome stood at Rs 24,263.4 cr with 18% contribution coming from other income.

57.7%

54.5%

44.4%

52.0%52.7%

52.0%52.0%

0%

10%

20%

30%

40%

50%

60%

70%

0

50000

100000

150000

200000

250000

300000

350000

FY07A FY08A FY09A FY10A FY11A FY12E FY13E

Deposits (LHS) Time deposits (LHS) CASA deposits (LHS) CASA (RHS)

Retail

Assets,

42%

Banks and Financial

Institutions, 8%

Roads & Ports, 5%

Automobiles &

Trucks, 5%

NBFCs & Trading,

3%

Agriculture and

Allied Activities,

3%

Iron & Steel, 2%

Power, 2%

Real Estate, 2%

Other, 28%


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Loss in sale of investments brought the contribution from other income down from

20% in FY10. In the past, contribution from the other income has been in the range

of around 17% to 20%.

Income structure as on March 31, 2011


Rise in interest rate is also likely to increase the cost of deposits. However, given

the percentage of CASA deposits in overall deposit liability of HDFC Bank, we

expect NIM to remain stable at the current level of 4.4% for FY12E and FY13E. Sofar NII is concerned, in FY11, it grew by 25.7% to Rs 10,543.1 cr. Going ahead,

NII is expected to clock a CAGR of 21.7% between FY11 and FY13E.

NIM is expected to remain stable


Over the last three years bottom line grew at a CAGR of 35.2% to Rs 3,926.4 cr in

FY11. On YoY basis, net profit increased by 33.2%. We expect HDFC Bank to

post PAT growth of 23.3% and 26.2% to Rs 4,840.7 and Rs 6,108.5 cr in FY12E

and FY13E, respectively. ROE for FY11 stood at 16.7%.

Dividend payout: During the last five years, the bank has maintained a dividend

payout in the range of 22% to 23%. The payout ratio for FY10 and FY11 was to

the tune of 21.7% and 22.7%, respectively.

Valuation

It is trading at a price of 473.3, which translates into trailing price to book value of

4.2. In terms of price to adjusted book value, it is available at 4.5x, 3.9x and 3.4x

times its adjusted book value of FY11, FY12E and FY13E, respectively. Its current

ROE is 16.7% and is likely to improve over the next couple of years. The coreperformance of the bank has been strong and is likely to remain strong going

ahead. We give a 'Buy' recommendation on the stock with a target price of Rs

540 and an investment horizon of 6-8 months.

20% 19% 18% 17% 20% 18% 17% 17%

80% 81% 82% 83% 80% 82% 83% 83%

0%

20%

40%

60%

80%

100%

0

5000

10000

15000

20000

25000

3000035000

40000


Interest Earned Other Income Total Income% of other income (RHS) % of interest income (RHS)

4.2%

4.4%

4.8% 4.9%

4.3%4.4% 4.4% 4.4%

4%

4%

4%

4%

5%

5%

5%

0

10000

20000

30000

40000


Interest Earned (LHS) Interest Expended (LHS) NII (LHS) NIM (RHS)


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Company profile

HDFC Bank is the second largest private sector bank in India. Bank has

demonstrated strong growth over the years and enjoys sound asset quality. Its

balance sheet size stands at Rs 285,942 cr for quarter ending June 2011. The HDFC

Bank was incorporated on August 1994 and commenced its operations as a SCB in

January 1995. Currently, it has a branch network of 2,111 branches and 5,998

ATMs in 1,111 cities as of June 30, 2010.

On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC

Bank was formally approved by Reserve Bank of India to complete the statutoryand regulatory approval process. As per the scheme of amalgamation,

shareholders of CBoP received 1 share of HDFC Bank for every 29 shares of

CBoP. In a milestone transaction in the Indian banking industry, Times Bank

Limited (another new private sector bank promoted by Bennett, Coleman & Co.)

was merged with HDFC Bank Ltd., effective February 26, 2000.

It provides whole gamut of banking services including Wholesale Banking

Services, Retail Banking Services and Treasury. It has two subsidiaries HDFC

Securities and HDB Financial Services.

Financial tables

Quarterly numbersDESCRIPTION Jun-11 Jun-10 Mar-11 YoY growth

(%)

QoQ growth

(%)

Interest Earned 5978.0 4419.7 5468.6 35.3 9.3

Interest expense 3130.0 2019.0 2629.1 55.0 19.1

NII 2848.0 2400.7 2839.5 18.6 0.3

Other income 1120.0 990.9 1255.8 13.0 -10.8

Total income 7098.0 5410.6 6724.3 31.2 5.6

Operating expenses 1934.6 1642.9 1998.4 17.8 -3.2

Total expenses 5064.6 3661.9 4627.5 38.3 9.4

Oper. Pro. bef. Prov. & Cont. 2033.4 1748.7 2096.9 16.3 -3.0

Provisions & Contingencies 443.6 555.0 431.3 -20.1 2.8

Oper. Pro. after Prov. & Cont. 1589.7 1193.7 1665.5 33.2 -4.6

Provision for Taxes 504.7 382.0 550.8 32.1 -8.4

APAT 1085.0 811.7 1114.7 33.7 -2.7

Gross NPAs 1833.1 1791.2 1694.3 2.3 8.2

Net NPAs 318.5 412.5 296.4 -22.8 7.5

% Gross NPAs 1.04 1.21 1.05

% Net NPAs 0.20 0.30 0.20Net Interest Margin (%) 4.2 4.2 4.3

Provision Coverage Ratio (%) 83.0 82.5 82.5

Capital Adequacy Ratio (%) 16.9 16.3 16.2

Tier I Capital-basel (%) 11.4 12.2 12.4



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Annual numbers

Profit & loss (Figures in Rs Cr)

Particulars FY09A FY10A FY11A FY12E FY13E

Interest Earned 16332.3 16172.7 19928.2 24939.4 30076.1

Other Income 3290.6 3983.1 4335.2 4987.9 6165.6

Total Income 19622.9 20155.8 24263.4 29927.3 36241.7

Interest Expended 8911.1 7786.3 9385.1 12102.5 14449.0

Operating Expenses 5532.8 5939.8 7152.9 8514.4 10163.4

Total expense 14443.9 13726.1 16538.0 20617.0 24612.4

NII 7421.2 8386.4 10543.1 12836.8 15627.1

Profit before provision and contingencies 5179.0 6429.7 7725.4 9310.3 11629.3

Provisions and Contingencies 1879.1 2140.0 1906.1 2136.0 2576.0

Profit Before Tax 3299.9 4289.7 5819.3 7174.3 9053.4

Taxes 1054.9 1341.0 1892.9 2333.6 2944.8

Profit After Tax 2244.9 2948.7 3926.4 4840.7 6108.5


Balance sheet (Figures in Rs Cr)

Particulars FY09A FY10A FY11A FY12E FY13E

Sources of funds

Share Capital 425.4 457.7 465.2 467.4 467.4

Total Reserves 14220.9 21061.8 24911.1 28677.2 33429.6

Networth 14646.3 21519.6 25376.4 29144.6 33897.0

Deposits 142811.6 167404.4 208586.4 253734.9 309793.1

Borrowings 9163.6 12915.7 14394.1 19186.2 21745.1

Other Liabilities & Provisions 16242.8 20615.9 28992.9 32971.0 40240.3

Total Liabilities 183270.8 222458.6 277352.6 335036.8 405675.5

Application of funds

Cash and balance with RBI 13527.2 15483.3 25100.8 22610.3 35545.3

Balances with banks and money at call 3979.4 14459.1 4568.0 15331.1 8924.1

Investments 58817.5 58607.6 70929.4 85620.6 101872.4

Advances 98883.0 125830.6 159982.7 194078.2 237000.5

Fixed assets 1751.0 2167.1 2214.9 2921.8 3002.8

Other Assets 6356.8 5955.1 14601.1 14472.5 19328.1

Total Assets 183270.8 222458.6 277352.6 335034.6 405673.3


Ratios FY09A FY10A FY11A FY12E FY13E

Some balance sheet ratios (%)

Credit to deposit 69.2 75.2 76.7 76.5 76.5

CASA 44.4 52.0 52.7 52.0 52.0

Investment to deposit 41.2 35.0 34.0 33.7 32.9

Gsec to total investment 88.7 87.1 75.6 85.7 77.9



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Growth Numbers FY09A FY10A FY11A FY12E FY13E

Growth (%)

Advances 55.9 27.3 27.1 21.3 22.1

Deposits 41.7 17.2 24.6 21.6 22.1

Networth 27.4 46.9 17.9 14.8 16.3

Investments 19.1 -0.4 21.0 20.7 19.0

Borrowings 99.4 40.9 11.4 33.3 13.3

Interest income 61.5 -1.0 23.2 25.1 20.6

Interest expense 82.3 -12.6 20.5 29.0 19.4

Total income 58.3 2.7 20.4 23.3 21.1

NII 42.0 13.0 25.7 21.8 21.7

APAT 41.2 31.3 33.2 23.3 26.2



NPA and CAR (%)

Gross NPA (Rs cr) 1988.1 1816.8 1694.3 2006.5 2390.5

Net NPA (Rs cr) 627.6 392.1 296.4 361.2 430.3

GNPA (%) 2.0 1.4 1.1 1.0 1.0

NNPA (%) 0.6 0.3 0.2 0.2 0.2

CAR 15.1 17.4 16.2 15.8 15.3

CAR 1 10.2 13.3 12.2 11.6 11.2

PCR 68.4 78.4 82.5 82.0 82.0



Yields / profitability (%)

Yield on advance 15.0 10.8 10.6 11.1 10.9

Cost of deposit 6.6 4.5 4.3 4.5 4.4

Yield on investments 7.4 6.8 7.2 6.5 6.6

Yield on average earning assets 10.7 8.2 8.3 8.6 8.5

Interest cost on avg. int. bearing liab. 6.9 4.7 4.7 4.9 4.8

Interest expense to interest income 54.6 48.1 47.1 48.5 48.0

NIM 4.9 4.3 4.4 4.4 4.4

PAT to total income 11.4 14.6 16.2 16.2 16.9

ROA 1.4 1.5 1.6 1.6 1.6

RONW 17.2 16.3 16.7 17.8 19.4


Ratios FY09A FY10A FY11A FY12E FY13EValuation ratios

Book value per share (Rs) 68.9 94.0 109.1 124.7 145.0

Adjusted book value per share (Rs) 65.9 92.3 107.8 123.2 143.2

EPS (Rs) 10.6 12.9 16.9 20.7 26.1

P/B (x) 2.8 4.1 4.4 3.9 3.3

P/ABV (x) 3.0 4.2 4.5 3.9 3.4

P/E (x) 18.4 30.0 28.7 23.4 18.5



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