HDFC Bank: Analysts see up to 29% upside for 'almost pandemic-proof' stock

HDFC Bank: Analysts see up to 29% upside for ‘almost pandemic-proof’ stock

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Calling HDFC Bank as “almost pandemic-proof”, analysts have upped their targets on the stock after the bank reported steady numbers in its second quarter results. A strong commentary by the bank management on business moratorium and improving asset quality even suggests that it is emerging stronger post the lockdown.
Lower credit cost, a rebound in fee income and higher investment profit were some of the key highlights for the quarter, which offset some disappointment over net interest margins (NIMs).

Morgan Stanley has upped the target on the stock to Rs 1,550 from Rs 1,450, while Macquarie has increased its target to Rs 1,489 from Rs 1,219. CLSA increased its target to Rs 1,525 from Rs 1,450. Edelweiss’ target on the stock is now at Rs 1,490 from Rs 1,335 earlier. ICICI Securities’ target too has risen to Rs 1,493 from Rs 1,470 earlier, Axis Securities’ to Rs 1,450 from Rs 1,350, Phillip Capital’s to Rs 1,380 from Rs 1,260 and Kotak’s to Rs 1,300 from Rs 1,200. The targets suggest up to 29 per cent upside over Friday’s close.

On Monday, the scrip was trading 0.9 per cent higher at Rs 1,210 on BSE.

Q2 results
HDFC Bank reported 18.4 per cent year-on-year rise in standalone net profit at Rs 7,513.10 crore for the September quarter compared with a profit of Rs 6,344.99 crore in the year ago quarter. Analysts at an ET NOW poll had projected profit at Rs 6,445 crore.

Net interest income (NII), which is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors, rose 16.7 per cent to Rs 15,776.40 crore from Rs 13,515 crore in the year-ago quarter.

The bank made provisions and contingencies amounting to Rs 3,703.50 crore for the September quarter which were lower than June quarter’s Rs 3,891.52 crore, but higher than year-ago’s Rs 2,700 crore.

Even if the bank were to account for classified borrower accounts as NPAs after August 31 and also adopt an early recognition of NPA using analytical models, the gross NPA would have been 1.38 per cent for September quarter compared with 1.36 per cent in the June quarter and 1.38 per cent in the September quarter of last year.

Since those accounts were not included, the bank reported a lesser gross NPA of 1.08 per cent for the September quarter. Net interest margin (NIM) came in at 4.1 per cent, which was a bit lower than 4.3 per cent each in June and 4.2 per cent in the year-ago quarter.

Management commentary
The bank said that its retail collections stood at 95 per cent in September and is expected to reach 97 per cent by

October-end.

In the pre-Covid period, retail collections stood at 99 per cent of the business. The non-moratorium portion of the bank’s business has already reached that level.

The bank is cautious on MFI space but expects a full recovery in 90 days, but analysts noted that the rural demand is showing robust recovery and two-wheeler and tractor sales are high.

In case of wholesale credit growth, around 75 per cent of the bank’s externally-rated disbursals are in AAA or AA rating category and 93 per cent towards AAA-A rated companies.

Meanwhile, as Prabhudas Lilladher reported, the bank gave limited clarity on potential restructuring, but mentioned that it could be much lower than anticipated due to a strong customer profile and importantly collections efficiency. “In last quarterly call, bank had indicated 9 per cent of the SME book could be under stress has now come down to 3-4 per cent, while corporate book remains quite strong, which leaves lower vulnerability,” the brokerage said.

What analysts say
CLSA said was that HDFC Bank’s second quarter results were strong but the management commentary was even stronger, underscoring the quality of is underwriting even at its current scale and market share. It noted that the SME book of the bank is just 3-5 per cent of loans compared with 9 per cent as of April.

Calling it ‘almost pandemic-proof’, CLSA increased its earnings estimates by 3-5 per cent for FY22-23, driven by higher pre-provision operating profit (PPoP) and lower credit cost.

Overall, 21 brokers have a buy rating on the stock, 20 have outperform rating against two ‘hold’ and one ‘underperform’ call. None of the brokerages have a sell rating on the private bank, publicly available data with Reuters suggested.

ICICI Securities said HDFC Bank is best positioned to rebound quicker. “We revise earnings up by 15 per cent for FY21E factoring-in lower credit cost,” the company said while giving a target of Rs 1,493 on the stock.

YES Securities, which has a target of Rs 1,500 on the stock, expects loan growth to not decelerate materially in the second half of FY21, aided by the bank’s festive treats campaign and acceleration in economic activity.

“Similarly, NIM seems to have made a trough and should recover gradually from hereon. Basis encouraging collection efficiency trends and management’s expectation of full normalization in a few months, the credit cost may not spike as feared earlier,” it said.

Valuations
YES Securities said that the bank’s valuation should mean revert over the medium term. At present, the 1-year rolling price to adjusted book value stands at 3.2 times compared with average valuation of 3.5 times since April 2015.

Emkay said its target of Rs 1,500 values the core bank at a high multiple of 3.2 times. It gives bank subsidiaries a value of Rs 57. Nirmal Bang values the bank at 3.2 times based on H1FY23 P/BV. This brokerage has a target of Rs 1,484 on the stock.

Credit: Stocks-Markets-Economic Times

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