28 JANURAY 2024

EQUITY RESEARCH
KANIKA SOHIL (IIM RAIPUR)

HDFC BANK
PRICE – 1434
TARGET PRICE – 1966
52 WEEK RANGE – 1380.25-1757.5
MARKET CAP 10.9 TRILLION (in Rs.)
ENTERPRICE VALUE – 13.76 TRLLION

Investment summary, recommendation, and target

Q3 RESULTS :
Net profit rises 33% to ₹16,372 crore, NII up 24% YoY. India’s largest private sector lender
reported a growth of 33 per cent in net profit at ₹16,372 crore, compared to ₹12, 259 crore
in the year-ago period. HDFC Bank's net interest income came in at ₹28,470 crore in the
December quarter, reporting a growth of 24 per cent year-on-year. HDFC Bank share price
has gained over nine per cent in the past three months and just over 5.5 per cent in one
year. This is against Nifty 50’s 12 per cent rally in three months and more than 23 per cent
surge in one year. Meanwhile, Bank Nifty has risen over nine per cent in three months and
14.5 per cent in one year.
FY 24 GUIDANCE :
HDFC is expected to see a stable quarter on earnings. Asset quality metrics would remain
steady. The brokerage expects a 15.4% YoY growth in net interest income to Rs 4,945 crore.
It expects provisions to rise 7% YoY to Rs 420 crore. Credit cost is likely to dip to 0.27% from
0.29% a year ago, and 0.32% a quarter ago. Net interest margin will see an 8 bps
improvement YoY to 3.43%. GNPA is seen improving to 1.48% from 2.32% a year ago and
1.59% a quarter ago.
KEY RISKS AND CATALYSTS :
Key risks: Delay in the lifting of credit card suspension, tail-end asset quality risk and
management attrition.
Catalysts : Strong balance sheet and high provision buffer remain key catalysts.

PE Ratio 16.41
Forward PE 16.81
PS Ratio 9.69
PB Ratio 3.80
P/FCF Ratio 25.53
PEG Ratio 0.97
Valuation Summary

EV / Earnings 25.62
EV / Sales 11.22
EV / EBITDA 18.74
EV / EBIT 19.40
EV / FCF 29.58

Discounted Cash Flow Analysis: Our base case analysis, with cost of equity 16.75% based on
WACC for the company is 14.2%, produced an implied share price of Rs.1397.

Current Share Price: At Rs. 1434, it appears substantially overvalued relative to its peer
companies as well as to the implied intrinsic value from our discounted cash flow (DCF)
analysis. As shown above, we believe a share price closer to 1397 would be more in-line with
the median EBITDA multiples from the comps and the DCF output.

Stock performance over last year and comparison with index

Basic info about company

Wholesale Banking : The Wholesale Banking business of HDFC Bank caters to a wide range of
clients including Large Corporates, Multinational Corporations, Public Sector Enterprises,
Emerging Corporates, and Business Banking/SMEs.
Retail Banking : HDFC Bank's Retail business is dedicated to serving individuals, salaried
professionals, micro and small sized businesses such as kirana stores, Self Help Groups
(SHGs), and Non-Resident Indians (NRIs). The Bank's goal is to create and customise
products and services that meet the unique needs of this segment. Key products and
services offered include savings and current accounts, loans for personal and business
needs, credit and debit cards, digital wallets, insurance products, investment products and
remittance services. The Bank strives to provide a seamless and convenient customer
experience through digital solutions such as Mobile Banking, Net Banking, and Chatbot
support.
Treasury : The Treasury department is responsible for safeguarding the Bank's cash and
liquid assets, as well as handling its investments in securities and other market instruments.
It manages the balance sheet's liquidity and interest rate risks and ensures compliance with
statutory reserve requirements. It manages the treasury needs of customers and earns a fee
income generated from transactions customers undertake with your Bank, while managing
their foreign exchange and interest rate risks.

Info about industry in which company operates.

GROWTH :
According to the Reserve Bank of India's Handbook of Statistics on the Indian Economy
2022-23, the resource flow to India's commercial sector surged by 31% in FY23, with banks
accounting for 59% of the total, up from 46% in FY22.

According to estimates from the country’s central bank, the Reserve Bank of India (RBI), the
banking sector’s cumulative profit after tax nearly touched Rs2.4tn ($29bn) in the 2022-23
financial year (FY22-23), a healthy 38.4% above the previous financial year’s figure. Return
on assets increased to 1.1% in 2023, from a low of -0.2% in 2018. Moreover, asset quality,
which for long was a key challenge for Indian banking, is at its best in a decade. Gross non-
performing assets (GNPA) as a proportion of total advances fell to 3.9% in March, a sharp
drop from a high of 11.5% in March 2018, and is expected to moderate further.
According to data shared by the Indian finance ministry, in FY22-23 public sector banks
earned a record aggregate net profit of around Rs1.05tn, nearly three times that of their net
profits in 2013-14. Their capital adequacy was at a high 15.53%, while the GNPA ratio, which
had reached a peak of 14.6% in March 2018, fell to 4.97% in March 2023. This performance
is noteworthy because public sector banks struggled for much of the past decade under a
mountain of bad loans caused by poor risk management and aggressive lending to
corporates followed by an economic slowdown, leading to very weak earnings
Snapshot of financial and financial analysis of company

No. of MThs 12 12 %
Year Ending Mar-22* Mar-23* Change
1,359,36 1,707,54
Interest Income Rs m 25.6%
4 1
Other Income Rs m 317,590 339,121 6.8%
Interest Expense Rs m 585,843 777,799 32.8%
Net Interest Income Rs m 773,521 929,741 20.2%
Operating Expense Rs m 403,124 515,337 27.8%
Pre-provision Operating
Rs m 687,986 753,525 9.5%
Profit
Provisions & Contingencies Rs m 306,477 292,038 -4.7%
Profit before tax Rs m 508,734 614,984 20.9%
Tax Rs m 127,225 153,497 20.7%
Profit after tax Rs m 380,528 459,971 20.9%
Minority Interest Rs m -982 -1,516 -54.4%
Net Interest Margin % 4.1 4.3
Net profit margin % 28.0 26.9

KEY PERFORMANCE RATIOS

ROCE (%) 2.97 3.22

CASA (%) 44.38 48.16

Net Profit Margin (%) 27.29 28.93

Operating Profit Margin (%) 7.97 5.83

Return on Assets (%) 1.78 1.78

Return on Equity / Net worth (%) 15.74 15.39

Net Interest Margin (X) 3.52 3.48

Cost to Income (%) 38.35 41.05

 Interest Income/Total Assets (%) 6.55 6.17

Non-Interest Income/Total Assets (%) 1.26 1.42

Operating Profit/Total Assets (%) 0.52 0.36

Operating Expenses/Total Assets (%) 1.93 1.81

Interest Expenses/Total Assets (%) 3.03 2.69

Efficiency Ratios

Credit/Deposit Ratio: The bank's credit/deposit ratio deteriorated and stood at 88.3x
during FY23, from 91.2x during FY22. The credit/deposit ratio tells us how much money a
bank has raised in the form of deposits and has deployed as loans.
Debt to Equity Ratio: The bank's debt to equity ratio increased and stood at 7.42x during
FY23, from 7.23x during FY22. The debt to equity ratio of a bank tells us how much debt a
bank uses relative to its equity.

Liquidity Ratios

Capital Adequacy Ratio (CAR): HDFC BANK's capital adequacy ratio (CAR) was at 19.3% as
on 31 March 2023 as compared to 18.9% a year ago. This ratio helps measure the
financial strength of the bank or any finance company to meet their obligations using
their assets and capital.
A bank that has a good CAR has enough capital to absorb potential losses. Thus, it has
less risk of becoming insolvent and losing depositor's money.

Provision Coverage Ratio (PCR): Apart from CAR, you also need to take a look at the
bank's PCR and LCR ratios. Provisioning coverage ratio (PCR) is the percentage of funds
that a bank sets aside for covering losses due to bad debts.
So a high PCR ratio means asset quality issues are under control and the bank is not
vulnerable.

Liquidity Coverage Ratio (LCR): The LCR is designed to ensure that banks hold a sufficient
reserve of high-quality liquid assets to allow them to survive a period of significant
liquidity stress lasting 30 calendar days.
Profitability Ratios

Return on Equity (ROE): The return on equity (ROE) ratio for the bank improved and
stood at 16.0% during FY23, from 15.4% during FY22. The ROE measures the ability of a
firm to generate profits from its shareholders capital in the company.
Return on Assets (ROA): The return on asset (ROA) ratio of the bank improved and stood
at 1.82% during FY23, from 1.79% during FY22. The ROA measures how efficiently the
company uses its assets to generate earnings.
Return on Capital Employed (ROCE): The ROCE for the bank improved and stood at
15.24% during FY23, from 14.05% during FY22. The ROCE measures the ability of a bank
to generate profits from its total capital (shareholder capital plus debt capital) employed
in the bank.

NPA Ratios

Gross NPA Ratio: The gross NPA ratio is the ratio of a bank's gross NPAs to gross
advances. HDFC BANK's gross NPA ratio stood at 1.1% as of 31 March 2023 compared to
1.2% in the same period a year ago.
A high gross NPA ratio is a bad thing as it indicates how much of a
bank's loans are in danger of not being repaid.

Net NPA Ratio: In simple language, net NPAs are simply the total non-
performing assets minus the provision left aside. It gives you the exact
value of NPAs after the bank has made provisions.
The net NPA ratio of HDFC BANK was 0.3% in financial year 2023. This
compared with 0.3% a year ago.

Investment disclosure and interest statement

Commodity Price Risks and Foreign Exchange Risks and Hedging activities : Being in the
business of banking, as per the extant regulations, the Bank does not deal in any commodity,
though, it can be exposed to the commodity price risks in its capacity as lender / banker to
its customers. Currently, the Bank has open exposure in Precious Metals i.e., Gold / Silver
and such open exposures in Gold / Silver are primarily on account of positions created from
short term deposits under the Gold Monetisation Scheme (GMS) raised from Customers and
trading positions in Gold / Silver. These positions are managed similar to other foreign
exchange exposures using spot, outright forwards and swap transactions in Gold/Silver and
monitored as part of the trading portfolio within the stipulated trading risk limits viz.
During the year under review, the Bank has not raised any funds through Preferential
Allotment or Qualified Institutions Placement as specified under Regulation 32(7A) of the
SEBI Listing Regulations.