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  • Stock Recommendation | HDFC Bank - ADD - Target price : 2,100

    Publish date: OCTOBER 08, 2018

    A window of opportunity to enter re-emerges. We upgrade HDFC Bank to ADD from REDUCE with a TP of ₹2,100 (from ₹2,000 earlier) as we roll forward our estimates to September 2020. The recent stock price weakness, post the capital raising exercise, provides a window to re-enter the stock. Near-term NIM/NII growth performance (unadjusted for capital infusion) is likely to be weak though loan growth would be better-than-expected. Management change is a key medium-term risk.

    We upgrade HDFC Bank to ADD from REDUCE earlier. The stock price has declined post the capital issuance by ~10% resulting in marginal underperformance in recent months. We roll forward our estimates to September 2020 with a revised TP of ₹2100 which implies 3.3X book and 20X earnings for RoEs in the range of 16-17% in the medium term and ~20% earnings growth. Superior growth and profitability metrics, solid execution of strategy, strong balance sheet strength gives comfort in these volatile times in the money market.


    Some of the key concerns that we have highlighted in the recent past continue: (1) share of unsecured loans continues to rise and our estimates suggest its contribution to profits has been rising steadily, (2) despite rising risks, NIM declined in the retail sector suggesting that the pressure in other business has been much higher as the bank has a high share of fixed rate loans in the retail business. Incremental growth in loans is outpacing the growth in retail deposits which could put pressure on near-time trajectory of NIM (unadjusted for capital infusion), (3) capital consumption in FY2018 has been a bit faster as compared to loan growth which probably reflects the shift in loan mix, (4) gross NPLs in the auto and unsecured business are growing faster than loan growth in the past few years while there is an improvement in business banking. While it is currently not too worrying but clearly the direction is not the most comforting either. Early warning indicators are broadly stable across most segments.


    Over the past month, we have seen an increase in the discussion on the successor to Mr Aditya Puri especially after the announcement of the exit of Mr Paresh Sukhthankar. However, HDFC Bank has arguably one of the best bench strengths which should be comforting. At the leadership level, the team was strengthened to 25 from 15 in 2016. With Mr Puri leaving in the next two years and an external candidate filling his shoes, as it now appears, it would not be too surprising if there are further changes in the team in the next few years. Note that all private banks are in a similar state regarding senior management changes as these organizations are now over 20 years old.


    Definitions of ratings

    BUY - We expect this stock to deliver more than 15% returns over the next 12 months.
    ADD - We expect this stock to deliver 5-15% returns over the next 12 months.
    REDUCE - We expect this stock to deliver -5-+5% returns over the next 12 months.
    SELL - We expect this stock to deliver

    Our target prices are also on a 12-month horizon basis.


    Other definitions

    Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.


    Other ratings/identifiers

    NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
    CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
    NC = Not Covered. Kotak Securities does not cover this company.
    RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
    NM = Not Meaningful. The information is not meaningful and is therefore excluded.


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