Amid tepid quarterly growth and withheld guidance, HDFC Bank may emerge as a contrarian choice for investors seeking long-term value
Photograph: Shailesh Andrade/Reuters
HDFC Bank’s January-March quarter result, which came in-line with expectations, failed to enthuse investors.
The reason? The management’s decision to abstain from providing any specific growth guidance, and analysts’ expectations of an arduous road to recovery.
Analysts believe the path to normalisation of several growth metrics is unlikely to be a straightforward one, and the road to balance sheet realignment may be long.
“While the bank is taking the right steps on slowing down loan growth and shifting focus on improving net interest margin (NIM), the management has alluded that the performance in the next few quarters is likely to be volatile.
“That apart, HDFC Bank has avoided providing timelines or guidance of future performance,” highlighted analysts at Kotak Institutional Equities.
The brokerage said it would avoid extrapolating the current quarter growth to future as ‘many quarters could see expectations running ahead of execution,’ especially on the two key variables, i.e., deposits and NIM progression.
On April 20, HDFC Bank reported net profit of Rs 16,512 crore, up 37 per cent year-on-year, but barely 1 per cent quarter-on-quarter.
Its net interest income of Rs 29,080 crore grew 24 per cent Y-o-Y and 2 per cent Q-o-Q.
Both the numbers were flat on a Y-o-Y basis on a pro-forma merged base estimate of Q4FY23.
That apart, NIM improved marginally by 4 bps Q-o-Q as interest expenses increased by 1 per cent Q-o-Q.
The deposits grew at 7.5 per cent Q-o-Q to Rs 23.8 trillion, where the retail deposits improved 6.9 per cent Q-o-Q while wholesale deposits saw a growth of 10.9 per cent Q-o-Q.
Advances, however, increased by 1.6 per cent sequentially to Rs 24.8 trillion, with a healthy momentum in retail loans (up 3.5 per cent Q-o-Q) and weak corporate lending (down 2.2 per cent Q-o-Q) due to unfavourable pricing.
“The quarter saw improvement in loan-deposit ratio (LDR), liquidity coverage ratio (LCR), and NIMs, which is positive. But some of these were on account of seasonal factors/ end-of-the-quarter flow; hence, sustenance of these performances would be the key to stronger re-rating,” said those at Antique Stock Broking.
Investment Strategy
As an investment strategy, most brokerages say they will wait for the bank’s performance in the second half of the current financial year (H2FY25) to see if there is any meaningful improvement in the core performance of the bank.
Kotak Institutional Equities, for instance, has maintained its ‘Buy’ rating on the stock with an unchanged target price of Rs 1,750, valuing the stock at 2.3X book and Rs 15X FY2026 EPS for RoEs at 16 per cent levels and 15 per cent CAGR (adjusted for merger).
“While the bank’s medium-to-long term outlook looks extremely comfortable, the risk reward is still not compelling on a relative basis, even as it trades at a discount to ICICI Bank.
“We would prefer for a wider discount to make room for any disappointment in execution,” they said.
Elara Securities, too, added that the stock price of HDFC Bank lacks positive triggers for the near-term, and believes the stock price may continue to see near-term time correction till investors find merit in execution.
“Q4FY24 was in-line after two soft quarters, which is comforting.
“We cut earnings per share (EPS) by 2 per cent and 3 per cent for FY25E and FY26, respectively, but arrive at a slightly higher target price of Rs 1760 from Rs 1,735 earlier.
“While we see long-term franchise value, we believe HDFC Bank price performance in the short-term shall be driven by the consistency of quarterly earnings.
“With LDR above 100 per cent, we reckon volatility in quarterly earnings shall persist for some time,” reasoned analysts at Nuvama Institutional Equities.
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