Analyst Corner

Maintain ‘buy’ on HDFC Bank, raise target price to R1,370

A key question for many investors is whether HDFC Bank can deliver 20% growth in a slower growth environment. We believe market share gain and lower cost ratios could enable a 20% EPS CAGR over the next 3 years. Over the past 2 years, the bank aggressively invested in branches, people and digitisation, and diversified its loan book. Incremental market share growth is 15% and improving, against 6% current market share. Slight NIM deterioration could be offset by lower cost: we expect 1.9-2% RoA and 20% RoE. Valuation is rich at 17x FY18E P/E and 3x P/B, but growth is likely to remain steady and strong. We roll forward to FY18E and raise TP to Rs 1,370.

HDFC Bank is in investment mode and has created enough tailwind to grow over the next few years, in our view. Over the past two years, it has added 33% to its branch network, 28% to the employee base, invested in digital, and been aggressive on the corporate side. All of these should lead to strong growth. A key measure has been CASA deposits: despite a strong base and the fact that it pays just 4% vs peers 6%, they continued growing at 20% in FY16. Similarly, in retail, growth momentum remains strong, with new products like the 10-second loan and ZipDrive gaining traction among customers.

Over the next 3 years, we expect a slight shift in the loan book towards mortgages and corporate loans.