Published on 29/10/2020 11:33:57 AM | Source: Emkay Global Financial Services Ltd

Buy HDFC Bank Ltd For Target Rs.1.300 - Emkay Global

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Transforming into techno-bank; sustaining management premium to be key

* HDFCB has built a strong retail-cum-corporate bank with market share gain across businesses, which the designate MD intends to strengthen by focusing on techno-banking, capturing B2B/B2C ecosystem and gaining market share at a pace faster than the past.

* The retail business is now at 80% of the pre-Covid level and should benefit from its strong rurban presence with agri doing well. The bank has a high share of the corporate book built around working capital and >AA corporates, where the deal pipeline is also building up well. The bank is well-capitalized, courtesy of higher internal returns v/s RWA growth.

* Retail collection efficiency is ~80-90% across products. The bank believes that NPAs may not cross the peak seen post-GFC at 2% (2010). Reducing cost ratios and better operating level should continue to support superior RoAs of 1.8-2%.

* We retain Buy/OW stance in EAP with a TP of Rs1,300 (based on 2.8x core bank Sep P/ABV + Subs value of Rs53), given its strong stress management capability and superior return ratios. Amid a spate of recent management churn and events, new top management will have an uphill task maintaining its historic management premium.


Stepped-up techno-banking platform to accelerate market share gain:

The bank has doubled its customer base to ~56mn over five years and targets 80-90mn customers (with focus on mid/upper income segment) in 2-3 years backed by strong digital capabilities. Its virtual RM platform has done well during the pandemic and plans to introduce new technology platforms, including Stack (One stop shop for all products/services) and Customer One View, which should improve customer experience/acquisition, cross-selling and accelerate market share gains. Cost ratios have improved to low 40s from high 40s, which should gradually move toward mid-30s, led by the next level of techno-banking and better returns from its rurban investments.


Growth trends picking up, though BAU still some time away:

The bank has been clocking much superior credit growth (>19-20% yoy) than the system led by high corporate growth and thus leading to a high corporate loan share of ~53% (Q1FY21). This has been on the back of capturing wallet share in captive, highly-rated corporates and gaining market share from weak competition. With elongated working capital cycle even in good corporates, we believe that HDFCB should post better corporate growth. The retail business is at 80% of the pre-Covid level and the bank should benefit from the festive season with possibly BAU by the year end.


Collection efficiency improving; restructuring to be in low single digit:

Retail collection efficiency across products is ~80-90%, up from 65-70% in Q1. The bank believes that NPAs may not cross the peak seen post GFC at 2% (2010), though we prefer to remain little cautious amid Covid-19. The bank has higher exposure to the trader segment, where disruption is high. However, the overall restructuring rate will be lower (around low single digits) for HDFCB, given its practice of recognizing stress upfront and low share of the mortgage book.


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