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HDFC Bank is one of India's leading private banks and was among the first to receive approval from the Reserve Bank of India (RBI) to set up a private sector bank in 1994. HDFC Bank Limited incorporated in Mumbai, India is a publicly held banking company engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations.

Investment Rationale

* Dominant Market Position: HDFC Bank, India’s leading private sector bank continues to deliver consistent growth and operational performance across cycles. It has a strong hold on maintaining net interest margins (NIM), operating expenses as well as asset quality thus resulting in superior return ratios. The bank has demonstrated strong operational performance even during a challenging year like in FY22 which was plagued by Covid-19 related restrictions and exited the year with strong RoA/RoE of 1.9%/16.5%. The merger between bank and HDFC Ltd is expected to aid in cement its market position.

* Robust CASA Flows Entails Healthy Margins: HDFC Bank’s Low cost deposit mobilization is expected to remain at a healthy pace, led by branch expansion strategy. The bank has maintained its CASA ratio consistently above 45% and the share of retail deposits in total deposits remains above 80%. Despite increasing competition and attractive rates offered by mid and small per banks, HDFC Bank has been able to maintain its market share. Higher composition of saving assets to aid in improving Net interest margins (NIM).

* Trades at Significant Discount to Historical PB(x) Median: HDFC Bank has reported robust performance in H1FY23 in terms of Net interest margins and improving assets quality. HDFC bank trades at Forwards PB of 2.6(x) which is at –40% discount to its 10 Yr historical PB median of 4.4. We believe robust credit growth along with strog performance trackrecord offers attractive entry at this price. Further, Merger developments of HDFCLTD and HDFC BANK Ltd are expected to result in one the largest financial firms in India, and makes HDFC Ltd a possible rerating candidate.

* Outlook and Valuations: We estimate a 15.8% CAGR in Net Interest Income for bank over FY22-25E, which implies a forward PB (x) of 2.6 based on FY 25E book value. We value it with a price to book multiple of 3x to FY25E book value which results per share value of Rs 3217. We recommend BUY on HDFCBANK at CMP of Rs. 1611 with Target price of Rs. 1867 (16%).

Technical View

* HDFCBANK is sustaining well above its 13 Week SMA indicating positive undertone of the stock.

* The stock has given an Inverted Head & Shoulder pattern breakout on the daily charts.

* Also the stock is moving in a upward slopping channel pattern after the breakout.

* The RSI plotted on the weekly and the daily time frame can be seen placed above the 60 and 50 mark respectively indicating existence of the bullish momentum in the prices.

* One can accumulate the stock at current level and also average it at lower levels around 1540 levels.

* Going ahead we can expect the prices to move higher towards 1764 followed by 1881.

* The stop loss for the setup would be 1480 on closing basis.

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