Diwali Picks 2024 : HDFC Bank Ltd For Target Rs.1940.0 By Way2Wealth
* HDFC Bank Ltd. (HDFCB) post merger with HDFC Ltd. is going through significant transition to emerge as the second largest lender in India. With merger related fixed costs largely absorbed, the bank is focusing on unlocking synergistic opportunities over next few quarters.
* Management aims to bring down its Loan-to-Deposit ratio as rapidly as possible to work towards accelerating loan growth momentum. In Q2FY25, gross advances grew at ~7.0% YoY to Rs.24,951bn, while deposits witnessed 15% YoY growth to Rs.25,001bn. Over next three years, bank’s focus would be on taking the loan book growth rate from below industry average in FY25 to above industry average in FY27.
* Post the merger, management has been mindful of the HDFC Ltd.’s high interest bearing debentures. It believes, Rs.600bn worth of these high-cost borrowings to get expired in FY25 and likely to get replaced by HDFCB’s deposits which would provide lender with the cushioning necessary against tight liquidity situations or high interest rate cycle.
* On account of robust underwriting models developed over the years, asset quality of the bank remained largely stable post merger. In Q2FY25, asset quality remained broadly under control and was aided by contingent provision release related to AIF provisions. Although bank’s portfolio is skewed towards retail segment, management remains cautious on unsecured lending, closely tracking asset quality trends.
* HDB Financial Services Ltd., the NBFC arm of HDFCB, which was declared as systematically important entity has received in-principle approval from the Board of Directors for primary listing. While the total size of the IPO is expected to be ~Rs.120bn, HDFCB is believed to offload its stake worth ~Rs.100bn while remaining ~Rs.25bn would be through issuance of fresh equity. Funds thus raised would act as capital for bank’s growth prospects.
* With merger related impact largely behind, several long term initiatives undertaken by the management would start showing results going forward. While value unlocking from synergies, loan growth pick-up, reduction in borrowing costs, improvement in NIM profile are some of fundamental key drivers, listing of HDB Financial Serv. would provide the capital cushioning. Thus, we selected HDFCB at CMP Rs.1,743.4 trading at 2.4x FY26e P/B. multiple
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