CoValue Markets

HDFC Bank: 8th Wonder of the World

hdfc bank covalue

Optimizing the compounding effect, the Mega-bank will continue to lead!

HDFC Bank Ltd. is an Indian Banking and Financial Services company headquartered in Mumbai, Maharashtra. India’s largest private sector lender by Assets – HDFC Bank has 5103 branches spread across 2748 cities in the country. HDFC Bank is a new-generation Private Sector Bank providing a wide range of banking services covering commercial, investment banking, and treasury services on the wholesale side and transactional/branch banking and consumer banking on the retail side. The Bank owns two subsidiaries namely HDFC Securities Ltd and HDB Financial Services Ltd.

The Market Capitalization of the Bank is INR 7 Trillion (As on 17th January 2020). HDFC Bank reported Net income of INR 22,332 Crores for FY 2019 with Y-O-Y growth of about 20.65%. For Q3 FY2020, it has reported Net Income of INR 7,659 Crores as compared to INR 5900 Crores for Q3 FY2019 with a growth of 29.80%. The PBT in Q3 grey YOY by 15.6%. The Gross and Net NPA for the quarter stood at 1.42% and 0.48% (% of Total Advances). The Advances Book grew by 19.18% Y-O-Y. The Net Interest Margin was about 4.3% for the Quarter

Leveraging the Power of Compounding

The Power of compounding works astoundingly well with rock-solid businesses, so is the case with HDFC Bank. During the last 20 years, HDFC Bank’s Earnings Per Share (EPS) has compounded by 32.4%. Compounding for 5 years period from 1999 to 2004 was 44%, and that during 2004-2009 was 34%. The bank ‘s EPS compounded by 31% for the next 5 years until 2014 and 20.6% in the last five years. HDFC Bank, over the years, has continued to compound its earnings efficiently and expected to continue doing the same in the future. The rate of compounding may lower down.

The Future corpus of compounding 

  • India is an underpenetrated banking market. As Infrastructure and Technology development gains pace, Indian geographies are coming closer, thereby amplifying opportunities for penetration in the rural and semi-urban regions of the country. The recent loan outreach programs underway in rural areas are turning HDFC Bank’s consumption in rural areas positive. In FY2020, the rural and semi-urban sector i.e. almost half of India’s output got 48% of the Bank’s Total Loans.
  • CEO Aditya Puri notes, “India Buland Hai” as he expects a growth opportunity of INR 20 Trillion in the underdeveloped Indian Regions. India’s growing needs for Consumer Finance, MSME and Agricultural Loans demand the presence of a concrete banking structure across the country, therefore, creating huge opportunities for business expansion for market leaders like HDFC Bank. 
  • The public sector, NBFCs, and Co-operative banks in India are in bad shape today. A structural asset-liability mismatch, delay in recognition and management of NPAs, fraud, and absence of stringent corporate governance, etc. are jeopardizing Indian Banking space. This lessens the competitive pressure and assists Private Sector players including HDFC Bank, to take over the Indian banking industry.
  • Investing in technological growth and transforming the banking ecosystem in India exhaustively, HDFC Bank has pioneered in the era of digital banking and earned itself the title of ‘Best Digital Bank’. Banking on Artificial Intelligence, the company has taken efficiency to a new level. 

HDFC Bank is, thus expected, to tap into these opportunities and compound further. One can expect compounding of 20% during the next 1-5 years and around 16% during the next 5-10 years. 

Based on the above narrative, the following inputs for the Valuation based on Discounted Future Earnings in the What’s Your P/E Module have been considered. The last trading price was INR 1,278 on 17th January 2020, when this valuation was undertaken. 

Input Assumptions for Valuation for HDFC Bank:

  • Forecast Period is taken as 10 years.
  • Earnings Growth in Nominal Terms is assumed at a 20% CAGR for 1-5 Years, and about 16% for 6 – 10 Years. 
  • Inflation is assumed at 7.35% as per December 2019 reported figures.
  • The Cost of Equity is taken as 13.79%. (Expected Market Returns 14.59, Risk-Free Rate 6.62 & Beta 0.9).

Valuation – Discounted Earnings Growth Model The Valuation of HDFC Bank has been computed based on the above assumptions using the Discounted Earnings Model. For Detailed Reports, Assumptions and In-Depth Valuation import the Valuation from CoValue App. The User must view the P/E Report (Valuation Report) to get a better insight and perspective. The Estimated Future Value Per Share is also mentioned in the Valuation Report.

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About the author

Sayli Patil

Sayli Patil

Sayli Patil is a Chartered Accountant and a Certified Research Analyst.
She holds keen interest in Corporate Valuation.

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