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Overweight on HDFC Bank – HSBC + Deutsche

February 27, 2008

With the mega merger of HDFC Bank [HDBK] and Centurion Bank of Punjab, HSBC Equity research & Deutsche have maintained a BUY on HDFC Bank.

The share swap ratio of 1:29 translates into a 10% dilution on an expanded capital base of 361 million shares (of the merged entity) and values CBoP at INR9.97bn. Post merger, HDBK’s loan book will be bigger by 20%, its branch network larger by 52% and its employee base higher by 35%. Apart from having a pan India presence, the branch network of CboP should give HDBK a strong regional flavour, with more than 150 branches in Punjab and the northern belt of the country alone.

HSBC expects the new entity to report an EPS of Rs 62.96 while Deutsche Bank pegs it at Rs 56.00 for FY2009. HSBC has followed 10 years of semi-explicit forecasts, assuming 25% loan CAGR and 25.0% dividend payout. HSBC has set a target price of Rs 1,800 and Deutsche has set a Target price of Rs 2,300 on an EPS of Rs 76.00 for FY 2010.

We feel that HSBC estimates are slightly higher and hence existing investors can HOLD on and any big fresh exposure can be considered only on corrections or after a clear picture emerges.

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