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Why HDFC Bank Must Trade at High P/E Like Consumer Stocks ?

March 18, 2014

HDFC Bank is India’s Global private sector bank. We have been BUYERS of the Bank at all levels over the past 12 months. We’d like to justify the top 10 reasons on why HDFC Bank must Trade at a High P/E of 20+ like consumer stock [even though ITC and HUL trade at much higher P/E of 30].

1. The first factor in Equity Analysis which we look at is the Quality of Management. HDFC Banks gets a full 10/10 as it has the best professional management which leads to innovative products being offered.
2. Second Lowest Non Performing Assets in the Indian Banking Industry [due to high quality processes in place] with enviable Mega balance Sheet. [Yes Bank has the lowest but is a small to midcap stock]
3. It has consistent track record of earnings growth [30% CAGR in Last 3 years] without any manipulations in books of accounts [Guaranteed].
4. HDFC Bank was the first to focus on CASA and the rest of the herd mentality in the Indian Banking space have adopted which leads to higher margins for the bank.
5. Have a look at the Table below on the Distribution of Loan Portfolio of the Bank,
HDFC Bank Loan Portfolio
Retail Consumer Lending still constitutes a whopping 56% of the Bank’s Expanded Loan Portfolio. This means there is heavy collection every day from retail customers just like how FMCG Goods are sold at Cash over the counter. Retail Borrowers are under the Obligation of CIBIL and other Credit Bureaus which makes them behave responsibly with the credit they have borrowed thus the low level of NPAs of the Bank.
6. As the Bank grows in Size, Retail lending should have come down drastically, but that is not the case implying new customer acquisition by Organic Growth into Tier-III Cities and Smaller Towns of India.
7. HDFC Bank is expected to report a Net Profit of Rs 10,000 Crore in March-2015 and Rs 12,600 Crore in March-2016 thus maintaining the growth momentum
8. New Banking Licenses – It is no joke to establish a Bank from scratch and operate the same under the hawk eyed regulations of the RBI in India today. Even Mukesh Ambani opted for Partnerships with competitors as he knows the ground realities of business are tough. In our opinion, it is a myth that new banking licensees in 2014 will dent the bottom line of HDFC Bank [Sure, their will be some employee attrition]
9. ITC and HDFC Bank are traded at 30 and 22 P/E on Trailing Twelve month EPS respectively. ITC is a diversified company now from Cigarettes to Apparels and yet trades at such a high P/E when its growth is tapering down.
10. HDFC Bank in our view should be viewed like any other consumer Stock with highest quality of innovative management as it does brisk business with Indian Retail Borrowers at very low risk of defaults & thus should be VALUED AS A CONSUMER STOCK.

We expect an EPS of Rs 45 for FY 2015 and at a P/E of 20 the stock must hit our target price of Rs 900 in the next 12 months 🙂

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