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ICICI Direct Report
Investment Rationale
Strengthening of distribution capabilities to enable future growth: HDFC Bank Ltd. has been aggressive in strengthening its distribution capabilities across channels with continued focus on semi urban and rural areas. Branch count has increased from 6342 in March 2022 to 7860 in June 2023 in-line with strategy to double branch in FY22-25E.
Such expansion is expected to keep opex elevated, though is expected to enable garnering of liabilities. Thus, credit-deposit ratio at ~110% (post-merger) is expected to normalize at 85- 88%, in next three-four years.
Steady operational performance to regain normalised RoA:
On proforma basis, HDFC Bank, post-merger, has reported 13% growth in advances, however, management seemed confident of revival in credit off-take to 17-18% in FY24, as non-individual book run down recedes.
Liabilities accretion to bring CD ratio from more than 100% (post-merger) to normalised level of ~85% remains in focus. Margins (post-merger) are expected to moderate in near term at 3.8-3.9%, however, decline in cost-to-income ratio (expected at 34-35%) and moderation in credit cost (given substantial increase in home loan book) is expected to result in steady return on asset at 1.8-1.9% in FY24-25E.
Merger to result in near term volatility; integration benefit to accrue gradually: Merger of HDFC Bank and Housing Development Finance Corporation Ltd has led to accretion of Rs 6 lakh crore of asset base and Rs 6.4 lakh crore of liabilities.
Management remains confident of integration benefit with substantial cross selling opportunities, thus, expecting merged entity to grow at 17-18% in FY24E (with receding of non-individual book from parent).
Rating and Target price
Historically, HDFC Bank has delivered consistent strong business growth coupled with superior return ratios. Post merger, integration and accretion of liabilities remain the focus area.
Management is confident of pedalling growth to 17-18% with steady return ratio at 1.8-1.9% in FY24-25E, though we expect some volatility in near term.
Valuing the merged entity on SOTP basis assigning 2.5 times FY25E adjusted book value for lending business (merged basis) and Rs 144 for subsidiaries arriving at a target of Rs 2050 per share.
Maintain 'Buy' rating on the stock.
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