The world's fourth largest bank by market value is likely to grow at 18% annually over the next four years, according to analysts who scrutinised the assimilation of Housing Development Finance Corp. with HDFC Bank Ltd.
The above assessment stems from HDFC Bank's Managing Director Sashidhar Jagdishan's comment in a letter addressed to the employees: “We could be creating a new HDFC Bank every four years."
Here's What Analysts Have To Say About It:
This means the bank is targeting a growth rate of 18%, according to Dipan Mehta, founding director at Elixir Equities. Theoretically, he feels that this will be possible for the combined entity as the GDP in India is at a nominal rate while the other market prices are growing in 10-12% range, and since bank credit grows 1.5 times the GDP rate, HDFC Bank will grow faster than some PSU banks and other smaller banks, he said.
Concurs Bunty Chawla, assistant vice president - BFSI at IDBI Capital Market. The bank is aiming for a growth rate of 20%, according to him. “It is possible because looking at the history of HDFC Bank, they have grown from FY13-FY23 at a 20% CAGR on the asset side. Now, post the merger with the opportunities of cross-selling, it is possible for the company to double their balance sheet,” he said.
Re-Rating Possibilities
There is a common consensus of a possible opportunity of re-rating of the merged entity, analysts told BQ Prime.
If the company does grow at the mentioned 18% rate, then there is scope to rerate the price-to-earnings and price-to-book multiples on the higher side, Mehta said. He also mentioned good demand from overseas investors, and concerns about adjustments in the weightages of the company in all the indices being dealt with, as additional factors that would lead to the re-rating.
“As the merger was announced, there has been a slight decline in the valuation,” Chawla said. "re-rating is on the cards,” he said, once the company shows its second and third quarter numbers. The market will get confidence in the post-merger entity and the re-rating will continue, he said.
The major competitive advantage that Mehta sees for the merged HDFC Bank is the super-cycle getting built on the capex side and the increased number of companies heading towards expansion. “Their requirement for working capital and actual asset purchases will go up, and these are big ticket lending assignments, which only a large bank like HDFC Bank can take the risk of, evaluate and then lend to,” he said.
While IDBI Capital's Chawla sees margin impacted due to the merger and the same would be visible in FY24. Margins may dip by around 15-20 basis points, which would be compensated for later on, he said. “Operating leverage and credit cost will be the key triggers in terms of positivity which will compensate for the margin pressure,” he said.
Home loan portfolio of the merged entity will be higher in terms of 30-31%, Chawla said, which had not been the case previously. The merged bank's earnings per share may grow at 14-15% in the current fiscal on the FY23 base and 18-25% from FY25, he said.
“We are positive on the stock and have a buy rating on it,” Chawla said, with the target price set at Rs 2,070 apiece on the merged entity.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.