HDFC Bank Shares Rally 2% After Q2 Report Card; Brokerages Recommend Buy, 30% Upside Seen Ahead

The largest bank in India and in the private sector, HDFC Bank witnessed healthy buying on Tuesday after its Q2 results for FY24 which was broadly in line with the Street's expectations. Overall, the heavyweight stock has zoomed by nearly 2%. Although there were some HDFC merger shocks in the financial books of HDFC Bank, earnings have been steady. That is why, brokerages have recommended buying HDFC Bank shares on expectations of improvement in margins going forward.

In the early trade, HDFC Bank shares zoomed by 1.8% to hit an intraday high of Rs 1,558 on BSE before correcting.

At the time of writing, the stock traded at Rs 1,540.40 apiece, up by 0.7% on the exchange with a market cap of Rs 11,67,902.94 crore.

HDFC Bank earned a net profit of Rs 15,976 crore in the quarter under review, increasing by 50.6% YoY. While net interest income (NII) which is the difference between interest earned and expended, came in at Rs 27,385 crore in Q2FY24, recording a growth of 30.3% from Rs 27,385 crore in Q2FY23.

Brokerages like JM Financial, Motilal Oswal and Prabhudas Lilladher have recommended buying HDFC Bank shares after its Q2 results.

Talking about the Q2 performance, analysts Gaurav Jani and Anant Dumbhare at Prabhudas Lilladher said, "HDFCB saw a good quarter; NIM was 4bps higher to PLe at 3.66% and core PPoP was a 2.9% beat owing to better fees. Loan growth at 5.0% QoQ was broad-based led by CRB/agri/retail/corporate. Asset quality was stable with GNPA at 1.34% (-6bps QoQ) and controlled net slippages."

Also, Motilal Oswal in its note highlighted that HDFC Bank reported a beat on profitability owing to healthy other income and a lower tax rate, partly offset by a miss on NII due to lower NIMs. Loan growth was healthy, driven by growth in retail and continued traction in Commercial and Rural banking. Asset quality ratios took a hit due to a 22bp impact from HDFCL's non-retail portfolio; however, the bank has maintained healthy PCR at 74%. It also holds a 0.7% buffer of floating+contingent provision, which provides comfort.

Going ahead, while net interest margin (NIM) was affected (-37bps QoQ) by surplus liquidity, Prabhudas Lilladher's analysts believe margins have bottomed out as excess cash has already been drawn down which should normalize NIM in H2FY24E.

The duo added, "as high-cost liabilities of HDFCL are replaced, NIM should enhance over FY24-26E from 3.57% to 3.72%. Due to higher fees/lower taxes, we raise FY24E core PAT by ~3%, although FY25/26E earnings remain unchanged."

With core RoA of 1.74% and likely core PAT CAGR of ~19% over FY24-26E, the analysts said, "HDFCB remains our preferred pick among large-caps. We maintain multiple at 2.8x on Sep'25E core ABV and TP at Rs2,025. Retain 'BUY'."

From the current intraday high, HDFC Bank has a potential of nearly 30% upside taking into consideration Prabhuda's target price.

Also, Motilal's note said, " HDFCB has made a good beginning and given a huge pace of capacity building, we believe that there are levers in place to sustain this momentum in business growth. Margins are likely to recover gradually, which, along with improved operating leverage should improve return ratios. We estimate HDFCB to deliver a CAGR of 18%/20% in loans/deposits and a 21% CAGR in earnings over FY24-26, translating into RoA/RoE of 2%/17.4% by FY26E. We reiterate our BUY rating with an unchanged TP of Rs 1,950 (2.7x FY25E ABV + Rs 209 for subs)."

Further, on the valuation, JM Financial's note said, "We believe that current valuations adequately capture the merger-related pangs and should alleviate concerns regarding the compression of RoAs over the medium-term. We project RoAs of 1.9% over FY24/25 on a merged basis. As HDFC Bank's liabilities momentum sustains, we expect the stock revert its recent underperformance and believe current valuations offer attractive risk-reward for a high quality, diversified asset franchise with superior through-cycle asset quality performance."

JM also highlighted that HDFC Bank has underperformed BANKNIFTY by 6%/14%/5%/20% over the last 3m/6m/12m/2yr and now trades at 2.0x FY25E core P/B.

It added, "We believe a) sustained healthy growth momentum, b) improvement in profitability metrics with a revival in NIMs and c) robust asset quality should aid in the reversal of this underperformance. Our target price of Rs 1,850 values HDFC Bank at 2.5x FY25E P/BV with Rs 180 for subsidiaries value. Maintain BUY."

Year-to-date, HDFC Bank shares have dipped over 5.4% as of now on BSE. Hence, more room for buying!

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.