2 Stock Splits: Amid Latest Falls, HDFC Is Up By 460% From Where It Was 13 Years Ago; Buy-On-Dips Opportunity?

India's largest bank in terms of market cap, HDFC Bank is a star fallen from its grace, as concerns over its growth after the once-largest NBFC HDFC merger made investors dicey in the share price and even in its ADRs. Year-to-date, HDFC Bank's share price has dropped by 16%, while ADRs by 17.4%. But despite the latest downfall, HDFC Bank is trading higher by 467% from where it was 13 years ago, especially during its first stock split. And more gains are expected in the long term, creating a buy-on-dips opportunity in HDFC Bank currently, because this private bank is just waiting for its muse to soar!

HDFC Bank's share price is currently at Rs 1,430.35 apiece with a market cap of Rs 10,86,464.53 crore, making it the third largest company in the country.

But HDFC Bank's share price is down by 10% on BSE in six months, and year-to-date the downside is around 15.86%.

Coming to its American Depositary Receipts (ADR), HDFC Bank's ADR is currently at $55.01. It is down by 11.73% in six months, and year-to-date, the drop is by 17.43%.

But HDFC Bank is a multi-bagger, and the latest correction gives room for fresh buying. That is because HDFC Bank is currently undervalued from its 52-week high of Rs 1,757.80, by 19%.

In the long term, HDFC Bank is a megastar. It not only multiplied investors' shareholding but has also given triple-digit returns.

The first stock split by HDFC Bank was 1:5 for which it turned ex-split on July 14, 2011. The face value of Rs 10 was trimmed to Rs 2. Let's suppose if you held 1,000 shares of HDFC Bank before the first ex-split, it will multiply by 5,000 (1,000 x 5).

Further, HDFC Bank carried a second split recently on September 19, 2019, where its face value of Rs 2 was reduced to Rs 1, hence a ratio of 1:1. Taking the same example, after the first stock split, if you still held onto HDFC Bank shares, your 5,000 shares will double to 10,000, since the face value halved.

13 years ago, on July 14, 2011, HDFC Bank shares were around Rs 252. Since then, the share price has skyrocketed by 466.61% to date. These gains are after adjusting to both stock splits.

More upside ahead in HDFC Bank!

Brokerage Kotak Institutional Equities is the latest to maintain BUY on HDFC Bank, however, it trimmed its target price on the bank. Nevertheless, there is the potential for a 22-35% upside in HDFC Bank.

Kotak's note said, "Our recent interaction with management brings the following takeaways: (1) the bank is likely to give a greater emphasis to earnings growth over balance sheet growth; (2) there is an acknowledgement of the challenges concerning the merger, but management is confident that the institution has the foundation to solve them over time; (3) greater emphasis on mobilizing deposits to repay the high cost of borrowings that came through the merger and then would be allocated toward growth; and (4) investment in infrastructure (branches) is a long-term objective, and any changes to the growth rate should not be measured on a near-term basis.

Further, Kotak added that "discussions with investors and management show some degree of difference in what they want the bank to deliver, while management is probably looking to balance loan growth, improve NIM by building back a superior liability franchise and deliver healthy RoEs. It is quite likely that we are going to see some degree of disappointment in some/many of these variables across quarters."

However, Kotak's note added, "Unfortunately, there are no easy solutions, as delivering pre-merger metrics takes time. In our opinion, the optimum decisions to resolve would be: (1) demonstrate a faster conversion of borrowings to deposits, even if it does imply lower growth and (2) look at opportunities to expand NIM through a mix of better pricing while capturing the upside of liability mix changes."

Accordingly, on the valuation, Kotak's note said, "With HDFC Bank significantly de-rating with its peer's post-merger, we would probably look at the following as the near-term investment theme: The probability of the bank getting back to its historical average multiple or peak multiples looks unlikely unless there is a perceptible change in the cost of equity as there are differences in growth."

Also, it said, "We would probably want to look at a possible convergence of multiples with peers, but only over the medium term, as these high-cost borrowings would eventually get replaced. We maintain BUY and revise FV to Rs1,750 (from Rs1,860), factoring in slower loan growth. We expect the bank to deliver RoEs of ~16-18% in the medium term."

However, the average target price of HDFC Bank is at Rs 1,938 apiece, hinting at 35% in a year, as per Trendlyne data.

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.