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Buy The HDFC Bank Stock After Today's 4.5% Fall, Upside Could Be 37%

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Broking firm, Emkay Global has suggested buying the stock of HDFC Bank for a price target of Rs 1,950, which implies an upside of almost 37% from current levels of Rs 1399.

 

A slight miss on net profits

A slight miss on net profits

According to Emkay Global, despite sector-leading credit growth (21% yoy), HDFC Bank reported a slight miss on PAT at Rs100 billion (est.: Rs 103 billion) due to continued weak core profitability (up 10% yoy), which was dragged by weak margins/fees and additional contingent provisions of Rs10bn.

"Asset quality trended well, with gross non performing asset ratio down 9bps qoq to 1.2%; for HDB Fin, it was down by 200bps qoq to 5%," the brokerage has said.

Retail credit growth a laggard
 

Retail credit growth a laggard

According to Emkay Global, Retail credit growth (15% yoy/4% qoq) lagged overall credit growth (21% yoy/9% qoq on corporate/commercial credit growth), with the share of retail down to 45%, thus weighing on core margins (4.1-4.2% down from 4.2-4.3% range).

"Management argues that the focus is on risk-adjusted margins, which have improved qoq to 3.5% from 3.1%. It expects retail growth to improve, driven by unsecured loans, providing some support to margins. However, we believe that the rising share of mortgages/higher fixed-rate loan book could keep margins in check in the near term," Emkay Global has said in its report.

Outlook and valuations

Outlook and valuations

Emkay Global believes that lifting of the RBI's restrictions on card/digital initiatives, plans to re-accelerate retail credit growth and focus on risk-adjusted margins should be long-term positives.

"As far as the merger is concerned, the bank/HDFCL will have time (2-3 yrs) to moderate regulatory drag by building buffers in both entities, but at the cost of margins in the interim. Factoring in lower NIMs/higher opex, we cut FY23-24E earnings by 2-3% and expect average sustainable RoE to moderate to 17% from 17.6% earlier. Further, factoring in slightly higher CoE (12.3%), we cut the standalone bank target price multiple to 3.2x on FY24E ABV and value the bank at Rs1,950 (Rs2,050 earlier), including subsidiaries at Rs 78. Retain long term Buy on the stock given the recent correction, with it trading at 2.5x standalone FY24E ABV (stripping subs value of Rs 78)," the brokerage has said.

Key risks

Key risks

According to Emkay Global, the key risks are slower-than-expected credit growth amid weakening macros due to the Ukraine-Russia conflict; further softness in margins due to slower retail credit growth/regulatory buffer built up in the run-up to the merger; and delay in getting regulatory approval for the proposed merger of HDFC Ltd.

Disclaimer

Disclaimer

The above stock was picked from the brokerage report of Emkay Global Financial. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Read more about: hdfc hdfc bank
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