Recommendation: Buy
CMP = Rs 1,433
Price target: Rs 1,694
Result highlights:
· HDFC Bank's Q2FY2008 results have been better than the expectations. The profit after tax (PAT) grew by 40.1% to Rs 368.5 crore compared with our estimate of Rs 345.8 crore. The PAT growth, of 40.1%, for the quarter was also much higher than the steady 31% growth in the PAT the bank has been delivering quarter after quarter.
· The net interest income (NII) grew by 47.6% year on year (yoy) and 18% quarter on quarter (qoq) to Rs 1,162.7 crore. However excluding the income on float funds the quarter-on-quarter (q-o-q) growth would be at 14%. The year-on-year (y-o-y) growth in NII was due to an average asset growth of 39.4% yoy and a 20 basis points improvement in the core net interest margin (NIM) (adjusted for HTM amortisation expenses) to 4%. However, the core NIM was down sequentially by 20 basis points.
· The non-interest income grew by 21.3% year on year (yoy) but declined significantly by 15.7% qoq mainly due to a 73.6% q-o-q fall in the foreign exchange (forex) and derivatives income. The core fee income grew by 24.8% yoy and 5.3% qoq.
· The operating profit grew by 36.3% yoy and 5.5% qoq to Rs826.7 crore, while the core operating profit (operating profit excluding treasury) was up 33.3% yoy and by 6.2% qoq to Rs 774.9 crore.
· Provisions and contingencies were up 16.6% yoy but declined by 5.8% qoq to Rs 289.4 crore mainly due to a lower general and specific loan loss provisions on a sequential basis. HDFC bank had a higher component of general provisions during Q1FY2008 as a spillover effect of increased provisioning norms stated by Reserve Bank of
· The bank’s advances grew by 45.6% yoy and 15.7% qoq to Rs 62,278 crore and the deposits (adjusted for IPO [initial public offerings] float funds) grew by 38.8% yoy and 7.9% qoq. The bank's business growth remained robust in a difficult environment where the industry has shown a slowdown. The bank's retail loan exposure stood at 55% from 57% in September 2007, which could be a deliberate strategy to slightly rebalance the loan portfolio, as asset quality remains a key concern on the retail loan book.
· The bank reported a 40.1% PAT growth for the quarter, which is much higher than the steady 31% growth in the PAT the bank has been delivering quarter after quarter. The business growth continues to remain robust with superior asset quality and margins compared with that of the industry. The bank has delivered a strong set of numbers and maintained or improved on most parameters in a difficult environment where the industry loan growth has slowed down, the asset quality has become an issue and the margins have been under pressure.
· Due to the reasons stated above we continue to like HDFC Bank a true evergreen stock under most circumstances. At the current market price of Rs 1,433 the stock is quoting at 26x FY2009E earnings per share (EPS), 10x FY2009E pre-provision profits (PPP), and 3.8x FY2009E book value (BV).
· I maintain Buy recommendation on the stock with a 12-month price target of Rs 1,694.
