Bank stocks: HDFC operations, profits to see marked uptick in coming quarters

By Srinivas Bandhakavi

Hyderabad: HDFC Bank is the country’s largest bank by market capitalisation with Rs 7,78,000 crore. It is also India’s largest private sector bank by assets and was the world’s 10th largest bank by market capitalisation in April 2021.

Trading at Rs 1,400 as of July 8, the share price is just off the 52-week low of Rs 1,271 it hit on June 17. In 2021-22, it turned in a revenue of Rs 1.36 lakh crore and a profit after tax of Rs 38,000 crore giving an EPS (earnings per share) of Rs 69, a growth of 15% over the previous year. The share has been under pressure for a while as the FIIs, who held nearly 40% of its stock, were believed to be selling it in large volumes.

The share, which for long enjoyed very premium valuations, is now trading at a P/E (price-to-earnings) ratio of just about 20. I believe this low price should be much higher keeping in mind its pedigree and performance. I also believe that the FIIs selling is not due to any shortcoming of the bank but because they held a huge quantity of shares and when they needed to sell they could sell only what they had.

In time I see the stock bouncing back and reclaiming its premium PE valuations. I would not be surprised if the P/E ratio increases 50% in the days to come. The bank has a very good reputation and high governance standards. For a banking company, this is very important as high NPAs resulting from unscrupulous or reckless lending can play havoc. A marked uptick in its operations and profits is likely in the coming quarters as the economy comes out of the Covid phase and also on account of the higher interest rate regime.

However, the higher interest rate scenario would also lead to losses as its assets in the form of securities start depreciating. But this is likely to be more than offset by the increased lending and also increased price of lending. Both lending and rate at which the bank lends are likely to go up in the coming quarters.

I expect a good 30% growth in EPS as buoyancy returns post-Covid. Finally, HDFC merging with HDFC Bank is important for bank operations and will not affect investors. It is safe to assume the share is currently attractively priced to give a good return on investment in the medium to long term. As always, it is a good practice to buy shares in three to four tranches. Happy investing.