Buy HDFC Bank, target Rs 2,900: Emkay Global
Amid a slowdown in retail, HDFC Bank reported strong credit growth of 24.5 per cent in FY19.
Shares of HDFC Bank traded at Rs 2,430.75 around 2:50 pm on 25 June, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
Amid a slowdown in retail, HDFC Bank reported strong credit growth of 24.5 per cent in FY19, led by corporate books. It expects above system growth in FY20 as well.
The private lender believes that the vehicle financing space will remain sluggish in the near-term, but continued strong growth in the non-vehicle retail space including mortgages and cards or personal loans should drive retail growth for the bank.
The bank is also not averse to continued accelerated growth in corporate, subject to generating desirable RARoC.
However, the brokerage said, it will continue to avoid or have limited exposure to real-estate developers, renewable energy and gems and jewelry segment, given their risk perception.
The bank has strategically increased the share of rural and semi-urban branches now to 53 per cent from 35 per cent in FY10 and should gradually inch up more than 60 per cent to tap retail liabilities and assets in these areas.
The bank has now also set up a low-cost Virtual Relationship Manager (VRM) system to outreach 1-1.5 crore customers from the current 35 lakh in order to improve customer convenience, penetration and thereby profitability.
As a measure to capture the complete payment ecosystem and improve fees, the bank plans to acquire 40 lakh merchant points from the current 10 lakh over the next two years.
"Given its strong franchisee, product suite and capital, we believe HDFC Bank is well positioned to gain market share in the current environment. This coupled with its strategy to deepen presence in ‘rurban’ areas and improving operating leverage should help sustain the superior return ratios (RoA: nearly 1.9 per cent/RoE: nearly 17 per cent)," said the brokerage.
The brokerage thinks the bank’s strong leadership backup and succession planning should likely minimize any disruptions (if any) from management transition slated to happen in 2020.
"We maintain our buy recommendation with a revised target price of Rs 2,900, based on 4 times FY21E standalone ABV and subsidiary valuation of Rs 118, and overweight position in sector EAP," the brokerage said.
Slower loan growth, higher-than anticipated NPAs in farm and retail loans and management transition are the key risks for the company.