Indiabulls has upgraded its rating on HDFC Bank from ‘hold’ to ‘buy’ with a target price of Rs 1,715 for FY09. HDFC Bank has been a consistent performer, with its key parameters being one of the best in the industry. Its net interest margin at 4.3% and the current account and savings account (CASA) ratio at 50.9% are among the highest in the industry. Non-interest income, after witnessing a slowdown for some quarters, started to pick up and increased 81.9% YoY, against its earlier increases in the range of 25-35%. With the bank taking new initiatives such as investment banking, other income will continue to have a large share in the total income.
There has been a consistent rise in the size of the balance sheet at an average pace of around 40% in the past few quarters, with significant contributions being made by both advances and deposits, indicating broad-based growth. Further, the growth has been accompanied by an excellent asset quality, with the net non-performing assets (NPA) ratio being maintained at 0.4% since the past few quarters.
In the year so far, the bank has added 64 branches, and is planning to open more than 250 branches in the next few months. Indiabulls has valued HDFC Bank using the two-stage Gordon-growth model as it’s likely to continue its high-growth journey for the next few years. Indiabulls has arrived at a target price-to-book value (P/BV) multiple of 4.8x by assuming a sustainable return on equity (RoE) of 19% on account of its high interest margins and increasing proportion of non-interest income.