Analysts see up to 27% upside in HDFC Bank's stk price post Q2; here's why

HDFC Bank shares advanced 2.5 per cent to Rs 1,229 apiece on the BSE on Monday after the bank reported healthy September quarter (Q2FY21) results on Saturday, October 17. The country's largest private lender clocked an 18.4 per cent year-on-year (YoY) growth in its net profit on substantial growth in interest earnings and other income.

The lender's net profit stood at Rs 7,513.1 crore during the quarter under review compared to a net profit of Rs 6,344.9 crore in the quarter ended September 2019 (Q2FY20). Sequentially, it had posted a net profit of Rs 6,658.6 crore in first quarter ended June 2020 (Q1FY21).

While PAT was mildly lower than the estimate given by Prabhudas Lilladher, that had pegged the profit at Rs 7,587.3 crore, improving 19.6 per cent YoY, it was better than expectations of Emkay Global, that had estimated the profit at Rs 7,314.7 crore. CLICK HERE TO READ ANALYSTS EXPECTATIONS

The net interest income (NII), too, came in-line with Street expectation, up 16.7 per cent YoY to Rs 15,774.4 crore in Q2FY21 from Rs 13,515 crore in Q2FY20.

That apart, the lender clocked stellar improvement in asset quality. The gross NPAs declined to 1.08 per cent in Q2FY21, from 1.38 per cent in Q2 FY20. The GNPAs were at 1.36 per cent at end of Q1FY21. The net NPAs, on the other hand, were at 0.17 per cent in September 2020, down from 0.42 per cent in September 2019. Its net NPAs were at 0.33 per cent in June 2020 (Q1FY21).

Post results, analysts see up to 27 per cent upside in the stock price from current levels and maintained their 'buy' rating on the stock.

Here's how brokerages interpret the results:

CLSA (Target price: Rs 1,525)

HDFC Bank's Q2FY21 results were strong and the management's commentary were even stronger underscoring the quality of its underwriting even at its current scale and market share. Overall, we increase our FY22-23 CL earnings 3-5 per cent driven by higher PPoP and lwoer credit costs. We increase our target price from Rs 1,450 to Rs 1,525 as we rollover to September 2020 book. With a best-in-class liability franchise, superior underwiritng, and the focused strategy of the new MD and CEO, HDFC Bank remains one of our top picks.

Jefferies (Target price: Rs 1,450)

HDFC Bank's  2QFY21  profit  of  Rs 7500 crore,  up  18 per cent  YoY,  was  healthy  even  if  tad  below estimate. Key positive was collections of 97 per cent of Sep-dues & indicate that restructuring will be just 1-2 per cent of loans; contingent provision at 0.6 per cent of loans. SC verdict held back downgrades, adj. NPL at 1.4 per cent was steady. Topline was ahead of estimate & pick-up in retail-lending will aid this further. 

We raise bank's earnings to factor better asset quality and recovery in retail demand. We maintain our Buy rating and roll-forward target price to Rs 1,450, with value of bank at 3.4x Sep-22 adjusted PB. We also initiate on HDFCB's ADR with PT of US$68, based on fx conversion of local PT and 15 per cent avg. premium.

Motilal Oswal Financial Services (Target price: Rs 1,400)

HDFC Bank has delivered strong growth amid a challenging macro environment, and business momentum is swiftly moving toward pre-Covid levels. Furthermore, the bank's operating performance remains steady, aided by healthy revenue growth and controlled opex. However, margins moderated 20bp QoQ on account of higher liquidity and a change in the asset mix. The bank further shored up provisions as it provided for Rs 2300 crore toward potential NPA (not declared due to the SC order) and other contingent provisions.

Kotak Institutional Equities (Target price: Rs 1,300)

A strong commentary on business momentum (closer to pre-Covid and likely to surpass soon) and solid performance on asset quality imply that HDFC Bank has a sizeable lead as compared to all banks. Strong operating profits gives adequate cushion to manage stress, a risk that still remains.

At our FV, we value the bank at 3X book and 20X September 2022E EPS for RoEs at 15 per cent levels. Our broad thesis has been to have a higher preference for the large caps in financials given the loan mix that has a higher share of salaried segment, strong liability franchise and better operating profits to deal with the post-Covid stress. We don't see a reason to shift from this thesis today and valuations are not still expensive in these banks, including HDFC Bank. The risk remains if there is a slowdown from 4QFY21 and a prolonged slowdown in FY2022 as it would result in a re-emergence of risk.

Edelweiss Securities (Target price: Rs 1,490)

GNPL/NNPL stood at 1.08 per cent/0.17 per cent versus 1.36 per cent/0.33 per cent in Q1FY21. However, had the bank recognized NPAs post August 31, in absence of Supreme Court directive, GNPL/NNPL would have been 1.37 per cent/0.35 per cent. The bank made contingent provisions of Rs 2300 crore, which include Rs 1120 crore for specific accounts, taking total contingency provisions to Rs 4000 crore. All provisions currently total about 2.2 per cent of loans. Collection efficiency (as a percentage of month’s receivables) for the moratorium book currently stands at 95% versus 99% for other loans in September. The bank expects 97% collection efficiency for moratorium loans by October, but stopped shy of guiding for restructuring proportion.

ICICI Securities (Target price: Rs 1,493)

What really encourages is the management's resilient narrative: i) pro forma GNPAs staying at 1.37 per cent (had it classified NPLs post 31st August + accelerated prudent recognition); ii) demand resolution for morat-retail portfolio at 97 per cent in October (compared to 99% pre-Covid levels) and that for non-morat retail portfolio at 99 per cent; iii) 30dps + identified stress in SME portfolio down to 3 per cent. Further confidence comes from: i) credit reserves of ~75bps being sufficient; ii) opportunism and optimism on growth potential given digital initiatives, franchise strength and sharp focus. The strong performance reaffirms our stance that HDFC Bank is best positioned to rebound quicker.

Elara Capital (Target price: Rs 1,460)

Management remains optimistic about a cyclical recovery. LAP and retail working capital loan disbursals are already at pre- Covid levels and unsecured loans will reach pre-Covid levels by October. Bureau data shows that inquiries for auto and home loans have moved above pre-Covid levels. We value the core bank at 3.2x PBV FY22E versus 2.9x earlier. We reiterate HDBK as our top pick driven by improving profitability, strong asset quality and upbeat commentary.