HDFC Bank: Maintain ‘buy’ with price target of Rs 1,860

We hosted Mr. Sashi Jagdishan (MD&CEO) & Mr. Srinivasan Vaidyanathan (CFO) at Jefferies’ India Financial Summit. It was encouraging to hear that, with fewer Covid cases & vaccination with opening-up, business is picking up with outbound activity on sales & recoveries.

Getting back to business: Mr. Jagdishan highlighted that, while the bank had taken a cautious view over the past 1-1.5 months in the light of Covid & its impact on staff & clients, the falling infection rates and vaccination are supporting the opening-up of the bank. The field staff (both for sales and collections) are more comfortable taking outbound responsibilities. On the client side, the bank is largely comfortable as (1) 85% of retail clients work with AA and above rated corporate where job losses have been low, (2) SMEs were better prepared than in past, and (3) larger corps. have better liquidity in their balance sheet.

Maintain Buy. We see 19% CAGR in profit over FY21-24 and maintain our ‘buy’ rating with a price target of Rs 1,860 with the value of bank at 3.7x Mar-23E adjusted PB. Our price target for ADR is $91, based on FX conversion of our local price target and a 22% premium.

SME will be the fastest-growing segment over the next three-five years: HDFC Bank plans to leverage its distribution in non-urban markets and digital strengths in expanding its SME banking platform (20% of loans) where it is already among the top bankers. The recent changes in the management structure were aimed to facilitate a far more focussed approach towards execution here and Rahul Shukla will drive growth in the business. Bank is cognisant of the asset quality risks associated with this segment and hence will keep underwriting and collection teams tighter.

Tech issues & fintech partnerships: Management highlighted that it continues to work with the RBI to resolve the issue and at the same time build more robust platforms. While tech-outages are a normal business risk for any bank/ financial company, bank could have built a system to ensure faster recovery here. On the fintech side, bank plans to build partnerships with platforms that can help to bring together scale (from bank) and seamless experience (from fintech platforms).

Subsidiaries: HDB-FS has a niche position (ex-Covid strong track) & HSL will get more legs; open for some monetisation. HDB-FS has focussed on segments of customers that are few notches below bank’s and had delivered well until Covid struck. Mgmt believes the company doesn’t need to make any structural changes to its business model.

HDFC Securities Ltd (HSL) has benefitted from the surge in retail trading volumes and its strong presence. It is expanding its reach and is scaling up its institutional platform.