Buy HDFC Bank; target of Rs 1800: Emkay Global Financial

"India’s specialty chemicals industry is a decadal growth opportunity and it is still not too late to participate in the value creation process. We prefer CRAMS/CSM players Navin Fluorine (Navin) and PI Industries (PI) as they provide long-term earnings visibility. We also like UPL due to robust growth outlook and reducing debt concerns and SRF due to rising contribution from the chemicals business," JM Financial research report.

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Emkay Global Financial's report on HDFC Bank

Merger to meet regulatory ask, remain competitive; regulatory approval on deal structure could be a hurdle: HDFCL management has been vocal that the regulator has clearly indicated that large NBFCs/HFCs need to either operate with bank-like rules or convert into a bank, while housing business at a scale is best done now under a bank given their cost advantage (see Exhibit 11) and potential cross-selling benefits. That said, HDFCL shareholders’ may be apprehensive about selling housing/other businesses at valuations inclusive of holdco discount. For HDFCB, the merger of the housing portfolio could be RoE dilutive in the near term due to regulatory costs, but brings scale, security and higher portfolio tenure with better long-term RoEs, factoring in crossselling/leverage benefits. We believe the RBI may have reservations in approving the proposed merger deal structure with non-lending businesses (mainly insurance with current stakes >30%) under the bank, as it will challenge its longstanding stance to ring-fence banks and avoid regulatory overlap. Allowing NBFCs HDB Fin/HDFC Credila as subsidiaries under a bank could also be difficult given the RBI’s insistence to undertake lending business primarily under the bank.

Outlook

We reduce TP but maintain Buy as valuations remain comfortable; top-picks are ICICI, SBI: Based on the Gordon growth model for the merged entity and factoring in a slightly higher CoE, we work out fair value at 2.7x FY24E ABV for the merged bank (10% discount to FV basis merger overhang), or implied 3.0x ABV of standalone bank (pre-merger) vs. earlier 3.2x ABV of standalone bank. Add to that the subsidiaries' valuation of Rs172/share for the merged bank (Rs78 for standalone bank pre-merger), we arrive at a TP of Rs1800 (Rs1,950 earlier).

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