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Last Updated : Mar 20, 2020 10:57 AM IST | Source: Moneycontrol.com

HDFC Bank share price slips further; tough times ahead?

Since February 1, the stock has corrected 25 percent against a nearly 35 percent fall in the Nifty Bank index.

The HDFC Bank was under strong pressure, as the stock price fell almost 8 percent in the morning trade on NSE on March 20.

The stock has taken a beating, with the market seeing a sharp coronavirus-driven selloff. Since February 1, the stock has corrected 25 percent against a nearly 35 percent fall in the Nifty Bank index.

However, the stock has been a favourite of investors for a long time and some call it a compounding machine. The bank's wider market penetration, loan book and its stable asset quality make it a top pick for brokerages and investors.

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But the coronavirus outbreak has caused serious disruption in the market and the economy. Some brokerages say India's banking sector is staring at a renewed liquidity crisis and HDFC Bank, too, will face challenges going forward.

Brokerages have mixed views on HDFC Bank. While some see the bank facing challenges, others say the bank is strong enough to withstand the headwinds.

Tough times ahead?

Credit Suisse warns that liquidity constraints will aggravate the credit crunch in the economy, whereas asset quality outlook becomes more uncertain in the face of economic disruption.

Global brokerage firm Bernstein said HDFC Bank may face tough times ahead. Bernstein has downgraded the stock to “underperform”, with a target price of Rs 750, implying a 16 percent downside.

"HDFC Bank, being a quality franchise, has weathered crises well in the past and has often been seen as a safe haven. However, in the current pandemic driven environment. we believe HDFC Bank carries certain idiosyncratic risks and unique management challenges," said Bernstein.

The brokerage highlighted that HDFC Bank's portfolio is most exposed to unsecured consumer credit risk versus peer private banks. Its subsidiary, HDB Financial Services, could also pose challenges, given the focus on weaker informal income segments. Further, the bank's non-proactive handling of the management succession, so far, could impact the bank's preferred status amongst the investor community, Bernstein said.

The virus outbreak, too, will have a negative impact on Indian banks as they will face operational and credit quality challenges, it said.

"Covid-19 will have a non-trivial impact on the Indian economy, even though the outbreak intensity so far does not point to a Europe or US-like scenario. But given the population size, density, community awareness, quality of infrastructure and global interlinkages, Indian businesses will still undergo disruption. Consequently, banks are likely to face operational and credit-quality challenges," said the brokerages.

"For FY'21E, we expect the earnings growth to slow down to sub-15 percent growth. We expect the succession challenges to impact its premium valuation multiples. We expect a 33 percent compression of its 1-year forward target multiple to13 times earnings, compared to its 5-year long term average of 21 times earnings," said Bernstein.

Target Investing founder Sameer Kalra has a negative view on the stock."We have a negative view on the stock, given the change the management is due and the unsecured book is high. Also, provisions in the last three quarters have been consistently rising that would impact the premium on valuations," he said.

But still a top pick

Even as the stock has suffered losses in recent times, it remains a top pick for brokerages, thanks to its strong market presence.

Global brokerage firm UBS has maintained a “buy” call on HDFC Bank, with a target price at Rs 1,480, which is a 65 percent upside from the previous day's close of the stock at Rs 895.55.

UBS said it does not expect any significant impact on the bank's asset quality and highlighted that the trends in the unsecured retail asset quality of the bank are stable.

As much as 80 percent of unsecured loans are to the salaried employees and repayments continue to remain healthy currently, UBS said.

As per the brokerage, the bank's 70-75 percent of SME loans are secured, while the bank has low exposure to airlines and is limited to restaurants and hospitality businesses.

Credit Suisse said HDFC Bank is among its top picks as the bank is well capitalised and competitively well-positioned at this juncture.

Vinod Nair, Head of Research, Geojit Financial Services, also has HDFC Bank in his model portfolio.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

 

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First Published on Mar 20, 2020 10:55 am
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