Snapping the losing run of the last three consecutive sessions, shares of HDFC Bank ended with a strong gain of 12.41 percent at Rs 863 on NSE on March 25.
The current selloff in the market has hit this bluechip stock too as the stock has fallen 30 percent since February 1, in sync with the benchmark Nifty which is also 30 percent down for the same period.
HDFC Bank is still among the top picks of many brokerages.
Morgan Stanley in a report on March 23 said the stock is well placed in uncertain times.
"Structurally, HDFC Bank is in an extremely sweet spot, we believe. It has the lowest cost of disintermediation and there is almost no balance-sheet stress, unlike most of its competitors. Moreover, the bank has been a front-runner in digitisation and has improved its product distribution capabilities in interior India (branches, CSC tie-ups, merchant acquisition points). This is allowing the bank to take a disproportionate share in various high margin businesses," Morgan Stanley said.
The global brokerage firm has an 'overweight' rating on the stock with a target price of Rs 1,285.
"After the sell-off, valuations are below the global financial crisis (GFC) lows and pricing in material stress on earnings, we believe. Uncertainty as to the duration of the lockdown will keep the stock volatile, but we see attractive risk-reward given a strong balance sheet, improved profitability and high growth potential.," said Morgan Stanley in a note.
HDFC Bank's recent initiatives are performing well and have the potential to drive sustained growth of more than 20 percent as the economy stabilises, Morgan Stanley underscored.
"We view payments, expansion into semi-urban and rural markets (SURU) and MSME as strong growth engines where profits can grow at 20-25 percent annually over the medium-term," Morgan Stanley said.
The global brokerage highlighted that over the past few years, the bank has improved digitization capabilities, strengthened distribution and accelerated deposit share gains.
As an output, the bank is already seeing accelerated customer acquisitions, a pickup in loan growth in SURU markets, and strong growth in payments, distribution fees and MSME loans, Morgan Stanley said.
The sharp increase in social distancing measures amid COVID-19 could have a material impact on HDFC Bank's earnings.
Depending on the duration, this will negatively impact earnings owing to moderation in loan growth, lower margins, slower growth in fee income and higher NPLs. However, Morgan Stanley sees these being partially offset by lower variable costs and higher treasury gains (given lower bond yields).
Morgan Stanley believes the stock's returns could be very strong over the next 2-3 years and said that the earnings compounding beyond the next few quarters will remain strong at a CAGR of over 20 percent, while valuation normalisation merely to historical mean levels would drive more than 100 percent upside over 2-3 years.
On growth, Morgan Stanley expects the strong trends to continue, beyond the current COVID-19 outbreak and estimate 18-20 percent loan growth over the next three to five years.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.