Buy HDFC Bank; target of Rs 1420: KR Choksey

While 1QFY17 performance stood mixed bag, the operating metrics (operating profit grew 20% Y-o-Y) stay on strong footing for HDFC Bank. The robust retail loan traction (25% Y-o-Y and 3% Q-o-Q) and margins expansion (4.4%, up 10 bps Q-o-Q) aided the top-line growth (NII 22% Y-o-Y), however, fee income tapered (15.5% Y-o-Y) and tad spike in gross NPA number (9 bps Y-o-Y, 10 bps Q-o-Q) came as a disappointment. Slippage ratio moved uphill to 2.1% from 1.4% a quarter ago. Further, the bank has utilized almost INR 1.3 bn of floating provisions towards Punjab Food Corporation account. Defying macro challenges, HDFC Bank continues to maintain business momentum and earnings traction each quarter; controlled asset quality is icing on the cake.

Liability franchise expansion (both in terms of CASA and branch), staunch fee income and loan growth and best-in-class asset quality has augured well for HDFC Bank. The earnings CAGR at 17% + and EPS CAGR at 15%+ coupled with superior return profile (RoEs at 18.5%+ and RoAs at 1.8%) over FY16-18E ensure sustainable earnings performance ahead. Defying macro challenges, HDFC Bank continues to maintain business momentum and earnings traction each quarter; controlled asset quality vis-à-vis peers. Against this backdrop, we tweak our multiple higher followed by a revision in target price at INR 1,420 (earlier INR 1,293) valuing the bank at 3.8x P/ABV FY18E. Currently, the stock trades at 3.3x P/ABV FY18E. Maintain BUY. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.