Equity dilution to aid HDFC Bank‘s credit growth: IDBI Cap

The Cabinet Committee on Economic Affairs, chaired by the Prime Minister Narendra Modi, gave its approval to the proposal of HDFC Bank for maintaining the permissible foreign holding in the bank up to 74 percent of the total paid-up capital and issuance of equity shares aggregating to an amount of Rs 10,000 crore to NRIs/FIIs/FPIs. The approval would result in foreign investment of Rs 10,000 crore (approximately) in the country.

Jignesh Shial, Banking Anlayst, IDBI Capital says this could lead to an equity dilution of around 5 percent and the stock is a definite buy.The dilution in fact would ramp up credit growth for the bank faster than the others, believes Shial.The bank is already has an impressive capital adequacy ration but this dilution could strengthen that further and give them headroom for lending risky sectors or aid corporate lending. The house currently has a target price of Rs 1110 and will adjust the number post dilution.

Below is the transcript of Jignesh Shial's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Rs 10,000 crore will be a 5 percent equity dilution, is HDFC Bank a buy?A: Yes, approximately that would be the quantum that they are diluting and definitely it would be a worthy buy.Latha: You aren’t worried about what it might do to their earnings per share (EPS) growth and valuations, what are the valuations that you have and what are you comfortable with?A: Definitely dilution is going to affect the EPS but as we understand, this is not a requirement that generally the banks have for strengthening capital adequacy; HDFC Bank already has a superb capital adequacy ratio. It is more to do with having a little breadth over the foreign institutional investors (FIIs) space and that is a reason why they are required to do this.Secondly, this will definitely strengthen their adequacy further, it will give them a little more headway or little more headroom towards expanding towards a riskier sector or higher risk weighted sectors or corporate lending part for the bank, which could be another booster which can come up for the bank. So on that basis, this will be another advantages. The stock would be close to 3.5 times price to book adjusted FY16-FY17 and we remain comfortable because we think the bank would be able to ramp up the credit growth faster than the others and that would be the key trigger to watch out for. This dilution will boost expansion on the credit growth side.Sonia: You said 3.5 times price to book FY17 but what would the price to earnings be on a post dilution valuations, how much of a discount is it to its historic valuations for the stock and what is your target price?A: Current target price is Rs 1,100 excluding or without considering the current dilution which is supposed to happen. We will to wait for the final pricing which the bank would be quoting and accordingly we will be adjusting our numbers. However, as we understand, it should be very quicker and it should be close to right now what the market price is. So then accordingly it should be a 5 percent kind of an addition which should be come up to more than 20 times, which the bank is already at price to earnings it is trading at - that won’t much affect the kind of numbers which is going to come up further.Latha: I just wanted to know what is your book value and EPS forecast for FY16 and FY17?A: We are basically assuming 22-24 percent kind of a growth or compounded annual growth rate (CAGR) of FY14 to FY17, so 3.5 times right now, so close to Rs 1,000 at 3.5 times, so it should be close to more than Rs 300 where our book value would be coming up to. So Rs 250-300 is the range where our book value would be coming up to. That sets very comfortable level for us, the kind of growth momentum on the topline as well as the bottomline that we are seeing it for the bank.Latha: State Bank of India (SBI) is also coming up with some capital raising. What have you heard in terms of what instruments they may use and do you think that will depress the share price?A: I won’t be exactly able to comment upon it because it is a little premature. There are a lot of other ways that they are planning to raise it. At this point of time, if the kind of turnaround, which is happening and the kind of growth momentum, which is possible in the next two-three years, capital raising won’t be something that we believe is a negative trigger.It is definitely a positive trigger, which we expect because that will strengthen the adequacy, which is weaker specifically for the PSU banks. So as the valuations happens, the adequacy strengthens, they would be able to leverage it well and would be able to grow in a better manner. That is what we believe in.