HDFC Bank will re-rate in next 12-18 months: Nitin Aggarwal of Motilal Oswal

The current multiple of 2.6 times price-to-book value for the bank remains, believe analysts

HDFC Bank's book value has taken a hit due to its merger with HDFC Ltd, which has caused brokerages to downgrade their rating and cut target prices, but the stock will re-rate in next 12-18 months, said Nitin Aggarwal of Motilal Oswal Financial Services. Aggarwal said that one cannot question the investment thesis for the stock in the long term as there is visibility for the merged entity to achieve 2 percent Return on Assets (ROA) by FY26. "There will be gradual improvement in earnings. The liquidity (from HDFC Ltd) is a big monitorable over the coming quarters and can help the business grow," he said, adding that HDFC group has sustained on- track execution to deliver returns.

Also Read: For HDFC Bank, FY24 is a speedbump year

The current multiple of 2.6 times price-to-book value for the bank remains attractive for Aggarwal. However, with the merger being implemented and the entity becoming extremely large, execution remains critical, he said.

Aggarwal highlighted that deposit growth will be the first key metric that investors will be watching out for. This is because the bank experienced a very strong run in Q1, while Q1 was slightly softer. “Going forward, the competition will remain tight, but the performance of the bank on deposits and thereafter even the advances shall be looked at, to evaluate the growth of the merged entity along with the margins” he said.

For the next one quarter, Aggarwal would prefer to wait out and take a breather from the HDFC Bank owing to the excess liquidity built up post merger. The deployment of this liquidity is yet to be seen, said Aggarwal.

Also Read: Lower book value, asset quality pain & high costs: Nomura downgrades HDFC Bank in merger aftermath

On September 18, foreign broking firm Nomura has downgraded its rating on HDFC Bank to Neutral after the country's largest private-sector bank held an analyst call to share particulars of the merged entity.

"Downward adjustment to the incoming net worth of HDFC Ltd (largely due to IGAAP accounting and provisioning harmonization) amounts to a book value per share cut of Rs 23 per share for the merged entity," said analysts at Nomura.

The broking firm further said that net interest margins (NIM) could see pressure over the next two to three quarters as HDFC Ltd's Q2FY24 opening book NIMs are at 2 percent versus 2.7 percent in Q1. This is mainly on account of excess liquidity being carried post-merger.