HDFC Bank Ltd. returned 8% gains over the last three years until November, compared with a 55% jump in the benchmark NSE Nifty 50. The private lender's prolonged period of underperformance may be ending, going by multiple indicators.
Historical data reveals that HDFC Bank has lagged only four times in the last two decades: September 2003, March 2009, May 2020 and 2022. And even though muted performance from 2022 has spilled over to 2023, on the earlier three occasions a surge of 50-100% in 12 months followed the period of poor returns.
The bank's price-to-book value is below three times. Only twice in the last 15 years—2009 and 2020—did the stock trade below this valuation, before bouncing back. That indicates that HDFC Bank may be primed for rerating.
There are other potential triggers as well.
Foreign Money Chasing Indian Stocks Again
HDFC Bank has been among the top picks for overseas investors in the past. In recent weeks, there has been a resurgence in buying of Indian stocks by overseas investors, with inflows in December already closing in on Rs 30,000 crore. The return of foreign portfolio investors could be a catalyst for HDFC Bank.
Merger Overhang To Recede
As the overhang of Housing Development Finance Corp.'s merger with the bank diminishes in 2024, a potential recovery in margin and return on assets may be on the horizon.
Banks Maintains Growth Outlook
There have been concerns that HDFC Bank’s credit growth may be impacted due to the larger book size. The bank has time and again clarified that it is looking to double the book in the next four–five years, indicating a growth rate of 15–18%.
The street remains optimistic on the stock.
About 90% of the analysts tracking the stock have a 'buy' rating, according to Bloomberg data. The remaining 10% suggest a 'hold'. The average of 12-month analyst price targets stands at Rs 1,930, implying a potential upside of 18%.
The key risk is that some of the positive factors, especially credit growth and ROAs might not materialise. Yet, even after about 10% uptick in the last month, the stock trades at historically attractive valuations.
With the weight of about 13% in the Nifty 50 index, HDFC Bank’s trajectory also influences the benchmark's performance.
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