HDFC Bank - Execution At The Core; Aims To Deliver Unchanged RoE: Motilal Oswal

Motilal Oswal Report

HDFC Bank Ltd.'s management believes that execution remains the most important aspect for the bank and that HDFC Bank has everything in place to deliver strong profitability and growth trajectory over the coming years (similar to pre-merger levels).

While the merged entity is expected to begin its journey on a softer note, we expect the operating performance to recover gradually from H2 FY24 onward.

We expect margins to recover to 3.8% by FY26E and expect improvement in cost ratios, which should enable a ~21% compound annual growth rate in pre-provision operating profit over FY23-26E, leading to return on asset/return on equity of 2%/17% by FY26E (reaching back to pre-merger levels).

The stock has corrected 10% in the recent weeks and the ADR premium has also shrunk to more than 12-month lows as investors remain watchful on growth and RoE recovery for the merged entity.

The stock is thus trading at attractive valuations of 2.1 times March-25E adjusted book value and ~13 times earnings per share and offers a favorable risk-reward for long-term investors.

We maintain 'Buy' with a target price of Rs 1,950 (premised on 2.7 times March-25E ABV plus Rs 206 from subs).

We believe that a gradual recovery in growth and earnings will improve the stock’s performance.

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