Shares of HDFC Bank fell 0.80 percent on June 2 even as the market benchmark Sensex rose 0.80 percent.
On May 31, the company held its analysts and institutional investor meets.
Many brokerage firms that attended the meet, expressed positive views on the stock, with some of them expecting an upside of as much as 47 percent in the stock.
Brokerages appear impressed by the management commentary on how the bank is getting future ready, with a focus on strengthening its digital capabilities and sustainable profitable growth.
As they highlighted that HDFC Bank is aiming to double the post-merger balance sheet in five years and expects an eventual steady-state RoA of 2 percent given the merger benefits.
Brokerage firm Nirmal Bang pointed out that apart from the mortgage business, the bank is undertaking multiple measures across retail, corporate and commercial and rural banking (CRB) segments in order to achieve growth. The bank would also be stepping up its retail liability garnering efforts in the near term to support the balance sheet well ahead of the merger.
Brokerages remain bullish on the stock
As the brokerage firm Motilal Oswal Financial Services pointed out, the bank is planning various new initiatives, with equal emphasis on providing a superior experience to its customers.
Growth is likely to be broad-based, with a target to double its balance-sheet over the next four-to-five years even on a merged basis. Motilal Oswal expects nearly 18 percent and 20 percent loans and PAT CAGR, respectively, over FY22-24E, with RoA and RoE at 2.1 percent and 17.8 percent, respectively, in FY24.
"HDFC Bank remains one of our preferred picks. We expect the stock to recover gradually as revenue and margin revive over FY23, while further clarity emerges on several aspects related to its merger with HDFC," said Motilal Oswal.
Motilal Oswal has maintained a 'buy call on the stock with a target price of ₹1,850 which is a 33 percent upside from the stock's May 31 closing price of ₹1387.45.
Another brokerage firm Kotak Securities has also maintained a 'buy' rating on the stock with a target price (fair value) of ₹1,650.
"At our fair value, we value the bank at 2.9 times book and 20 times FY2024E EPS for RoEs at 15-16 percent levels and 15 percent CAGR (adjusted for merger). We present our views on the merger as well as look at the strengths of the franchise that was re-affirmed in the analyst meet. The short term outlook on the bank is likely to be dominated by the merger," Kotak said.
However, the brokerage firm added that the medium term outlook suggests that the recovery of peak multiples is quite challenging given the construct of the loan book and the economic cycle which prevents differentiation between lenders.
Brokerage firm JM Financial has also maintained a 'buy' call on the stock with a target price of ₹1,690
JM Financial believes valuation compression due to potential decline in RoEs on a post-merger basis has largely played out given that core bank is now trading at 2 times FY24E P/BV versus 2.5 times FY24E P/BV (pre-merger announcement).
"While meaningful upsides are contingent on a sustainable uptick in net interest margins (NIMs), continued growth momentum across business lines and smooth integration of HDFC Ltd driving steady improvement in quality of earnings, we believe downside risks are minimal from current valuations given the strength of its liability franchise as well as its high quality asset book," said JM Financial.
Nirmal Bang Equities has also maintained a 'buy' call on the stock with a target price of ₹2,042, which is a 47 percent upside from the stock's May 31 closing of ₹1387.45 on BSE.
Nirmal Bang said given the expected liability build-up, it expects the intermittent impact on margins, but the structural outlook remains positive given the high market share in unsecured segments.
"In the near term, the bank is expected to roll out multiple digital products, including an industry-first Xpress auto loan. Investments in branches, human capital and technology will continue, leading to elevated opex ratios in the near term. The bank expects to achieve nearly 35 percent opex/income (ex-mortgages) in the next three-five years. Including mortgages, opex/income is likely to be 30 percent or lower," said the brokerage highlighted.
"We have come away positively overwhelmed from the insightful session on the bank’s overall future growth strategy. Execution, especially on garnering huge amounts of liability, is of paramount importance and will need to be closely monitored. We maintain our RoA/RoE estimate of 2 percent/17.6 percent by FY24E. We maintain a 'buy' on the stock with a target price of ₹2,042 (3.4 times FY24E ABVPS + value of subsidiaries)," said Nirmal Bang.
Disclaimer: The views and recommendations made above are those of broking firms and not of MintGenie.