HDFC Bank To Re-rate In 12-18 Months: Expert
HDFC Bank's book value has suffered a setback due to its merger with HDFC Ltd, resulting in brokerage firms downgrading their ratings and reducing target prices. However, Nitin Aggarwal of Motilal Oswal Financial Services believes that the stock will undergo a re-rating in the next 12-18 months. Talking to a media house, he emphasised that the long-term investment thesis for the stock remains robust, with the merged entity expected to achieve a 2 per cent Return on Assets (ROA) by FY26.
Aggarwal noted that there will be a gradual improvement in earnings, and the infusion of liquidity from HDFC Ltd will be a significant factor to monitor in the coming quarters, potentially fueling business growth. He also highlighted the HDFC group's consistent execution in delivering returns.
Aggarwal finds the current multiple of 2.6 times price-to-book value for the bank to be attractive. However, he acknowledged that with the merger underway and the resulting entity's substantial size, execution will be critical.
Investors, according to Aggarwal, will closely watch deposit growth as the primary metric. While the bank experienced strong growth in Q1, Q1 was slightly softer. Aggarwal pointed out that competition will remain fierce, and the performance of the bank in terms of deposits and advances will be critical in assessing the growth and margins of the merged entity.
For the next quarter, Aggarwal expressed a preference for taking a breather from HDFC Bank due to the excess liquidity generated post-merger. The deployment of this liquidity is a key aspect that remains to be seen.
On 18 September, Nomura, a foreign brokerage firm, downgraded its rating on HDFC Bank to Neutral following an analyst call in which the bank shared details about the merged entity. Nomura cited a downward adjustment to the incoming net worth of HDFC Ltd, primarily due to accounting and provisioning harmonisation, resulting in a reduction of Rs 23 per share in the book value per share for the merged entity.
The brokerage firm also noted potential pressure on net interest margins (NIM) in the next two to three quarters, as HDFC Ltd's Q2FY24 opening book NIMs stood at 2 per cent, compared to 2.7 per cent in Q1, largely due to excess liquidity carried post-merger.
