We're increasing HDFC Bank’s fair value estimate by 25% to Rs 1,050 per share, or $50.80 per ADR, as we reduce our cost of equity assumption, or discount rate, to 12% from 13%.
Our fair value estimate represents 3.7 times 2016 book value per share, and 20 times our fiscal 2016 diluted earnings per share estimate of Rs 52.41. The lower cost of equity assumption is in line with a global change to Morningstar’s cost of capital methodology as it takes into account a lower required investment return for the U.S. market of 9% versus 10% previously, for companies with average systematic risk.
Our core financial forecasts and outlook for the bank remain unchanged. Our five-year average earnings forecast remains at 20%, driven by 22% growth in interest revenue (net of provisions) and 20% growth in non-interest revenue, on average, over our five-year explicit forecast, with NIMs stable at 4.6%.
We continue to project average loan growth and deposit growth of 23% and 21%, respectively, over the next five years, as we see the bank continuing to take market share from the less stable, state-owned banks. Overall, we believe HDFC Bank will comfortably exceed its estimated 12% COE while maintaining adequate equity coverage, justifying our narrow economic moat rating. We believe the bank has an exemplary track record of capital allocation decisions placing it in a strong position for future growth.
Overall, we maintain a positive outlook on the bank despite shares trading close to our estimate of intrinsic value.
To read a more detailed analysis, click here.
Earlier Posts:
