Expect rerating of HDFC Bank stock in 12-15 months: Rahul Malani

Rahul Malani, Sharekhan By BNP Paribas, says over 12 to 15 months, we should see improvement in all the key metrics which should result in re-rating of the HDFC Bank stock. But we believe that in the next 12 months, it will likely consolidate.


Can one safely assume that the scope for more negative surprise from HDFC Bank is unlikely?
From here, the probability of any additional bearing factors that could weigh down the earnings trajectory of the merged entity are unlikely. In terms of trajectory, NIMs have been under pressure and came in higher than expected at a lower rate. But we believe that at this point, NIMs have probably bottomed out and it will improve gradually. The important thing here is that the key challenge remains the higher credit deposit ratio, which is at 107% higher than the industry and currently, we believe that the loan growth will be in the low to mid-teens in near term which should normalise the CD ratio gradually.

Currently the challenge is that the choice is to slow down the growth and focus on improving the liability profile or to have a gradual improvement but deliver higher than industry average loan growth. The key is to decide whatever path is to be taken and currently we do not have differentiating factors which earlier we used to have in HDFC Bank like higher unsecured portion and a lower credit cost compared to the peers to the likes of the ICICI and Axis and a temporary weak liability profile also remains a key challenge at this point of time.

But over 12 to 15 months, we should see improvement in all the key metrics which should result in re-rating of the stock. But we believe that in the next 12 months, it will likely consolidate.

When will HDFC Bank turn from a buy to an attractive buy? It was always a buy, but when does it become like a value buy?
Currently the valuations are very handy. If we look at the things in current juncture, when the things will turn, valuations are currently reasonable at this point of time whatever the circumstances happens and at present we believe that instead of the decadal loan growth of 17-18%, it would grow at 14-15% in the next decade and so, valuations have already been priced in. We believe that a gradual build-up in the portion should happen with a long-term view and we do not see any outperformance in the near term.

But we will see outperformance once all the key metrics come in place and it has to be compared in line with all the competitors. Right now, it does not have any differentiation in terms of key metrics which is allowing a re-rating in the stock.