HDFC bank's market value of equity was Rs.367 b in 2007; it was also available for Rs.198 b in the same year. Now, the whole bank is worth Rs.4750 b. That's a massive change in fortunes. And there is a reason for that. Earnings per share has increased from Rs.7.15 to Rs.59.52 during the period, even after accounting for dilution. Check this out: the number of common shares outstanding increased from 1.59 b to 2.56 b, adjusted for a 10:2 split in 2012.
Market share has been steadily increasing. More importantly, the bank has been managed exceptionally well by Aditya Puri and his team. Book value per share increased more at the rate of 24.42% annually during the last decade. Mere increase in book value is meaningless if do not consider how good the book equity is. And that is measured by the quality of its advances, which were at Rs.5854 b, and increased at 28.7% annually. Gross NPA was 1.05% in 2017, and net NPA was 0.33%. Including restructured loans, net NPA was 0.43%; that is phenomenal. Compare that to ICICI and Axis in the private sector, have a look at the entire public sector banks, and we will get the picture. Its equity capital is healthy too, with Tier 1 capital at 12.79% in 2017.
The bank has excelled in other parameters as well. Its return on assets was 2.09% in 2017. Net interest margin was 4.30%. Average CASA ratio was 48%, which makes its cost of funds lower. Cost to income was 44.50%. Return on equity was 20.53%.
The story has been so good for the bank that its investors have really reaped rewards. The low base of a newly incorporated bank, and the advantages of a superior management have been clear. But where does it go from here? Is there anything left for the new investors to achieve superior returns?
The problem is that a good quality company always commands premium valuations. HDFC bank's price-to-book was 5.71 (high in 2007) and 3.08 (low). During 2008, 2009, and 2010, it was available at less than 3 (low). Even during 2014, 2015, and 2016, it was available at less than 3 (low). The high PB was never more than 5 during 2009-2016. I am measuring the ratio based upon latest annual historical numbers, rather than projected book numbers. Now the bank is selling at 5.18 times 2017 book equity. From March to September 2017, the book value has increased making it lower than 5 probably.
With the mess that has been around in the public sector banks regarding low quality book, their need for fresh equity is imminent. And, with the digital push from the government, it is reasonable to expect that the market share of public sector banks will gradually diminish, and private banks will gain. HDFC bank stands to gain from two counts: one, because of the sectoral changes shaping the economy, and two, top class reputation.
HDFC bank will grow; but we do not know by how much. It will also command superior valuations compared to its peers; but again, we do not know how much. The bank's stock was trading at a high value of Rs.1454 during the year ended March 2017. In eight months time, it is quoting at Rs.1854 per share, a gain of more than 27%.
Should we wait for the declines, or should we buy in bulk for the next decade? Or, should be accumulate on a periodic basis, averaging out the cost per share? My guess in terms of the strategy and results, is as good as anyone else's.
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