INDIA DAILY March 24, 2020 India 23-Mar 1-day 1-mo 3-mo Sensex 25,981 (13.2) (35.6) (37.3) Nifty 7,610 (13.0) (35.7) (37.7) Contents Global/Regional indices Dow Jones 18,592 (3.0) (33.5) (34.8) Daily Alerts Nasdaq Composite 6,861 (0.3) (25.6) (23.4) Change in Reco FTSE 4,994 (3.8) (30.2) (34.6) HDFC Bank: Fresh opportunity into an attractive franchise Nikkei 17,661 4.6 (24.5) (25.8) Hang Seng 21,696 (4.9) (19.1) (22.1) Tailwind of a decade low valuation leading to an upgrade KOSPI 1,557 5.0 (25.1) (29.1) Timing of upgrade is risky along with the multiple assigned; but franchise is Value traded – India strong, in our view Cash (NSE+BSE) 369 513 406 Earnings risks comes from three sources: revenue, costs and provisions Derivatives (NSE) 6,778 33,194 7,387 Deri. open interest 2,688 5,090 3,548 Company alerts Tata Power: Sliver of hope Forex/money market Legal advisory allows individual amendment of PPAs, could bring an end to Change, basis points Mundra troubles 23-Mar 1-day 1-mo 3-mo Targeting asset monetization of Rs50 bn in FY2021 to address leverage Rs/US$ 76.4 (2) 436 513 concerns 10yr govt bond, % 6.9 (7) 21 (12) Maintain BUY rating with revised fair value estimate of Rs60/share Net investment (US$ mn) 20-Mar MTD CYTD Sector alerts (6,698 FIIs (460) (4,911) ) Media: Box office trends: Rs1 bn - the new normal? MFs 157 2,845 4,500 Box office drivers of 2019: Bollywood movies #6-25 and Hollywood Top movers Change, % Best performers 23-Mar 1-day 1-mo 3-mo CDH IN Equity 280 (0.7) 2.0 8.5 DIVI IN Equity 1,852 (7.2) (14.3) 1.9 HUVR IN Equity 1,870 (8.9) (15.6) (3.9) DRRD IN Equity 2,768 (4.4) (12.8) (4.4) DMART IN Equity 1,820 (5.0) (23.8) (4.6) Worst performers IIB IN Equity 336 (23.6) (71.2) (77.9) IHFL IN Equity 96 6.0 (70.9) (69.0) EDEL IN Equity 37 (10.0) (60.1) (66.9) MSS IN Equity 53 (19.9) (53.4) (63.5) TTMT IN Equity 66 (14.4) (56.1) (62.3) [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY HDFC Bank (HDFCB) Banks MARCH 24, 2020 CHANGE IN RECO. Sector view: Attractive Fresh opportunity into an attractive franchise. We upgrade HDFC Bank to BUY CMP (`): 772 from ADD as the recent correction, which has erased three years of performance, is Fair Value (`): 1,050 available at a far more attractive valuation. A slowdown in the consumer space remains BSE-30: 25,981 an area of risk on growth, costs and provisions in the near term. We cut our earnings estimates to reflect this risk and reduce our fair value to Rs1,050 from Rs1,350 earlier. However, the franchise has demonstrated that its strength in underwriting is better than its peers in the past and its ability to overcome a slowdown, if any, should be better. HDFC Bank Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 1,306-760 EPS (Rs) 48.2 50.2 55.5 Mcap (bn) (Rs/US$) 4,231/55.4 EPS growth (%) 24.5 4.3 10.5 QUICK NUMBERS ADTV-3M (mn) (Rs/US$) 11,622/152 P/E (X) 16.0 15.4 13.9 Shareholding pattern (%) P/B (X) 2.5 2.2 2.0 Building 6% Promoters 21.3 BVPS (Rs) 307.2 343.0 385.1 earnings CAGR for FIIs 49.6 RoE (%) 16.5 15.2 14.9 FY2021-22. MFs/BFIs 11.7/2.5 Div. yield (%) 1.2 1.3 1.4 Price performance (%) 1M 3M 12M NII (Rs bn) 555 625 692 Absolute (36) (40) (32) PPOP (Rs bn) 478 527 588 LLP increased to Rel. to BSE-30 (1) (4) (0) Net profits (Rs bn) 262 274 302 1.5% from 1% currently for Tailwind of a decade low valuation leading to an upgrade FY2021-22. We upgrade HDFC Bank to BUY from ADD with a revised FV of Rs1,050 (from Rs1,350 earlier). Upgrade to BUY On our revised FV, we are valuing the bank at 2.8X book and 19X FY2022 EPS for RoEs moving from ADD with FV to ~15% levels. We cut our estimates by 11% and 17% respectively for FY2021-22 building in of Rs1,050 (from lower loan growth and higher loan-loss provisions to reflect the long standing risks that we Rs1,350 earlier) have articulated consistently in the past. From a purely technical perspective, we are closer to -2 standard deviation to its two decade average price/book history. Valuation has moved closer to FY2008 levels (October 2008-April 2009) and FY2002 levels (October 2002 –2004). Timing of upgrade is risky along with the multiple assigned; but franchise is strong, in our view We note that the upgrade has risks especially on a few factors: (a) we are uncertain of the slowdown both from a timing or depth perspective. (b) Depending on the nature of slowdown, the credit costs are likely to have a significant impact on earnings. We are also uncertain on the policy actions that could result in delay in asset classification. This would make it challenging to provide comfort on reported earnings leading to a lower multiple to business. (c) Management M B Mahesh, CFA change has been dominating discussion but we see lower risk to business performance in the medium term. The long term execution of the bank is driving the change in the current view. Nischint Chawathe Earnings risks comes from three sources: revenue, costs and provisions Dipanjan Ghosh We are building 6% CAGR in earnings which would lead to RoEs slipping to 15% levels for FY2021-22. While there would be discussion on the credit costs or asset impairment, we see Venkat Madasu two additional risks as well: (a) Revenue growth would slow down led by slower loan growth, change to less risky loan book which can be NIM dilutive unless the bank is able to improve Ashlesh Sonje lending spreads from other segments. Fee income growth, especially asset side fees, would be weaker consequent to lower disbursements from high margin business. A slowdown in consumption can weaken spends in the coming quarters and this would have a direct bearing on earnings. We are building 12% revenue growth on the back of 12% NII growth (b) Cost ratio could weaken (not built in our estimates currently) as the investments for collections would [email protected] significantly rise but be partly offset by lower origination costs. (c) We are building 30% CAGR Contact: +91 22 6218 6427 in provisions which would result in LLP moving to 1.5% of loans as compared to 1% currently. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. HDFC Bank Banks A longer term view needed to be positive at current stage of business We note that our upgrade to BUY is probably fraught with a lot of risk and investors need to build a long term view to build a positive thesis on the bank as history has shown that HDFC Bank has been one of the best banks in India. There is a fair amount of uncertainty on (1) earnings or revenue growth given that HDFC Bank has been consistently delivering solid print and is well ahead of its peers, (2) the current economic conditions show a fair amount of impact on the consumption or the retail parts of the business where the growth for the bank has been fairly strong in recent years which could result in higher credit costs, (3) management succession process has begun and probably has been slower than what we would have anticipated. A line of argument that we have always positioned ourselves is that ICICI Bank was a higher conviction idea given that the bank was offering superior liability profile, less risky loan portfolio (housing), lower aggression in lending with greater emphasis in establishing strong underwriting practices and was gradually coming out of the previous corporate credit cycle. Finally, we were of the assumption that if retail credit cycle were to reverse, there is always a likelihood that HDFC Bank’s credit costs could be higher than ICICI Bank’s purely on the basis of asset mix and ignoring the relative strengths in underwriting within each product segments. As ICICI Bank was available at a lower multiple, our argument was that with the passage of time and steady execution in business strategy, one could build a thesis that the discount to HDFC Bank should gradually decline from current levels. However, the sharp reduction in stock price of banks with less differentiation to the above arguments has given an opportunity to build a stronger conviction on HDFC Bank on an absolute basis. We are uncertain if the bank can enjoy the high premium-to-its-peers that it has enjoyed in the past, especially with changes in the senior management which can potentially see changes in execution strategy. On our revised FV, we are valuing the bank at 2.8X book and 19X FY2022 EPS for RoEs moving to ~15% levels.