Is HDFC Bank a good investment?

HDFC Bank Analysis

RTI For Money, Lillaney

7/9/20233 min read


  1. What is a good investment?

  2. What are the factors to be considered while analysing banks?

  3. How does HDFC Bank perform on these factors?

  4. Is HDFC Bank a good investment?


1. What is a good investment?


Ben Graham defined investment as below:


“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”


If I had to invest any amount I would look at the following criteria.


What’s the current rate of inflation?

How much are the bonds yielding, especially the 10Y?

Are there any investments which can give me more return than the bonds above?


The answers currently as on 04-07-2023 according to me would be as follows:


Around 4-5%

Around 7%

Investing in an index ETF has returned over 7% in the last 10 years if I am not wrong.


From the above it seems that at a minimum we should target a return of more than 7% for any investment that we make at present considering the data points above.


But how do we know if HDFC Bank can give us more than 7% returns in the upcoming period?


2. What are the factors to be considered while analysing banks?


The following ratios can help us to know if a bank is a good investment.


a. ROE over the last 10 years

b. Net Interest Margins over the last 10 years

c. Non Performing Assets Ratios over the last 10 years

d. Leverage (Debt / Equity) over the last 10 years

e. Coverage ratios over the last 10 years



3. How has HDFC Bank performed on these factors over the last 10 years?


a. ROE over the last 10 years


ROE has been between 14.5% and 20% in the last 10 years.


b. Net Interest Margins over the last 10 years


NIMs have been in the range of 3.5% to 4% in the last 10 years.



c. Non Performing Assets Ratios over the last 10 years


NPAs have been less than 1.5% in the last 10 years.


d. Leverage (Debt / Equity) over the last 10 years


Leverage has been between 84% and 113% over the last 10 years.


e. Coverage ratios over the last 10 years


Capital Adequacy Ratio has been between 17% and 20%.


4. Is HDFC Bank a good investment?


Based on the above factors HDFC Bank seems to be satisfying the criteria of safety of principal.


Now let's look if it can provide a satisfactory return. Based on the CMP of 1700 and EPS of 80 its yield is less than 5% which is not a satisfactory return.


Even if we consider that sales and profits have grown at more than 18% compounded for the last 10 years it means its sales and earnings could double every 4 years if it continues at the same pace.


Current earnings - say x

Earnings in 4 years - 2x

Earnings in 8 years - 4x

Earnings in 12 years - 8x

Earnings in 16 years - 16x

Earnings in 20 years - 32x


At the end of Mar 2023 , EPS was around Rs.80 and price was around Rs.1700 giving a P/E of 1700/80 which is approx 21.25 and a bit on the higher side than normal.


If the above assumptions are correct the EPS in March 2043 would be 80 * 32 = Rs.2560.


Assuming a P/E of 20 the price would be 2560*20 = Rs.51200 which is 30 times the price of Rs. 1700 at the end of March 2023.


If we consider a price increase of 30 times in 20 years it indicates a growth of more than 18% which is a very good return.


If you would like to know more about growth investing by which we assumed the returns and prices above, you can do so by reading the books below:


  1. Common Stocks Uncommon Profits by Phil Fisher - https://amzn.to/420BrGY

  2. Buffettology by Mary Buffett - https://amzn.to/3AU7cWw



Conclusion


Although HDFC Bank is a good quality business the price at which it is available does not promise a satisfactory return from these levels in the short term. However, if you have a long-term view of 10-20 years then HDFC Bank can give fantastic returns if it continues to grow at the same pace that it has been growing in the past.