1

SAPM Assignment : Fundamental Analysis of HDFC Bank

HDFC BANK : FUNDAMENTAL ANALYSIS

Submitted to Prof (Dr) Anuj Verma

By Group No 4

INTRODUCTION
0.1

Aim

This paper aims at carrying out a detailed analysis of HDFC Bank from a
perspective that tends to focus on various issues ranging from macro-economic
issues financial health of the company.
0.2

Scope & Layout

The paper would cover macro-economic outlook of the country as such before
narrowing its focus on the overall outlook of banking industry and then down to the
company, ie HDFC, itself.
The paper is laid out in the following parts:(a)

Part 1 Macro-economic outlook.

(b)

Part 2 Banking Industry in India.

(c)

Part 3 Financial health of HDFC.

(d)

Part 4 Conclusions.

(e)

References.

PART 1- MACRO-ECONOMIC OUTLOOK

1.1

International Linkages

In the present age of globalisation and fluid international linkages, it would be

improper if the economy of a developing nation like India is studied in isolation. To
many, the simple fact, that when many world economies went into a tail spin in 2008
and yet India could keep her neck above the water line, may appear to be a reason
enough to study our economy in isolation. But reality is far from such a belief. Just to
illustrate the point, we do not have to go too far. A simple statement made by
Chairman of American Fed on 22 May 2013 sent ripples across the globe and what
happened to many economies, India included, is all to see. The irony of the situation
is that whatever was thought loudly by USA central bank chairman, did not happen
Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

at all and when news came out on 18th September 2013 that Fed was not going to
implement those policy changes, stock markets soared all over the globe (and so did
the banking stocks). It is evident that Fed would ultimately get into tapering mode as
far as Quantitative Easing is concerned and such happiness may be short-lived. The
aim of looking at this aspect is simply to highlight the fact that while our domestic
economy would dictate industrial/sector specific agendas, the effects from points of
origin that lay well beyond our international borders, cannot be simply wished away.
The fundamental analysis being carried out in this paper, therefore, is based
on prevailing global and domestic financial scenarios. How long such input would
remain relevant, would be anybodys guess.

1.2

Indian Economic Outlook

Different analysts and scholars have different take on our economy in

prevailing times of uncertainty and volatility and rightfully so. Agreeing with anyone
or quoting any one particular school of thought, therefore, would not be the right way
forward. For the purpose of this analysis, the group has decided to follow official
figures as quoted by governmental agencies like Planning Commission, RBI and PM
Office. It is felt and believed that data from such agencies have the official backing
and the sanctity that comes along with such a credence. Also, due weightage has
been given to certain studies that have attempted to lay bare facts about our
economy without playing the blame games.
Earlier this month, the Economic Advisory Council to the Prime Minister
(PMEAC) released the document Economic Outlook 2013-14. As per the
document, the economic growth forecast of India for the current fiscal has been
lowered to 5.3% (a huge drop from 6.4% projected earlier and 9% as envisaged
during 12th Plan). RBI, however, appears to be more pessimistic with its revised
figures of 5.5% vis--vis earlier figures of 5.7%. The mood, therefore, is dismal.
When read in conjunction with a volatile exchange rate, depleted FOREX reserves
and Current Account as well as Fiscal deficits, the scene looks more gloomy.
But there are certain silver linings too. Finance Ministry is confident of bringing
down Fiscal Deficit to manageable range of less than 4.5% and CAD has also
started to show some recovery after restrictions of gold and non-essentials were put
in place. As if to boost the sagging morale, PMEAC has listed out host of measures
to address the issue and restore the confidence. Some of the important
suggestions/assessments are as under:(a)
With great Monsoons, the agriculture sector is expected to grow by
4.8% in the current fiscal. That would be a huge leap from 1.9 %.
(b)
13.

Industrial growth has been pegged at 2.7 % as against 2.1 % in 2012-

(c)

On a negative side,

growth of services sector is projected to

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

decelerate to 6.6% in current fiscal from 7.1 % a year ago.
(d)
The government should liberalise FDI investment norms, resolve tax
concerns of the industry, fast track public sector investment and initiate
measures to contain fiscal deficit.
(e)
Referring to the external sector, CAD in 2013-14 is likely to come down
to 70 billion US dollars or 3.8% of GDP, from 88.2 billion US dollars or 4.8% a
year ago.
(f)
Rupee appears to well corrected at the current level it is well corrected.
Stability is expected to return to the foreign exchange market. As capital
flows return and as CAD begins to fall, this tendency will strengthen.
(g)
The expected WPI inflation by end March 2014 will be around 5.5% as
against the average of 7.4% in 2012-13 and 5.7 % for March end 2013.
However, the wide range of 4% between WPI and CPI would continue for the
time being.
(h)
The trade deficit should come down to around 185 billion US dollars in
2013-14, against an estimated 195.7 billion US dollars in 2012-13.
(j)
Between 2010-11 and 2012-13, the combined impact of higher net oil
and net gold imports on the CAD was almost 57 billion US dollars or 3% of
GDP. The CAD may go even below 70 billion US dollars in 2013-14 if the
recent trends in exports and imports are maintained through the year.
(k)
Net Capital flows are projected to fall to 61.4 billion US dollars in 201314 against an estimated 89.4 billion US dollars in 2012-13 putting pressure on
the country's forex reserves.

RBI, during its September/mid quarter review of Monetary Policy, did increase policy
repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.25%
to 7.5% while reducing the marginal standing facility (MSF) rate by 75 basis points
from 10.25% to 9.5% as also the minimum daily maintenance of the cash reserve
ratio (CRR) from 99% of the requirement to 95%. However, CRR was left unchanged
at 4.0 per cent. Needless to say, all such measures and forecasts have
corresponding effects on the banking sector.

1.3

Macro-economic Issues Concerning Banking

Since mid-July, the RBI has put in place a number of exceptional measures to
tighten liquidity with a view to dampening volatility in the foreign exchange market.
These measures have raised the effective policy rate for monetary policy operations
to 10.25 per cent, aligned to the re-calibrated MSF rate. The intent has been to
maintain tight liquidity conditions at the short end of the term structure until the
measures designed to alter the path of the CAD and improve prospects for its stable

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

funding take effect.

As a number of these measures are now in place and because the external
environment has improved, it is now possible for the RBI to contemplate easing
these exceptional measures in a calibrated manner. As a first step, therefore, the
MSF rate was reduced by 75 basis points. Furthermore, the minimum daily
maintenance of the CRR prescribed by the RBI was brought down as mentioned
earlier. The timing and direction of further actions on exceptional measures will be
contingent upon exchange market stability, and can be two-way.
As the measures are unwound, the objective of the RBI would be to normalise
the conduct and operations of monetary policy so as to allow the LAF repo rate to
resume its role as the operational policy interest rate. However, inflation is high and
household financial saving is lower than desirable. As the inflationary consequences
of exchange rate depreciation and hitherto suppressed inflation play out, they will
offset some of the disinflationary effects of a better harvest and the negative output
gap.
In the current scenario, banks are constantly pushing the frontiers of risk
management. Compulsions arising out of increasing competition, as well as agency
problems between management, owners and other stakeholders are inducing banks
to look at newer avenues to augment revenues, while trimming costs. Consolidation,
competition and risk management are no doubt critical to the future of banking but it
is believed that governance and financial inclusion would also emerge as the key
issues for a country like India, at this stage of socio-economic development.
As a step towards technical environment that affects banking sector in our
country, we need to have a look at Porters Five Forces Model. The diagrammatic
representation of the model is as follows:-

Threat of New Entrants. As part of on-going banking sector reforms, new

licenses would be issued to a few new players shortly. And yet the fact remains that
Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

anyone and everyone cannot start up a bank. Nevertheless, there are services, such
as internet bill payment, on which entrepreneurs can capitalise. Banks are fearful of
being squeezed out of the payments business, because it is a good source of feebased revenue. Another drift that poses a threat is companies offering other financial
services eg an insurance company offering mortgage and loan services. As far as
regional banks are concerned, the possibility of a mega bank entering into the
market poses a real threat.
Power of Suppliers. The providers of capital might not posture a gigantic
hazard, but the threat of suppliers luring away human capital does. Retention of
talent becomes difficult in a situation wherein a talented individual working in a
smaller regional bank, may be stolen away by bigger banks, investment firms, etc.
Power of Buyers. One single retail customer may not really pose much of a
threat to the banking industry, but one major factor affecting the power of buyers is
relatively high switching costs. If a person has a mortgage, car loan, credit card,
checking account and mutual funds with one particular bank, it can be extremely
tough for that person to switch to another bank. In an attempt to lure in customers,
banks try to lower the price of switching, but many people would still rather stick with
their current bank. On the other hand, large corporate clients have banks running
after them, offering innovative plans and schemes. Financial institutions - by offering
better exchange rates, more services, and exposure to foreign capital markets - work
extremely hard to get high-margin corporate customers.
Availability of Substitutes. Our market, as is well known, has a parallel
economy based on black money and grey operators. Even if, for a moment, we
discard such realities, there would still be plenty of substitutes in the banking
industry. Banks offer a suite of services over and above taking deposits and lending
money, but whether it is insurance, mutual funds or fixed income securities, chances
are there is a non-banking financial services company that can offer similar services.
On the lending side of the business, banks are seeing competition rise from
unconventional companies that offer preferred financing to customers who buy big
items. If a company is offering 0% financing, why would anyone want to get a loan
from the bank for the same commodity and pay expensive interest?
Competitive Rivalry. The banking sector is highly competitive. The financial
services industry has been around for a good amount of time and simply put across,
anyone and everyone who needs banking services, already has the access to such
services. Banks, therefore, have no choice but to make attempts to lure clients away
from their competitors. A bank may do so by offering lower financing, preferred rates
and investment services but such an action may cause banks to experience pretty
lower profit margins. In such a scenario, concerned bank(s) have an incentive to take
on high-risk projects. In the long run, we're likely to see more consolidation in the
banking industry. Big fish may, logically, prefer to digest smaller fish rather than
spending or cutting on own margins.
The Indian banking sector is linked to the world economy but the Indian
banking system has had no direct exposure to the sub-prime mortgage assets or to

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

the failed institutions. It has very limited off-balance sheet activities or securitized
assets. In fact, our banks continue to remain safe and healthy. The Indian banking
sector has been well shielded by the central bank and has managed to sail through
most of the crisis with relative ease. It is hoped that the trend would continue for a
foreseeable future.

PART 2- BANKING INDUSTRY IN INDIA

2.1

Introduction

Banking in India is the salvation of the nation and its people. Banking has
helped in developing the dynamic sectors of the economy and guide in a new dawn
of development on the horizon. The sector has transformed the aspirations of
millions of people into reality. As on date, Indian banks do assuredly compete with
modern banks of the world.
The progression in the Indian Banking Industry has been more qualitative
than quantitative and it is anticipated to remain the same in the coming years. As per
the projections made in the "India Vision 2020" of Planning Commission and the
Draft 12th Plan, the pace of enlargement in the balance-sheets of banks is likely to
decelerate in coming years. The total assets of all scheduled commercial banks by
end-March 2014 is estimated at Rs 50,75,000 crores. Bank assets are expected to
grow at an annual composite rate of 13.4 per cent during the 2012-2017 as against
the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is
expected that there will be large additions to the capital base and reserves on the
liability side. The recent observations on NPAs have also not been too healthy either.

2.2

Place Under Sun

The Public Sector Banks form the base of the banking sector in the country
and account for almost 80 per cent of the total banking industry assets. However, as
hinted earlier, most of such banks have huge NPAs, too much or massive manpower
and lack of modern technology. On the other hand the Private Sector Banks are
making marvellous progress. They are front-runners in Internet banking, mobile
banking, phone banking as also ATMs. As far as foreign banks are concerned they
are likely to succeed in the Indian Banking Industry.
The banking industry is presently in a changeover phase. On the one hand,
the PSBs are in the process of detaching their corpulence in terms of unwarranted
manpower, excessive NPas and disproportionate governmental equity, while on the
other hand the private sector banks are consolidating themselves through M&As. At
the same time, the economic and corporate sector slowdown has led to an
Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

increasing number of banks fixing on the retail sector. Many of them are also
entering the new scenes of insurance. Banks with their impressive reach and a
regular interface with the retail investor are the best placed to enter into the
insurance sector. Banks have been allowed to provide fee-based insurance services
without risk participation, invest in an insurance company for providing infrastructure
and services support and set up of a separate joint venture insurance company with
risk participation. The process of granting new licenses is going on as on date and
even foreign banks have been given options to participate through Indian entities.
The RBI has been affecting bank rate and CRR cuts at regular intervals to
improve liquidity and reduce rates. One of the exception was in recent months (mid
2013) when the RBI modified the CRR norms to stem the fall in the Rupee against
the Dollar. The recent interest hikes (September 2013) would aid banks that have
been facing heat since slide of Rupee began earlier this year.

2.3

The Road Ahead

India Vision 2020 envisages refining the position of India from the present
11th to 4th among 207 countries given in the World Development Report in terms of
the Gross Domestic Product (GDP). It also envisions moving the country from a lowincome nation to an upper middle-income country. To achieve this objective, the
India Vision aims to have an annual growth in the GDP of 8.5 per cent to 9 per cent
over the next 10 years. Economic development of this scale would see quadrupling
of real per capita income. When compared with the growth in GDP of less than 6%
as of now, this is an ambitious target. This would call for substantial investments in
the infrastructure and meeting the funding requirements of a high magnitude would
be a challenge to the banking and financial system.
The skill of the financial system in its present structure to make available
investible capitals to the potential investors in the forms and tones that will be
required by them in the coming years, that is, as equity, long term debt and medium
and short-term debt would be critical to the achievement of plan objectives. The gap
in demand and supply of resources in different segments of the financial markets has
to be met and for this, level flow of funds between various types of financial
institutions and instruments would need to be enabled.

2.4

Productivity and Efficiency

In the month of August 2013, RBIs Deputy Governor, during his address in an
industry organised event (FIBAC 2013) tried to spell out the productivity and
efficiency of banking sector and related challenges. The text ahead is based on the
above mentioned address.
Investopedia defines productivity as an economic measure of output per unit
of input. The concept of productivity is more easily applied to industrial settings while
it is more difficult to define and measure in the context of services sector, including

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

the banking industry. One has to rely upon proxies to gauge productivity of banks
and there is no single measure that has been universally accepted as representing
banking productivity. It is common to see the terms productivity and efficiency
being used interchangeably in literature. However, productivity is more a measure of
performance of labour, which is one of the factors of production. Efficiency, on the
other hand, is a much broader term which represents the performance of all factors
of production. In case of banks, while productivity measures the performance of their
staff, efficiency represents the combined performance of staff, capital and
management. However, it needs to be noted that there are strong inter-linkages
between the performance of the three factors of production: high productivity of staff
will result in efficient utilization of capital, while an efficient management function
would result in superior performance by labour and capital. It would, therefore, be
safe to conclude that when all the key inputs are optimally deployed, the outcome
will be an efficient bank.
Banks form the core of a nations financial system, performing the vital
function of financial intermediation through liquidity, maturity and risk transformation.
Finance is the lifeline of any commercial activity and banks act as a link between the
savers and the borrowers. The productivity and efficiency of banks, thus, critically
impacts the productivity and efficiency of all economic activity and is a matter of
concern for policy makers and economy watchers. The Indian banking system has
seen important productivity improvements over the last two decades with the PSBs,
in particular, bridging the gap with new private banks and foreign banks. However,
the pace of progress has declined, largely due to lack of desired impetus. India
continues to lag behind several other countries on various productivity parameters.
Banks gains in operational efficiency have, however, come at the cost of their
allocational efficiency. The improved operational efficiency has been a result of
technological progress and structural changes in balance sheet towards more
wholesale business. The operational efficiency gains, though profitable for the
banks, have not had the desired beneficial impact on the society as a whole,
particularly the rural areas, individuals and small businesses. It is not wrong to say
that the vulnerability of the banking system has increased on account of the
imbalances arising from growth in operational efficiency without commensurate rise
in allocational efficiency. Both Reserve Bank of India and Government of India have
initiated several corrective measures to reverse this trend by actively promoting the
programme of financial inclusion. Banks have to ensure that they attain greater
allocational efficiency by extending access to financial services to the unbanked
masses and providing the excluded poor the opportunity to leverage the financial
system to improve their economic condition. True productivity of the banking system
can be judged not just by the positive impact on banks own financials but by the
impact it has on the lives of ordinary citizens.
2.5

In a Nutshell

It is true that banks have been under tremendous pressure, especially during
the present fiscal. It is wrong to see such a trend in isolation as a host of factors
have been contributing to such a trend. With new RBI Governor at the helm of

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

SAPM Assignment : Fundamental Analysis of HDFC Bank

affairs, banking industry is optimistic even though the pressure would continue for a
while. Even though SBI remains the biggest of all, banks like HDFC and AXIS Bank
have been successful in leading with their operational efficiencies and resultant
productivity. The future that envisages growth of the nation, cannot ignore a parallel
growth of banking sector and that being something inevitable, future looks bright for
the industry despite present hiccups and glitches.

PART 3 - FINANCIAL HEALTH OF HDFC BANK

3.1

An Overview of the Bank

HDFC Bank Limited was incorporated in August 1994 as HDFC Bank

Limited', with its registered office in Mumbai and it began operations as a
Scheduled Commercial Bank in January 1995. It is involved in providing a
wide range of banking and financial services in retail banking, wholesale
banking and treasury operations. Over the last ten years, HDFC has grown at
a compounded annual growth rate of 29.55% and has emerged as a market
leader across multiple products. For FY 2013, HDFC Banks net interest
margins stood at a healthy 4.5 % (4.4% for FY 2012). 30% of its operating
revenue came from non-funded segments such as fees and commissions for
services. For the same period, net NPAs stood at 0.2% (0.18% for FY 2012)
far below the industry average for private banks. As of June 30, 2013, HDFCs
customer base was over 26.2 million and its distribution network was at 3,062
branches and 10,743 ATMs in 1,845 cities. 75% of HDFCs branches are
outside the top 9 cities of India.
3.2

Shareholding Pattern

The promoters, as can be seen, do hold the power to resist any major
decision that may try to change the outlook or profile of the bank. Large promoter
holding indicates conviction and sincerity of the promoters. It is believed that a
greater than 35 % promoter holding offers safety to the retail investors. At the same
time, FII participation of 34% is a great indicator of good financial health of the bank.
Total institutional holding in the Company stood at 42.66 % (FII+DII). Large
institutional holding indicates the confidence of seasoned investors. At the same
time, it can also lead to high volatility in the stock price as institutions buy and sell
larger stakes than retail participants.

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

10

3.3

SAPM Assignment : Fundamental Analysis of HDFC Bank

Key Financial Figures (in Crores)

As under :-

Particulars

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

16,314.02

16,232.92

20,043.33

27,605.56

35,861.02

Interest expended

8,903.37

7,797.60

9,425.15

15,106.12

19,695.45

Net Interest Income

7,410.65

8,435.32

10,618.18

12,499.44

16,165.57

Other income

3,436.52

4,034.07

4,585.05

5,452.39

7,132.97

Operating expenses

5,649.27

5,905.51

7,317.95

8,807.12

11,551.90

Operating Profit

5,197.90

6,563.88

7,885.28

9,144.71

11,746.64

1,879.85

2,144.87

1,928.06

1,477.21

1,742.63

Interest earned

Provisions (other than

provisions for tax) and
contingencies

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

10

11

SAPM Assignment : Fundamental Analysis of HDFC Bank

PBT

3,318.05

4,419.01

5,957.22

7,667.50

10,004.01

Tax

1,065.92

1,386.09

1,939.52

2,394.10

3,103.73

2,252.13

3,032.92

4,017.70

5,273.40

6,900.28

2,248.99

3,003.65

3,992.49

5,247.02

6,869.64

PAT (before Minority

Interest and share of
Associates)
Profit/ (loss) attributable to
Minority Interest
Share of profit / (loss) of
Associates
Consolidated Profit / (Loss)
for the year

As can be seen, the YoY profit figures have been steadily increasing and the growth has been re-assuring even during the
times that have not been too easy. More analysis would follow.

3.4

Profitability Analysis
As under (in %age):-

Particulars

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Net Profit Margin Ratio

11.40

14.96

16.31

15.95

15.98

Cost to Net Income Ratio

52.08

47.36

48.13

49.06

49.58

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

11

12

SAPM Assignment : Fundamental Analysis of HDFC Bank

Other Income to Net Income

31.68

32.35

30.16

30.37

30.62

Ratio

Net profit margin is arrived at by dividing profit after tax by the total income generated (i.e. interest earned plus other
income) and shows what is left for the shareholders as a percentage of total income.
Cost to net income ratio is particularly important in valuing banks. It is derived by dividing operating expenses by the net
income generated (i.e. net interest income plus the other income). The ratio highlights the efficiency with which the bank is being
run - the lower it is, the more profitable the bank will be. If this ratio rises from one period to the next, it means that costs are rising
at a higher rate than income. Together these ratios help in understanding the cost and profit structure of the bank and analysing
business inefficiencies. Other income largely constitutes of fee income such as commission and brokerage fees and client based
merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management
services), syndication and placement fees, processing fees from loans and commission on non-funded products (such as letters of
credit and bank guarantees) etc. Banks in developed countries derive nearly 50% of their income from these non-funded sources. A
high other income to net income ratio is good for the bottom line (i.e. net profit) as income from this stream is derived without
significant mobilisation of deposits and hence the cost associated with this income is relatively lower compared to interest income.

3.5

Key Figures (in Crores)

Sources of Funds / Liabilities

Particulars

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Share Capital

425.38

457.74

465.23

469.34

475.88

Money received against warrants

400.92

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

12

13

SAPM Assignment : Fundamental Analysis of HDFC Bank

Reserves & Surplus

14,262.74

21,158.15

25,117.91

29,741.10

36,166.84

5.49

2.91

2.91

0.30

15,094.53

21,618.81

25,586.05

30,210.74

36,642.73

43.35

75.89

121.66

183.66

221.34

1,42,644.80

1,67,297.78

2,08,287.21

2,46,539.58

2,96,091.77

9,253.64

13,171.80

14,650.44

26,334.15

39,496.61

16,366.44

20,783.21

29,317.57

37,786.88

35,270.54

1,83,402.76

2,22,947.49

2,77,962.93

3,41,055.01

4,07,722.99

Particulars

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Fixed Assets

1,732.28

2,149.07

2,200.94

2,377.91

2,773.32

13,527.22

15,483.31

25,100.89

14,991.63

14,630.88

4,009.94

14,594.88

4,737.39

6,183.53

12,900.28

Advances

99,027.37

1,26,162.73

1,60,831.42

1,98,837.53

2,47,245.12

Investments

58,715.15

58,508.28

70,276.67

96,795.11

1,10,960.41

Other Assets

6,390.81

6,049.22

14,815.63

21,869.30

19,212.98

Total assets

1,83,402.76

2,22,947.49

2,77,962.93

3,41,055.01

4,07,722.99

Employee stock options grants

Net worth (shareholders funds)
Minority Interest
Deposits
Borrowings
Other liabilities and provisions
Total Liabilities
(Rs. Cr)

Application of Funds / Assets

Cash and balance with RBI

Balances with banks and money at call and
short notice

In isolation, the above fact sheet may not really convey much beyond YoY progress towards assets and a corresponding
Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

13

14

SAPM Assignment : Fundamental Analysis of HDFC Bank

trend towards liability side. In the present era of high NPAs (around 5-6% for PSBs), the total provisions of around 35,000 Crores
stand very well covered through investments that run to the tune of 1,10,000 (three times).
3.6

Efficiency Analysis (in %age)

Particulars

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Advances / Loan Funds Ratio

65.19

69.91

72.14

72.87

73.68

ROE / RONW

14.90

13.89

15.60

17.37

18.75

Advances to Loan funds ratio: This ratio indicates the efficiency with which the bank is able to deploy the funds it
mobilises and is arrived at by dividing the banks total advances by its total deposits (i.e. deposits + borrowings). A high advance to
loan fund ratio indicates that the bank might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too
low, banks may not be earning as much as they could be.
Return on Equity (ROE) or Return on Net Worth (RONW) : measures the amount of profit which the company generates
on money invested by the equity shareholders (i.e. share capital + reserves and surplus). In short, ROE draws attention to the
return generated by the shareholders on their investment in the business. ROE is widely used in comparing the profitability of the
company with other companies in the same industry.

3.7

Valuation Analysis

Particulars

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Net Interest Income Rs.

16,314.02

16,232.92

20,043.33

27,605.56

16,165.57

(0.50 %)

23.47 %

37.73 %

(41.44 %)

Growth (%)

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

14

15

SAPM Assignment : Fundamental Analysis of HDFC Bank

PAT Rs.

2,252.13

3,032.92

4,017.70

5,273.40

6,900.28

34.67 %

32.47 %

31.25 %

30.85 %

Earnings Per Share Basic

10.58

13.76

17.30

22.50

29.10

Earnings Per Share - Diluted

10.54

13.62

17.30

22.20

28.80

Price to Earnings

18.36

28.08

27.05

23.63

21.67

Growth (%)

EPS, as we understand, is a rough measurement of the amount of a company's profit that can be allocated to one share of
its stock. Basic earnings per share (EPS) do not factor in the dilutive effects on convertible securities. Basic EPS is calculated as
follows:
Basic EPS = (net income preferred dividends) / weighted average number of common shares outstanding.
Now, earnings per share is calculated by dividing the company's profit by the number of shares outstanding. Warrants, stock
options, convertible preferred shares, etc. all serve to increasing the number of shares outstanding. As a shareholder, this is a bad
thing. If the denominator in the equation (shares outstanding) is larger, the earnings per share is reduced (the same profit figure is
used in the numerator). This is a conservative metric because it indicates somewhat of a worst-case scenario. On one hand,
everyone holding options, warrants, convertible preferred shares, etc. is unlikely to convert their shares all at once. At the same
time, if things go well, there is a good chance that all options and convertibles will be converted into common stock. A big difference
in a company's EPS and diluted EPS can indicate high potential dilution for the company's shares, an attribute almost unanimously
ostracized by analysts and investors alike. And in this case, the difference between the two is minimal (29.10-28.80=0.30) and that
augurs well for the bank.
As regards P/E, a high P/E suggests that investors are expecting higher earnings growth in the future compared to
companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It is usually more useful to compare the
P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own
historical P/E. A look at the following data would be self-explanatory:Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

15

16

SAPM Assignment : Fundamental Analysis of HDFC Bank

Company
Kotak Mah. Bank
Dhanlaxmi Bank
HDFC Bank
IndusInd Bank
ING Vysya Bank
ICICI Bank
Dev.Credit Bank
IOB
Axis Bank
St Bk of India
Central Bank
Yes Bank
City Union Bank
Federal Bank
Lak. Vilas Bank
Karur Vysya Bank
St Bk of Mysore
UCO Bank
South Ind.Bank
Stand.Chart.PLC
J & K Bank
Bank of Baroda
IDBI Bank
Karnataka Bank
United Bank (I)
Allahabad Bank
Bank of India
Canara Bank
Punjab Natl.Bank
SBT
Oriental Bank
Union Bank (I)
St Bk of Bikaner

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

PE
35.53
24.12
20.45
17.31
15.27
11.97
9.39
9.28
9.01
8.27
7.59
7.53
6.52
6.48
6.48
6.32
5.76
5.79
5.16
5.07
5.03
4.64
4.54
4.50
4.32
3.62
3.51
3.48
3.42
3.41
3.33
3.03
2.99

16

17

SAPM Assignment : Fundamental Analysis of HDFC Bank

Vijaya Bank
Bank of Maha
Corporation Bank
Andhra Bank
Pun. & Sind Bank
Dena Bank
Syndicate Bank
Indian Bank

2.97
2.81
2.66
2.53
2.32
2.14
2.06
2.04

Further, the PE of Banking Sector is 9.31% and HDFC is way beyond the industry averages. The two banks, Kotak and
Dhanlaxmi may be scoring higher than HDFC in PE but HDFC Bank with its market cap of 146,260 Crores is way ahead and
beyond a fair comparison wrt Kotak Mahindra ( 52,632 Crores) and Dhanlaxmi Bank ( 434 Crore).

3.8

Dividend History
Rate of dividend (of face value)

Rs.

Closing price*

Date*

FY 2008

85 %

1.70

248.60

5 June 2009

FY 2009

100 %

2.00

308.04

22 June 2009

FY 2010

120 %

2.40

382.83

10 June 2010

FY 2011

165 %

3.30

471.79

2 June 2011

FY 2012

215 %

4.30

547.00

28 June 2012

FY 2013

275 %

5.50

655.70

13 June 2013

Year

* Closing Price as on the date of declaration of final (or last) dividend for the Financial Year.

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

17

18

SAPM Assignment : Fundamental Analysis of HDFC Bank

The Company has maintained an average dividend yield of 0.71 % over the last 5 financial years. When compared with market prices, the
dividend yield is not the highest (eg 0.8% in FY2013) in the industry and yet the consistency in the payments has been a feature of this stock.

3.9

Liquidity and Credit Analysis

Particulars
Net Interest Margin Ratio (NIM)
Capital Adequacy Ratio
Net NPAs

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

4.22

4.35

4.25

4.44

4.50

15.69

17.44

16.22

16.52

16.80

0.63

0.31

0.19

0.18

0.20

NIM: Banks focus on lending or advancing money at a rate higher than the rate at which they accept deposits. Net Interest
Margin is calculated by dividing the difference between Interest earned (on advances) and interest expended (on deposits) by the
amount of (average) Invested Assets. If this ratio rises from one period to the next, it indicates that the bank is able to deploy its
funds more efficiently which results in greater profitability. It has been the case with HDFC Bank.
Capital Adequacy Ratio (CAR): or Capital to Risk Weighted Assets Ratio (CRAR) is a measure of a bank's capital (net
worth plus subordinated debt) expressed as a percentage of a bank's risk weighted credit exposures (loans). Two types of capital
are measured: Tier I capital, which can absorb losses without a bank being required to cease trading (such as ordinary share
capital and free reserves); and Tier II capital, which can absorb losses in the event of a winding-up and so provides a lesser degree
of protection to depositors (such as long term unsecured loans and revaluation reserves which is taken at a discount of 55 % while
determining its value for inclusion in Tier II capital). Measuring credit exposures requires adjustments to be made to the amount of
assets shown on a bank's balance sheet. This is done by weighting the loans made by a bank according to their degree of
riskiness, e.g. loans to Governments are given a 0 %weighting whereas loans to individuals are weighted at 100 %. Similarly offbalance sheet items such as guarantees and foreign exchange contracts are also weighted for their riskiness. On-balance sheet
and off-balance sheet credit exposures are added to get total risk weighted credit exposures.
Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

18

19

SAPM Assignment : Fundamental Analysis of HDFC Bank

As per the Basel II norms the minimum capital adequacy ratios that apply are:(a)

Tier I capital to total risk weighted credit exposures to be not less than 4 %;

(b)

Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit exposures to be not less than 8%.

The RBI currently prescribes a minimum capital of 9 % of risk-weighted assets, which is higher than the internationally
prescribed percentage of 8 %. Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and
efficiency of the financial system. HDFC Bank, therefore, is well capitalised with an overall capital adequacy ratio (CAR) of 16.8 %
for FY 2013, well above the benchmark requirement of 9% stipulated by Reserve Bank of India (RBI). Of this, Tier I CAR was
11.1% (9.41% for FY 2012), while the Tier II CAR was at 5.7% (3.24% for FY 2012).
NPA: Non Performing Asset or NPA is a classification used by financial institutions that refer to loans that are in jeopardy of
default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a nonperforming asset. Any rise in the percentage of NPAs results in a sharp decline in the overall profitability.

3.10

Position in NIFTY

There are a total of 12 banking stocks amongst 50 in NIFTY. As can be seen, despite bigger banks like SBI also appearing
in the list, HDFC is at apex position as far as weightages (30Sep 2013) are concerned. As is known, stocks weightages in bank
nifty are determined based on their free float market cap outstanding. Bank Nifty index stocks are selected from banking stocks
which are traded on National Stock Exchange of India, which are highly liquid and large capitalized. Bank Nifty Index provides
investors a bench mark of banking stocks performance in Indian capital markets. Their respective weightages are as indicated
below:-

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

19

20

SAPM Assignment : Fundamental Analysis of HDFC Bank

SECURITY NAME

WEIGHTAGE %

Axis Bank Ltd.

7.65

Bank of Baroda

2.56

Bank of India

0.9

Canara Bank

0.86

HDFC Bank Ltd.

32.48

ICICI Bank Ltd.

27.48

IndusInd Bank Ltd.

4.48

Kotak Mahindra Bank Ltd.

7.4

Punjab National Bank

1.9

State Bank of India

11.6

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

20

21

SAPM Assignment : Fundamental Analysis of HDFC Bank

SECURITY NAME

WEIGHTAGE %

Union Bank of India

0.76

Yes Bank Ltd.

1.93

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

21

22

SAPM Assignment : Fundamental Analysis of HDFC Bank

PART 4 CONCLUSION
4.1

Scenario

The fundamental analysis, as above, indicates scenarios at three levels and it

is a combination of all three of these that would give an investor confidence to invest
for a long term, buoyed by the strong fundamentals and bright prospects. The
summary of three scenarios is as follows:(a)
Macro-economy. The worst appears to be over. In any case, as the
turmoil of 2008 could not dent our economy and the present crisis being a
combination of both domestic and international factors that have affected
many developing economies across the globe, it is safe to assume that our
macro-economy fundamentals are strong and our economy has no option but
to follow a path of growth. Needless to say that banks will have a big role to
play in such a growth that, itself, would be dependent on capital intensive
projects.
(b)
Banking Industry. The industry is passing through a stress as of now.
But as the economy begins to recover and as the worst appears to be falling
behind, banking industry is also set to follow a path of growth. But if we focus
on birds in hand, it would be pertinent to mention that even during present
crisis, even though biggies went into a spin, some of the better managed (and
largely private banks) managed to maintain their financial health and
credibility. HDFC is one such bank.
(c)
HDFC Bank.
HDFC Bank is among the top banks in the private
sector domain. The bank boasts of a huge amount of operational efficiencies
for over the years. It has got a very good asset quality and good coverage
ratios. The bank has aggressively looked into rural areas and tier-V and tier-VI
cities. And that would lead to almost 30% plus compound annual growth rate
(CAGR) in revenues for the bank in the next two-three years. As explained
above, the bank has positive net interest margins (NIMs) of almost 4.5% and
it is felt and believed that it would be able to maintain that for the foreseeable
future, especially so when the worst appears to be over. Although the stock is
trading at premium to other banks, but given the kind of good asset quality,
traction of business, reduced credit cost going forward, it can easily trade
around 3.5 times the adjusted book value of FY13, which is close to 180.
With standalone Book Value of approximately Rs 125, at Rs 611.75 (closing
price on 01 Oct 2013), the share is trading at close to 5.0 times. The industry
P/E of 11.85 v/s its present P/E 20.4 (01 Oct 2013) also conveys the
confidence that shareholders have in this bank. With its 52 weeks high of
727.30 and 52 weeks low of 505.75 (NSE quotes), the stock is a good buy at
611 or so.

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

22

23

4.2

SAPM Assignment : Fundamental Analysis of HDFC Bank

The Verdict

A good buy for the long term investments; the stock has been giving healthy
returns in terms of appreciation. Even though it may not be the sector leader as far
as dividend is concerned, it has been consistent nevertheless. Its weightage within
NIFTY is also a firm indicator even if a lay investor takes a cursory look at its profile.
References:www.hdfcbank.com
www.rbi.org.in
www.nseindia.com

www.icicidirect.com
www.planningcommission.nic.in
www.ibef.org
www.moneycontrol.com
www.motilaloswal.com
www.equitymaster.com
www.shodhganga.inflibnet.ac.in
www.economictimes.indiatimes.com
www.sanasecurities.com
www.deloitte.com
www.investopedia.com
www.sharemarketschool.com
www.businessweek.com

Group Members : Manoj Kajla, Praveen & Col Ajay K Raina, SM

23