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Aggressive Growth

Earnings momentum for HDFC Bank Ltd. (HDB - Analyst Report) has advanced over the past 60 days based on this Indian bank’s impressive fiscal second-quarter results. The company hit its 52 week high on November 21 and became a Zacks #1 Rank (Strong Buy) on October 16. With a year-to-date return of approximately 53.1% and a long-term expected earnings growth rate of 30.0%, the ADRs look like a solid aggressive pick.

Robust Q2 Results

On October 12, HDFC Bank reported fiscal second quarter earnings per share of INR6.50 (36 cents per ADR), topping the year-ago earnings by 27.5%. Moreover, the company reported notable growth in deposits and loans.

HDFC Bank’s net revenue surged 22.2% year over year to INR50.77 billion ($0.96 billion). Net interest income improved 26.7% to INR37.32 billion ($0.70 billion), driven by strong loan growth and a stable net interest margin. Non-interest revenues of INR13.45 billion ($0.25 billion) grew 11.0%. Operating expenses totaled INR25.06 billion ($0.45 billion), increasing 23.4% from the prior-year quarter.

Asset quality continued to remain strong with gross nonperforming assets (NPAs) at 0.90% of gross advances, down 10 basis points year over year. Furthermore, net NPAs remained healthy at 0.20% of net advances, on par with the year-ago quarter. Moreover, provisions and contingencies plummeted 20.0% to INR2.93 billion ($0.09 billion).

Surge in Earnings Estimates

Over the last 60 days, the Zacks Consensus Estimate for fiscal 2013 rose 6.5% to $1.64 per ADR. For fiscal 2014, the Zacks Consensus Estimate advanced 6.1% to $2.09 within the same time frame.

The Zacks Consensus Estimate for fiscal 2013 reflects year-over-year growth of about 18.8%, while the expected growth rate for fiscal 2014 is 27.4%.

Reasonable Valuation

ADRs of HDFC Bank currently trade at 24.5x 12-month forward earnings, a 98% premium to the peer group average of 12.4x. Its price to book ratio of 5.2 is at a significant premium to the industry median of 1.6. Given its strong fundamentals, the premium valuation looks justified.

Moreover, given the long-term growth projection of 30.0%, the PEG ratio comes in at 0.82, an 18.0% discount to the benchmark of 1 for a fairly priced stock. Thus, the expected long-term earnings growth is currently priced at a discount.

The company has a trailing 12-month ROE of 17.4%, compared with the peer group average of 11.4%. This implies that the company reinvests its earnings more efficiently than its industry peers.

Chart Echoes Growth Potential

HDFC Bank has been continuously outperforming its 200-day moving average over the past three months, showing a steady growth trend. The year-to-date return for the stock came in at 53.1% compared with the S&P 500’s return of 10.6%.

Headquartered in Mumbai, India, HDFC Bank commenced operations in 1995. After growing aggressively in a relatively short span of time, the company is now one of the largest banks in India. The bank enjoys favorable brand equity among Indian consumers and depositors, which enables it to keep its borrowing costs low. The company has a market cap of about $31.5 billion. ICICI Bank Ltd. (IBN) is another strong Indian bank, but it holds a Zacks #2 Rank (Buy).


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