HDB Still a Hold

We are continuing our Hold on HDFC Bank Ltd. (HDB - Analyst Report). The company posted 2009 fiscal third quarter (Dec 31) earnings of Rs 6,217 million, up 45% from last year, and above our estimate as noninterest revenues were higher than expected and compensation costs lower.

We are cutting our fiscal year (Mar 31) EPADS estimates to $3.40 from $3.50 for 2009 and to $3.75 from $4.50 for 2010, as we have reduced revenue growth assumptions and increased loss provisions. This reflects a greater impact from the economic slowing in India than previously expected. Indeed, customer advances fell 11.2% sequentially during the quarter, which could be a foretaste of things to come. While HDFC increased the annual dividend by 21% last year, this is not likely to recur this year.

At its current price, HDFC Bank is trading at 17.4X the consensus fiscal 2009 earnings estimate and 13.7X the consensus fiscal 2010 earnings estimate, representing significant premiums to the industry P/E medians, also based on consensus estimates. Our $63 target price represents a 16 ¾X P/E multiple of fiscal 2010 estimated earnings of $3.75 per ADS, providing a 0.8X PEG ratio (P/E divided by estimated future growth rate), roughly in line with the industry median.

Read the full analyst report on HDB