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HDFC Bank, Ltd. - ADS (HDB)

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HDFC Bank, Ltd.'s (HDB) fiscal fourth quarter 2011 (ended March 31, 2011) net earnings were up 33.2% year over year. However, higher operating expenses were among the negatives. The company is still exposed to the threat related to higher cost of funds. Also, growing competition in the retail space with the re-entry of peers is a future concern.

Most Indian banks are expected to encounter higher costs of funds as they have to raise deposit rates to meet increasing loans demand. This will keep margins of some banks, including HDFC Bank, under pressure.

Our six-month target price of $146.00 per ADS equates to about 24.7x our earnings estimate for fiscal 2012. This target price implies an expected negative total return of 9.3% over that period. This is consistent with our long-term Underperform recommendation on the ADSs.

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