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HDFC Bank, Ltd. - ADS (HDB)

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HDFC Bank (HDB), like most Indian banks, are expected to encounter higher cost of funds as they have to raise deposit rates to meet increasing loan demand. This will keep margins of some banks including HDFC Bank under pressure. But as lending rates are expected to climb faster in the upcoming quarters, demand for loans would decline.

On a price-to-book basis, HDFC Bank is trading at 3.8x, a sizeable premium to the 1.1x for the industry average. The valuation on a price-to-book basis looks expensive, given a trailing 12- month ROE that is only 9% above the industry average.

Our six-month target price of $28.00 per ADS equates to about 23.1x our earnings estimate for fiscal 2012. This target price implies an expected negative total return of 10.1% over that period. This is consistent with our long-term Underperform recommendation on the ADSs.

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