Valuation of HDFC Bank

INVESTMENT ANALYSIS| GROUP 11

SECTION A
AZAAN ATEEF A 14P014
KARAN GUPTA 14P024
SHOBHIT GARG 14P048
UDIT UPRETI 14P056
VISHAL GARG 14P058

AGENDA

Banking Industry Background

About HDFC

Challenges in Valuation of Banks

Valuation using DCF

Valuation using relative valuation

About the Banking industry

Banking Deposits = $1.5 trillion (with a CAGR of 11.4%)
Unbanked population in India = 41%
Total Banking Assets = $1.8 trillion (with a CAGR of
11.3%)
No. of commercial banks in India = 157
Indias bank penetration score = 42.8

About HDFC Bank

What

Banking and Financial services company

Promoted by HDFC (a housing finance company)
Largest private sector bank by m-cap
Products Private Banking, Corporate Banking, Mortgages, Credit Cards, Wealth
Management, Investment Management etc.

When
Where
Who

HQ at Mumbai

Numbers

Beta = 1.13
EPS = 40.76
ROE = 19.8%

Incorporated in Aug 94
IPO in March 95

MD Aditya Puri
PE = 27.26
Dividend Yield = 0.73%

Challenges in Valuation of Banks

Difficult to define debt and reinvestment

More akin to raw material than a source of capital for banks

Defining working capital and capital expenditures

Heavily regulated: Adds a layer of uncertainty (risk)

Required to maintain capital ratios

Constrained in terms of where they can invest their funds

Entry of new firms regulated

Accounting rules significantly different from rules of other firms

Challenges in Valuation.(Contd.)

Interest expense

Operating

expense / Interest Expense ??

Estimating cash flows difficult

No

concept of EBIT/PBT in banks

Capital

expenditures mainly for intangible

assets
Enormous

fluctuations in Working Capital

(CA CL = Working Capital)

Estimate

of expected growth rate difficult

DCF VALUATION

DCF Methods

Equity Valuation rather than Firm Valuation

Difficult to estimate WACC

With FCFE, difficult to classify debts again

Two Methods:

Dividend Discount Model

Present

Value of Expected Dividends

Excess Returns Model

Equity

capital invested + PV of excess returns to

equity investors

2-stage Dividend Discount Model

High growth period (2016-2020)

Use Average ROE and BV of equity to calculate net income for the year

Calculate dividend using dividend payout ratio

Add retained earnings to BV of equity to get the book equity capital for next
year

Discount the dividends to the present using the cost of equity as the
discounting factor

XLSX File

2-stage Dividend Discount Model

Stable Growth period (2020 onwards)

Terminal

growth rate: 7%

Number

of outstanding shares: 2511458217

Terminal
Cost of
Equity
Equity
Value

Present
Value of
Terminal
Value

Total
Value

Value
per
share

Scenario

ROE

Optimistic
Intermedi
ate
Pessimisti
c

22%

9%

908527

522628

533054 2122

17%

10%

403790

232279

242705

966

14%

12%

169592

97557

107983

430

Excess Return Models

Value of Equity = Equity Capital Invested Currently + PV of

Expected Excess Returns to Equity Investors

Excess Equity Returns = (Return on Equity Cost of Equity)

(Capital Invested)

Terminal Value

XLSX File

Limitations of DCF models

Consistency is important: Growth vs Dividends

Dividend forecasts is difficult

Expected ROE estimation is a challenge

Cost of equity assumed constant for high growth as well as stable period

Terminal Growth Rate Assumption (current GDP growth rate)

Relative
Valuation

Factors for identifying the Comparable Companies/Peer Group

Correlation
Quantitative Factors

Qualitative Factors

Cost of Equity

Expected Growth rate in

Earnings

Industry, Business model, Market

Positions

Payout Ratio or Retention

Ratio

Life-cycle stage

Differences in customer base

Size

Accounting Policy, Financial years

Financial Structure

Identifying the appropriate multiples

Enterprise Value
Multiple

EV/Revenue

EV/EBITDA

EV/EBIT

EV/Sales

Equity Multiples

P/E

P/BV

P/Sales

Equity
Multiples

Equity
Multiples

P/E
P/BV
P/Sales

P/E
P/BV

P/E : function of three variables

the expected growth rate in
earnings, the payout ratio and the
cost of equity

Chosen Comparable Companies

SBI Bank

ICICI Bank

Axis Bank

Kotak Bank

Valuation - Multiple Estimation

Company
Name

Full Year (Rs Cr.)

Price Information
EPS
Price

NP
B.V Rs
Rs.
Price
Date
Mkt. Cap. P/E
62,009.4
1,111.0
HDFC Bank
10,208.55
2
39
0 31-Jul-15 279,341.10
128438.2
St Bk of India 13,129.51
2 16.7
270 31-Jul-15 204590.5
80,421.9
ICICI Bank
11,170.56
2 18.8
303 31-Jul-15 175594.4

28.5

Axis Bank

7,360.16 44676.51

30.1

574 31-Jul-15

136321.6

19.1

Kotak Mah. B
ank

1,857.08 14141.09

10.1

696 31-Jul-15

127111

68.9

P/BV

16.2
16.1

TTM (Rs Cr.)

EPS
Rs.

TTM NP
P/E
20150 10,671.
4.5
6
23 42.45
20150 13,129.
1.55
3
51 16.7
20150 11,491.
2.19
6
42 19.8
20150 7,671.8
3.05
6
4 32.29
20150 1,617.0
8.95
6
6 8.85

26.17
16.2
15.31
17.78
78.64

Median

Avg

Src: Capitaline Database

Multiples

19.1

3.05

17.78

29.76

4.048

30.82

Limitations of Relative Valuation

Market is correct Assumes markets are correct in the aggregate,

which may not be true

Difficult to compare Several reasons multiples can differ for

different companies. For eg, different accounting policies can
result in diverging multiples

Simplistic Makes it difficult to disaggregate the effect of different

drivers on value. This may lead to simplistic interpretation

Static valuation - Fails to capture the dynamic and ever evolving

nature of business

Thank you!

Annexure -1

Src: Bloomberg Database

Annexure -2

Src: Bloomberg Database

Annexure -3

Src: Bloomberg Database

Annexure : Correlation - Peers

Src: Bloomberg Database

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