This dividend king is set for a big rebound in 2024

The primary concern has been the bank's loan-to-deposit ratio, which reached 110% following the merger between HDFC Ltd and HDFC Bank. Additionally, the bank's gross non-performing assets (NPA) saw a slight increase to 1.26% from 1.23%.

With the rate of loan growth outpacing that of deposits, analysts feel that interest margins may come under pressure.

The important question remains: Just how bad will the impact be and how long will it last?

Does HDFC Bank deserve to trade at historic lows?

Co-head of research at Equitymaster Tanushree Banerjee, who tracks HDFC Bank closely, wrote in one of her recent editorials:

"HDFC Bank has never been completely immune to stock market crashes. Whether in 2009 or 2020, shareholders took the stock to the cleaners, at every crisis. After all, no business is as closely linked to the economy as banking.

Also, despite HDFC Bank's reputation for consistency in asset quality and profit growth, the bank has been at the receiving end of investor apathy from time to time.

But what explains the fact that in 2023, when Sensex and Nifty are near all time highs, the stock of HDFC Bank is once again at rock bottom valuations?

Not one to offer last moment surprises, the management of HDFC Bank chose to warn analysts about the possible bad news in coming quarters, at the latest concall.

But like it typically happens for consistent entities, even the slightest aberration, even if it is temporary, is not pardoned.

The warning of muted margins and slightly bloated NPAs has sent the stock price back to April 2020 valuations.

Question is, does HDFC Bank deserve to trade such historic lows (price to book value below 3x)?"

Read the entire editorial to find out: Does HDFC Bank deserve to trade at historic lows?

HDFC Bank’s impeccable dividend track record

Investors are wondering whether they should buy HDFC Bank amid this sell-off.

Their rationale to gauge the risk-reward situation should also include the growing dividend that the bank pays every year.

 

The bank has maintained a double-digit dividend payout ratio for all the years except the pandemic year.

The payout ratio has only increased over the years.

Talk about consistency in dividend payout ratio!

So even if the stock dips some more from the current level, investors won't complain as they'll be making passive income via dividends.

HDFC Bank has not announced any interim dividend so far for the financial year 2024.

Last year, it paid the highest ever dividend and investors could expect a similar payout this year as well.

What Next?

Now, for anyone who has been tracking HDFC Bank, it is a well-known fact that the company has been able to grow consistently over the years to become India's largest private sector bank.

If one was to go back and see, between 2000 and 2010, the bank used to grow at a compounded annual growth rate (CAGR) of 25% which over the years has reduced to around 15-18% as the bank has become bigger and bigger.

This is normal for any big company.

In an interview last year, Sashidhar Jagdishan, CEO of HDFC Bank had mentioned that he expects a growth rate of 18-20% and profits almost doubling to US$15 billion in 5 years after the merger with HDFC Ltd.

In its latest quarterly earnings call, the private lender’s management acknowledged the need for loan to deposit ratio to decline. It stated that the ratio would trend lower over the next several quarters and further stated that deposit growth must be 3-4% higher than the loan growth to bring down loan to deposit ratio.

The bank is currently focussing on deposit mobilisation and branch expansion to drive growth and is well-placed to capitalise on the pickup in the corporate credit cycle.

HDFC Bank has also been investing in various startups to fill gaps and gain expertise in many niche services. This is helping the bank stay ahead of the curve in the fintech race.

Notwithstanding this minor blip, HDFC Bank’s strong franchise, the huge synergies post the merger and the long runway for growth, makes it a good stock to keep on your watchlist.

The current marketcap of the company stands at ₹1,098,280 crores making it the second most valued company in India after Mukesh Ambani’s Reliance.

After the recent fall, the stock is trading at a 5-year low P/BV of 2.7x, a 30% discount to its 5-year median P/BV of 3.8x.

Here’s a table comparing HDFC Bank with its peers on important parameters –

In Conclusion

In a sector which is so closely linked to the macro environment, HDFC Bank’s ability to manoeuvre through market cycles with exceptional capital allocation sets it apart from other banks.

HDFC Bank has been theultimate wealth creatorin Indian share markets.

If you had invested ₹10,000 in HDFC bank's IPO in 1995, today your investment would have grown to somewhere around ₹1.5 crore.

As Tanushree wrote in her editorial, the bank has built its reputation of choosing quality over balance sheet size for nearly three decades. The fact that it has commanded premium valuation for most of the period shows investor trust in the bank's quality and consistency.

So, will HDFC Bank continue its slow and steady journey and climb upwards?

All factors indicate there's a good chance of that happening over the long term.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com