Stock Of HDFC Bank Rises Following Merger With HDFC, Morgan Stanley Says Valuation Attractive

According to analysts, this is an opportune time to invest in HDFC Bank which is on a rapid growth path

HDFC Bank's current valuation is at 16 times the one-year forward earnings per share (EPS), which is 20 per cent below the 15-year average.

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The share price of HDFC Bank gained over 2 per cent on Monday after the lender announced completion of merger with its parent HDFC Ltd. Sashidhar Jagdishan, the top boss of HDFC Bank, has said that the lender can now create a new bank its size every four years after the merger. The HDFC Bank stock was quoting at Rs 1,736.95 on the NSE at 9:40am, up 2 per cent over the previous close. HDFC Ltd was also trading 2.6 per cent higher at Rs 2,896.50 on the NSE.

At 2.10 pm, the stocks of both HDFC and HDFC Bank dipped a bit on the BSE in intra-day trade. HDFC stocks were trading at Rs 2878.15 apiece, up 2.01 per cent, while HDFC Bank was trading at 1724.95 per share, up 1.36 per cent on Monday.   

Jagdishan said given the combined entity's large and growing distribution and customer franchise, more-than-adequate capital, healthy asset quality and profitability. He noted the bank is well placed to serve the under-penetrated markets.

According to analysts, this is an opportune time to invest in HDFC Bank which is on a rapid growth path. Foreign broking firm Morgan Stanley believes the stock is a compounder and is trading at attractive valuations.

The bank's current valuation is at 16 times the one-year forward earnings per share (EPS), which is 20 per cent below the 15-year average, it said. This means that the stock is trading at a relatively lower price compared to its historical average.

The reverse merger of HDFC with its subsidiary HDFC Bank effective on Saturday has increased the total business of the merged entity to over Rs 41 lakh crore, closer to the country's biggest lender SBI. The total business (deposit and advances) of State Bank of India (SBI) stood at Rs 70.30 lakh crore at the end of March 31, 2023.

However, the combined profit is higher at Rs 60,000 crore as compared to Rs 50,232 crore recorded by SBI in FY23. Post-merger, HDFC Bank became the fourth most valued lender in the world, and narrowed the gap by asset size with state-owned SBI to be the second largest Indian bank.

"HDFC Bank has a strong track record of delivering investor returns. Additionally, the bank is expected to benefit from cyclical tailwinds, which will assist in navigating the challenges posed by the merger," the company said.

With the deal getting effective, HDFC Bank will be 100 per cent owned by public shareholders, and existing shareholders of HDFC will own 41 per cent of the bank. Every HDFC shareholder will get 42 shares of HDFC Bank for every 25 shares they hold.

The board of directors of HDFC Bank in consultation with the board of directors of HDFC Limited has fixed July 13, 2023, for determining the shareholders of HDFC Ltd who would be issued and allotted the shares of HDFC Bank.