HDFC Bank to overcome merger overhangs gradually; LKP recommends ‘strong buy’, sees 22% upside at TP of ₹1,762

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₹1,443, LKP sees an upside of 22 per cent on HDFC Bank stock at a revised target price of ₹1,762 for the next 12 months. According to the brokerage, HDFC Bank is expected to overcome the merger overhangs gradually led by:
- A healthy balance sheet growth
-Much higher provision then regulatory requirement in the balance sheet
-Best in class underwriting and risk management practices. Also Read: HDFC Bank raises its MCLR, base rate, prime lending rate.

Check the latest interest rates here ‘’Given these strengths, we expect HDFC Bank to remain one of the best among all the lending businesses. Thus, we continue to maintain BUY rating (given historical lower valuation) on the bank with revised target price of ₹1,762,'' said LKP Securities. The brokerage believes that all merger related negatives are in price and a re-rating is expected with an improvement in FY25 return on assets (RoA), which is a profitability ratio that provides how much profit a company can generate from its assets.

HDFC Bank’s price performance was lukewarm for previous three years. With merger overhangs, higher operating expenses, reducing yields and marginally reducing RoA (~around two per cent for 3QFY24); the bank has underperformed the whole sector. However, LKP Securities believes that the negatives are in price as trailing P/BVPS (2.78x) is at comfortable level, whereas the five-year peak P/BVPS (5.8x) of the bank was on June – 19.

‘’The median P/BVPS for last five–years was 3.8x. The trailing P/BVPS (2.8x) is way below the five-year median of 3.8x. We opine a turnaround from this point as the RoA is likely to stay stable despite higher operating expenses,'' said the brokerage.