Edelweiss - HDFC Bank - Mr consistent; event update; upgrade to Buy

HDFC Bank (HDFCB IN, INR 1,043, upgrade to Buy)

HDFC Bank, following the footsteps of ICICI Bank and SBI, has approved fund raising plans for USD 1 bn ( 12.7% dilution at current levels) in FY08E. It has announced preferential issue of 13.6 mn shares at INR 1023 per share to HDFC Group, to maintain the parent's stake at or above 23%,. For the balance, it may resort to public offering or private placement in domestic or international markets.

The capital raising is likely to help the bank meet capital adequacy requirements under the Basel II norms and aid rapid loan book growth. We consider this fund raising exercise a positive for the bank, as it would be significantly book accretive, raising money at ~5.0x FY07 book. We expect the book value per share to grow 64% Y-o-Y to INR 330 by March 2008.

We are raising our credit growth forecast by 2% points to 32.5% CAGR over FY07-09E, Due to equity infusion, NIMs would improve by 8-14bps during FY08-09E, We are increasing our profit forecast by 4% for FY08E and 5% for FY09E to factor in higher credit growth and equity money. However, due to equity dilution in FY08E our EPS for FY08E at INR 43 stands reduced by 7%, while FY09E EPS at INR 58 is 12% higher than earlier estimates.

The stock has underperformed its peers by 10-20% in the last one year and has returned just 10% in the last six months, despite strong operating performance. Post the capital issue, the stock will be trading at 3.2x FY08E, 2.9x FY09E book (diluted), and 18.0x FY09E earnings.

Amongst rising concerns on asset quality and margins in higher interest rate scenario, we believe HDFC bank would be fare well compared with its peers on the back of its stable and predictable growth.

HDFC Bank has always traded at a premium to peer banks due to its steady growth, earnings quality, and M&A premium. We expect the bank to generate 27% EPS CAGR over FY07-09E and ~17% ROE in FY08-09. Using our 3-stage DDM, we arrive at a target value of INR 1320 per share, which would value the stock at 3.5x FY09E book and 23x FY09E EPS, implying 25% upside in 18 months. We upgrade the stock to 'BUY' from 'ACCUMULATE'.

Edelweiss - HDFC Bank - Mr consistent; event update; upgrade to Buy