Buy rating on HDFC Bank, target Rs 1,255: Jefferies

We maintain a ‘buy’ rating on HDFC Bank and raise price target to Rs 1,255 (earlier Rs 1,240). The stock trades at 5x adjusted book value (December 2014) and 21.4x 12-month rolling earnings (Dec 15). Our target implies a forward book multiple of 4.4x and 20.0x earnings versus last eight-year averages of 3.9x and 19.8x, respectively.

HDFC Bank’s Rs 10,000-crore issue received CCEA approval on Wednesday, so long as overall foreign ownership remains within 74% (currently at 73.4%). Theoretically, offer could be higher than 74:26 in favour of foreigners. With foreign limit at 74% and foreign ownership at 73.4%, technically, the issuance can happen slightly ahead of the 74:26 split. Management, however confirmed that they won’t use this capital issue to issue more rupee shares to create foreign headroom. We concur, as the size of issue is unlikely to move the ownership needle much, even as greater FII ownership implies better price realisation (ADRs and FII board trades at a decent premium over local shares). We factor in Rs 10,000 crore of new capital issued at current market price of Rs 1,059, versus our earlier estimate of Rs 8000 crore at Rs 950. We forecast total new shares at 94.4 million, or a dilution of 3.9% (on Q2FY15 shares).

Asset quality should ease and expense ratio should stabilise around 45%. The uptick in investment in branches/staffing does indicate that the bank is poised for the next cycle of growth.

HDFC Bank