Shares of a fundamentally strong large-cap stock shed 4.05 per cent to reach an intraday low of ₹ 1,563.10 apiece on the National Stock Exchange (NSE). This happened after the company received a downgrade from Nomura. Its shares were trading at ₹ 1,567.85 apiece at 11:07 AM on Wednesday.
Brokerage firm Nomura has downgraded HDFC Bank’s rating to ‘neutral’ from ‘buy’. Moreover, it cut the bank’s target price to ₹ 1,800 from ₹ 1,970 earlier. The revised target price still implies an upside of 14.81 per cent as compared to its current share price.
Meanwhile, Citi has maintained its buy rating on the stock, but has revised HDFC Bank’s price target to ₹ 2,110.00 per share. This translates to an upside of 34.58 per cent, compared to its current share price.
Jefferies has also maintained a ‘Buy’ rating on the stock, but has lowered its target price to ₹ 2,030.00 per share. It noted that the non-performing loans (NPLs) of HDFC Ltd are higher, which now form a big part of the merged entity.
Here are four reasons why Nomura downgraded the stock:
For starters, the networth adjustments after its merger with HDFC Ltd. have a negative 4 per cent impact on the lender’s financial year 2024 book value per share. Thus, Nomura has cut HDFC Bank’s financial year 2024-2026 Earnings per Share (EPS) estimate by 5 per cent to 9 per cent and book value per share estimates by 7 per cent over the same period.
Moreover, the bank’s Net interest margin (NIM) estimates have been cut due to excess liquidity and accounting adjustments. Nomura expects that there will be pressure on NIM for another 2-3 quarters. It has cut its NIM estimate by nearly 25 basis points in the financial year 2024 and by 15-20 basis points over the financial year 2025-2026.
Additionally, Nomura foresees a higher cost-to-income ratio due to the accounting changes. It is building in a cost-to-income ratio of 40 per cent for the financial year 2024 compared to 38 per cent earlier, and maintaining its 39 per cent to 40 per cent projection over the financial year 2025-2026. The cost-to-income ratio is calculated by dividing the operating expenses by the operating income and is shown in percentage terms.
Finally, it points to a sharp uptick in non-performing assets (NPAs) in HDFC Ltd.’s corporate book. HDFC Bank in an analyst meeting on Tuesday, September 19, mentioned that HDFC Ltd.’s individual gross NPA ratio stood at 1 per cent for the June quarter compared to 0.75 per cent in March, while non-individual gross NPA ratio saw a sharp spike from 2.9 per cent in March to 6.7 per cent in June.
HDFC bank also expects its Return on Assets (ROA) to be at 1.9 per cent to 2 per cent, compared to 2.1 per cent in June. Its Return on Equity (RoE) may drop to around 16 per cent from 17.2 per cent in June.
With a market capitalization of ₹ 1,567 crores, HDFC Bank is a large-cap company. It has a low return on equity of 1.60 per cent and a dividend yield of 0.86 per cent. Its shares were trading at a price-to-earnings ratio (P/E) of 25.29, which is higher than the industry P/E of 14.87, indicating that the stock might be overvalued as compared to its peers.
As per the bank’s latest shareholding pattern, foreign institutions hold a 33.36 per cent stake in it, followed by promoters with 25.52 per cent, mutual funds with 17.60 per cent, retail investors with 15.82 per cent and other domestic institutions with 7.70 per cent.
Written by Simran Bafna
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