Newly listed Indian shelter finance also growing ver well. But it’s trading at less valuation compare to Aavas, Home first and Aptus.

Why Aptus are getting high valuation and all? How we should decide what valuation we can give as all these companies want to grow 25-35%

Hi Gaurav
Thanks for sharing this information … I did not fully understand the implication of this maybe as a beginner investor… can you please share in slight detail why has book value increased and what implications it might have on potential valuation / share price of the company ?

My notes on HDFC Bank based on my limited understanding of lending idustry:

Positives:

1. History of impeccable credit quality across multiple credit cycles. HDFC Bank has remained the best credit underwriter for more than two decades. Credit quality may continue to remain impeccable in the future. This is my assumption

2. Growth – Credit demand will continue to grow in the future, and only a few well managed banks will be able to take advantage of this tailwind in the future. All the profits can be deployed back to grow the business, creating a compounding machine.

3. Public Sector Banks – Even today, PSB’s have large chunk of deposits with them and the trend of business migration from PSB’s to Private banks will continue to work for a long time in future.

4. Cost of funds of large private banks is less than 5%. This is a huge advantage over other banks and financial institutions and extremely difficult to replicate.

5. Risk Taking – Because the cost of funds is low for banks, they do not need to chase high yields for risky lending. NIM of 4% is good enough to generate enough returns for them.

6. Regulatory Barrier – Banking is a regulated business with huge entry barriers. It’s extremely difficult to get a banking license from RBI.

7. Scale gives big private banks huge advantages. Their operational cost reduces a lot due to scale.

8. Consolidated industry – Though lending is a commodity business, the industry is consolidated with top 4 private banking players taking away huge market share.

Other positives :

1. Reasonable valuation – After many years it is available at 2.5x book and 15 times earnings, cheapest in its history. It comes with HDFC AMC and Insurance business embedded inside, which provides further valuation comfort.
2. Depressed Earnings – It currently has high cost of debt due to merger with HDFC. Cost of debt may decrease over time. NIM’s that are currently at 3.5% may inch up 4%+ as merger stabilizes. Profits may increase over time, even without growth in next couple of years.

Negatives:

1. Size – It’s the largest market cap company , how much can it grow? Isn’t the company already too big to grow?
2. Black Swan Event – The first industry to hit in a black swan event is lending and HDFC will have to take its share when negative events unfold. However, past shows that though during black swan events (Global Financial crisis, Covid etc), HDFC stock did suffer, but business/ credit quality was never a issue.
3. Regulatory Axe – Business is highly sensitive to regulatory actions. Recent reference – Kotak being asked not to onboard new customers by RBI
4. Nature of business – Lending in itself is extremely difficult business where profits of last many years can be wiped out in a single year. Quality of lending book is always opaque topic.

Past fundamental performance of HDFC may not be indication of the future, and my entire thesis rests on the past of HDFC.

Disclosure – Invested. I may sell anytime without informing the forum. I am a amature investor, not a SEBI Registered analyst.

The risk, particularly in buying a single bond, and for 1 year, to earn good returns is more, compared to buying a debt fund which holds many bonds. Even with a debt fund, there is a chance of losing some return due to a credit rating downgrade. And here, it is already at BBB, hence the 10.6% return. For a tenure of 1 year, it is better to go with a simple FD, despite the lower returns.