HDFC’s price-to-earnings (PE) derating story from the last 3 years:

(Source: Finology Ticker)

Over the past 3 years, HDFC Bank’s stock has been trading within a range-bound territory.

• the stock has struggled to sustain levels above ₹1,800
• it repeatedly approached the ₹1,750 mark but failed to break through
• on the downside, the stock has received strong demand around the ₹1,450 level

Earnings Growth vs. Price Performance

From March 2021 to March 2024, HDFC Bank’s Earnings Per Share (EPS) significantly increased from ₹56.8 to ₹85.83. That’s an impressive growth of ~50%.

Despite this notable earnings growth, the stock’s 3-year price return is -2.61%.

According to financial theory, stock prices are heavily dependent on earnings growth.

• this scenario of HDFC Bank illustrates a classic example of P/E derating
• it only happens when the industry is facing strong near-term headwinds

Let’s Explore what are the Odds against HDFC

HDFC Bank is India’s biggest bank in terms of market cap. However, the strong pressure in the banking sector might be contributing to its inability to sustain levels above ₹1,750.

The average advances increased with small numbers:

• it rises from ₹19.0 trillion in Q4 FY24 to ₹19.2 trillion in Q1 FY25
• while the YoY growth declined from 21% to 17%

On the other hand, the average deposits increased slightly:

• from ₹20.3 trillion to ₹21.3 trillion
• and YoY growth also declined from 20% to 17%

In Q1 FY25, the growth fell short of expectations:

• due to deposit growth shortfalls and
• management expressing dissatisfaction

Seasonal variations and unexpected outflows from current accounts have also adversely affected deposit stability. While average deposits have remained steady, liquidity constraints have become a significant concern. They are witnessed by a shift of funds from fixed deposits to the Indian share market as investors pursue higher returns in equities.

Recently published data by CRISIL indicate that the household savings rate (net household savings/GDP) fell to a six-year low of 18.4% in fiscal 2023.

• this trend reduces the pool of stable deposits available to banks
• it is forcing them to compete with higher interest rates on term deposits

As a result, the overall profitability gets impacted due to increasing the cost of funds and leading to the Net Interest Margin (NIM) contraction.

Another major concern is the imbalance between loan and deposit growth. HDFC Bank’s deposits grew by 26.4% in the previous year, compared to a 55.2% expansion in the loan book. This disparity raises regulatory concerns.

The Reserve Bank of India (RBI) worries about the narrowing gap between loan and deposit growth rates. Thus, it is posing challenges for HDFC Bank to sustain its loan book growth without adequate deposit growth.

The liquidity challenges and competitive cost of funds affect not just HDFC Bank but also the entire private banking sector.

Banks play a critical role as the backbone of the economy. Yet, the recent Q1 FY25 GDP growth slowdown to 6.7% from 8.2% a year ago underscores the urgency for action.

It’s just a matter of time before the RBI and the Indian government implement a revival plan to address these structural liquidity issues. Although near-term pressures are expected to persist, they could be resolved within the next two to three quarters.

The real question is: will HDFC Bank seize the opportunity?
If the stock has to break and sustain above the crucial level of ₹1,800, it will require a solid quarterly result and an above-average deposit growth rate that outpaces its peers.

The stage is set, but time will only tell whether HDFC Bank rises to the challenge.

Hi…

Aaron Industries was listed in September of 2018, and you can read their annual report of 2019-20, which includes their growth philosophy.

The market cap was barely Rs 20cr, but they were confident in their strategy and philosophy for growing. (Read past annual reports)

Few points to be noted in last 5 years about the performance of the company:

• Top and bottom lines grew by 36% and 48%, respectively.
• The fixed asset block has been increased from Rs 8 (2019) crore to Rs 24 crore (Rs 26 crore in QIP).
• The debt to equity ratio is always less than one.
• A consistent cash conversion cycle of 140 days maintained.
• Operating margins have improved from 11% in 2019 to 19% in the last two quarters.

My only concern is that management doesn’t do con-calls and hence the information is limited. However, they used to respond any investor query over the email with full details in a timely manner.

Disclaimer: Invested from lower levels and biased. No buy/sell recommendation by any means.

tried libgen? it usually has everything,

Oh okay absolutely will definitely will be joining the next meeting you will have. Please do let me know if you I need to come prepared for any investment thesis that I may have or if it will be an open forum ? How long will the meeting be for ?

Looking forward to it !