Earnings to compound at 25%; attractive entry point: Driven by technical factors (MSCI recast) and concerns of slowdown in growth, HDFC Bank’s stock price has been flat in CY13. However, we note that earnings CAGR of 25%+ over FY14E/16E is intact, which percolates to valuation becoming cheaper – one-year forward P/E of 15x (near 10-year low LPA; 25% discount to its LPA) and P/BV of 3.2x (5% discount to its LPA). While discount over the LPA has increased significantly, RoE is best in the decade at 22%+. Coupled with attractive valuation, our positive view on the HDFC Bank stock is driven by: (1) strong CASA ratio of ~45% (positive in a volatile and high interest rate environment), (2) growth outlook of at least 1.3x the industry growth (led by new customer acquisition and product penetration), (3) improving operating efficiency, (4) expected traction in income due to strong expansion in branch network, (5) best-in-the-class asset quality, (6) structural improvement in RoA (1.8%+, best in the industry) and (7) highest earnings CAGR of 25% (best in the financial sector). We upgrade the recommendation to Buy HDFC Bank, with a target price of INR 820 (3.2x FY16E BV and 15x FY16E P/E).
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