AREPORT ON

“ PERFORM EIC ANALYSIS OF BANKING SECTOR AND HDFC

BANK "

Fundament analysis■ Investors generally like to be rational and

scientific in their investment selection.■Thus they would want to collect and analyze a

lot of information about the past performance of companies, industries and the economy as a whole.

■So that the future expected performance can be estimated.

Fundament analysis■Such an evaluation of company, industry and

economy is known as fundamental analysis.■Fundament analysis is a logical and systematic

approach of estimating future price and dividends.

■ It is based on the premise that a share price of a company depends upon fundamental factors relating to the company, industry and economy.

■Fundamental analysis is done in three steps:– Economy analysis– Industry analysis– Company analysis

■The logic is that a company’s efforts alone are not responsible for its performance. But a company belongs to an industry and industry is part of overall economy. Thus, industry and economy as a whole affects the performance of the company.

■Here, we took Banking industry for analysis.

Economy analysis■ A booming economy is good for the stock market as

there are higher chances for companies earning more profits & hence giving more returns. Similarly, an economic slowdown can dampen profits hence returns go down.

■ Thus, a study of certain economic variables is important to ascertain whether the economy is doing well or otherwise. In the case of banking industry,

■ Strong GDP growth will facilitate banking sector expansion.

■ Rising per capita income will lead to increase in the fraction of the Indian population that uses banking services. Growth of banking sector of India is 6.3 per cent per capita growth (annually).

Economy analysis■Population in 15-64 age groups is expected to

grow strongly going ahead, giving further push to the number of customers in banking sector.

■Total banking sector credit is expected to increase at a CAGR of 2.5 per cent during FY11 to FY16 to reach USD1015.9 billion by March 2016.

■During FY16, USD1 trillion was the total value of bank loans in India.

■The sector will also benefit from economic stability and credibility of the monetary policy.

Economy analysisInterest rate income ■Public sector banks account for over 72.3 per cent

of interest income in the sector in FY15■They lead the pack in interest income growth with

a CAGR of 11.5 per cent over FY09-15■Overall, the interest income for the sector has

grown at 11per cent CAGR during FY9-15■ Interest income of Public Banks was witnessed to

beUSD105.44 billion in FY16

Economy analysis

Return on assets and loan to deposit ratio showing an uptrend.

■Loan-to-Deposit ratio for banks across sectors has increased over the years

■Private and foreign banks have posted high return on assets than nationalized and public banks.

■This has prompted most of the foreign banks to start their operations in India

Economy analysis

Government The government and the regulator have undertaken

several measures to strengthen the Indian banking sector.

■ In July 2016, the government allocated Rs 22,915 crore (US$ 3.41 billion) as capital infusion in 13 public sector banks, which is expected to improve their liquidity and lending operations, and shore up economic growth in the country.

Economy analysis■The Reserve Bank of India (RBI) has released the

Vision 2018 document, aimed at encouraging greater use of electronic payments by all sections of society by bringing down paper-based transactions, increasing the usage of digital channels, and boosting the customer base for mobile banking.

■Reduce the burden of loan repayment on farmers, a provision of Rs 15,000 crore (US$ 2.2 billion) has been made in the Union Budget 2016-17 towards interest subvention.

■The Reserve Bank of India (RBI) plans to guidelines know-your-customer (KYC) norms to reinforce protection for consumers.

Economy analysisEconomic and demographic drivers ■Favorable demographics and rising income

levels.■Strong GDP growth (CAGR of 7 percentage

expected over 2012-17) to facilitate banking sector expansion.

■The sector will benefit from structural economic stability and continued credibility of monetary policy.

Economy analysisInfrastructure financing ■ India currently spends 6 percent of GDP on

infrastructure; Planning Commission expects this fraction to grow going ahead.

■Banking sector is expected to finance part of the USD 1 trillion infrastructure investments in the 12th five year plan, opening a huge opportunity for the sector.

Economy analysis

Technological innovation ■Technological innovation will not only help to

improve products and services but also to reach out to the masses in cost effective way.

■Use of alternate channels like ATM, internet and mobile hold significant potential in India.

■Now, cloud technology and analytics also gaining ground.

Industry analysis■ Industry life cycle

– Profitability of an industry depends upon its stage of growth.

– Each industry passes through 4 stages of growth.■Pioneering stage■Expansion stage■Stagnation stage■Decay stage

■Each stage is unique in its characteristic and hence exhibits different type of investment opportunity.

Industry life cycle

Industry analysisIndustries in pioneering stage:■These are sunrise industries■At budding level, it is very risky to invest■Some firms do not survive long enough and

hence there are chances of losing money.Industries in expansion stage:■These are industries which survived the

pioneering stage and have become stronger.■Thus, these industries are highly profitable and

also provide good dividends.

Industry analysis Industries in stagnation stage:■All growth opportunities are explored.■The growth of the industry stagnates.■At this point, companies going for mergers or

diversification are a safe bet.■ Investors need to invest very carefullyDecay stage■The profits decline.■Hence it is safe for investors to move out as soon

as possible.■At times short selling can be adopted.

Industry analysis■As we shown in economic analysis that banking

industry is now on expansion stage which lead banking industry towards earning more profit and dividend to their investors so there is a good opportunity for investors to invest in banking sector.

Industry analysis■ Indian banking system recently on expansion

stage, the Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions.

■Strong growth in savings amid rising disposable income levels are the major factors

■ Influencing deposit growth. During FY06–16, deposits grew at a CAGR of 11.47 per cent and reached 1.46 trillion in FY16.

Industry analysis■As on September 2016, the outstanding credit to

NBFCs stood at US$ 55.27 billion, growing at 25 per cent on year-on-year basis. Bank credit to non-banking finance companies (NBFCs) has touched the highest in three years.

■ Indian banks are increasingly focusing on adopting integrated approach to risk management. Most of the banks have put in place the framework for asset-liability match, credit and derivatives risk management. Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 11-13 per cent in FY17 from less than 10 per cent in the second half of CY14.

Industry analysis■ Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) are

growing. As on November 09, 2016, US$ 6,971.68 million were deposited, while 255.1 million accounts were opened.

 

■ Rising incomes are expected to enhance the need for banking services in rural areas and therefore drive the growth of the sector; programmes like MNREGA have helped in increasing rural income aided by the recent Jan Dhan Yojana.

 

Company analysis

■Showing growth of banking sector, following information are regarding to HDFC bank to analyze for investment purposes.

■HDFC bank Market Value is 383.27 which is higher than their competitors. (ICICI Bank Ltd with market value 261.97, Infosys Ltd with market value 252.67, Reliance industries Ltd with 252.46, State Bank of India with market value 246.72).

Company analysis

■HDFC bank investment plan is on growth side. ■HDFC’s performance of last month was 120.99

NAV with 0.91%. Last 3 months performance was 124.30 NAV with negative return 10.24%. Last year performance was 105.77 NAV with 14.37% return.

■HDFC Banks 52 wks high performance 1318.20. and 52 wks low performance 928.80.

(Compare between HDFC & ICICI) Company analysisPer Share Ratios 2016 2015 2016 2015

Basic EPS (Rs.) 48.84 42.15 16.75 19.32

Diluted Eps (Rs.) 48.26 41.67 16.65 19.13

Cash EPS (Rs.) 51.43 43.38 17.92 20.41

Book Value [Excl. Reval Reserve]/Share (Rs.)

287.47 247.39 149.45 138.71

Book Value [Incl. Reval Reserve]/Share (Rs.)

287.47 247.39 154.30 138.71

Dividend/Share (Rs.) 9.50 8.00 5.00 5.00

Operating Revenue / Share (Rs.)

238.20 193.38 90.68 84.66

Net Profit/Share (Rs.) 48.64 40.76 16.72 19.27

(Compare between HDFC & ICICI) Company analysis

Per Employee Ratios 2016 2015 2016 2015 Interest Income/ Employee (Rs.)

6,878,127.47 6,353,708.99 7,307,161.04 7,401,381.02

Net Profit/ Employee (Rs.)

1,404,398.73 1,339,160.38 1,347,597.82 1,684,887.74

Business/ Employee (Rs.)

115,472,348.9

1

107,003,994.6

6

118,696,176.0

3

112,938,140.2

6

(Compare between HDFC & ICICI) Company analysis

Per Branch Ratios 2016 2015 2016 2015Interest Income/ Branch (Rs.)

133,233,285.62 120,752,128.55 118,515,583.82 121,212,691

.11

Net Profit/ Branches (Rs.)

27,204,011.28 25,450,719.73 21,856,825.39 27,593,468.

89

Business/ Branches (Rs.)

2,236,765,820.

58

2,033,609,052.

57

1,925,145,282.

02

1,849,592,1

05.93

(Compare between HDFC & ICICI) Company analysisKey Performance Ratios 2016 2015 2016 2015

Net Profit Margin (%) 20.41 21.07 18.44 22.76

Operating Profit Margin (%) 2.56 2.51 -10.61 -2.03

Return on Assets (%) 1.73 1.73 1.34 1.72

Return on Equity / Net worth (%) 16.91 16.47 11.19 13.89

Net Interest Margin (X) 3.89 3.79 2.94 2.94

Cost to Income (%) 36.69 36.84 39.40 32.70

Interest Income/Total Assets (%) 8.49 8.20 7.31 7.59

Non-Interest Income/Total Assets (%) 1.51 1.52 2.12 1.88

Operating Profit/Total Assets (%) 0.21 0.20 -0.77 -0.15

Operating Expenses/Total Assets (%) 2.39 2.36 1.75 1.77

Interest Expenses/Total Assets (%) 4.60 4.41 4.37 4.65

(Compare between HDFC & ICICI) Company analysis

Valuation Ratios 2016 2015 2016 2015Enterprise Value (Rs. Cr)

840,203.70 724,875.64 706,700.41 691,147.70

EV Per Net Sales (X) 13.95 14.96 13.40 14.08

Price To Book Value (X)

3.73 4.13 1.58 2.27

Price To Sales (X) 4.50 5.29 2.61 3.72

Retention Ratios (%) 80.46 80.37 70.10 74.06

Earnings Yield (X) 0.05 0.04 0.07 0.06

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