Friday, August 5, 2011

HDFC Bank - Buy, Sell, or Hold Now, Based on Q1 Results?

HDFC Bank (BSE: 500180, NSE: HDFCBANK), India’s second largest private sector bank by revenue, has delivered excellent returns to investors during most time-frames in its listed history. Anyway, what is the outlook now after first quarter results and the ongoing correction in markets?

HDFC Bank’s Q1 revenue has soared year-on-year from Rs. 5360.03 crore to Rs. 7098 crore, which is a robust 32.42% jump. The quarter-on-quarter growth is from Rs. 6724.31 crore, which is a modest 5.56% increase.

The year-on-year Q1 net profit of HDFC Bank has surged from Rs. 811.71 crore to Rs. 1084.98 crore, which is an impressive 33.67% jump. However, sequential profit has dipped by 2.67%, exposing current headwinds.

The net profit margin (NPM) of HDFC Bank's core business almost stood its ground on an year-on-year basis, dipping only marginally from 18.36% to 18.15% now.

Other income at HDFC Bank, which also maintained YoY growth, relates to income from non-fund based banking activities including commission, fees, foreign exchange earnings, earnings from derivative transactions and profit and loss from investments including revaluation.

HDFC Bank's Net NPAs stood at 0.20%, unchanged from the previous quarter.

Return on Assets of HDFC Bank remained stationary at 0.40% sequentially as well as year-on-year, which is not outstanding. Return on Equity for FY’11 was 15.47%, which is healthy.

However, current valuations of HDFC Bank at 4.3 times the book-value is not safe, and new investors should wait for deep corrections in banking sector stocks to enter this scrip, carefully watching out for slippages in its core strengths of NPAs and NPM.

For existing investors, HDFC Bank is now a ‘sell’ or ’hold’, depending on the entry price, as the current valuations are very high.

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