HDFC Bank Valuation Update

Impact of Corporate Tax Rate Cut on HDFC Bank’s Valuation

Introduction

In this article, we are going to discuss the HDFC Bank Valuation Update Post Corporate Tax Rate Cut by considering valuation factors like Revenue growth, PBT growth, PAT projection, PE ratios and Market Capitalisation etc. What will be the impact of corporate tax rate cut on the valuation of HDFC Bank, what is the potential upside for the stock.

HDFC Bank Valuation Update Post Corporate Tax Rate Cuts

• Finance Minister Nirmala Sitharaman had announced the corporate tax rate cuts measure to boost economy. It is one of the biggest reform in stimulating the GDP growth rate of the country.
• This move has significant positive implications for corporate profitability, the broader economy and market valuations.
• With the enhanced profitability of the corporates, companies can either pay higher dividends or use their retained earnings for the business expansion.
• Thus, the capital expenditure and investments by the corporates can lead to a big growth in coming quarters. So, we can clearly get the how important is this structural reform done by Government of India.
• There are many pros and cons of corporate tax rate cut on Indian economy.

Lets discuss the impact of corporate tax rate cut on ITC Ltd stock valuation in detail.

HDFC Bank Valuation Update

• It is the biggest private sector bank (according to the market capitalization) among peer private banks. Current Market cap is Rs.6,73,807 Cr.
• HDFC Bank is well-diversified in a range of banking and financial services including retail banking, wholesale banking and treasury operations
• Here, we are doing the valuation analysis of the HDFC bank on the basis of following valuation factors : Revenue Growth, Profit Before Tax (PBT) Growth, PE Ratio, Market Capitalisation etc.

CAGR Growth of Revenue & Profit Before Tax (PBT)

• Here, we have calculated the CAGR growth of revenue and Profit Before Tax (PBT) of HDFC Bank Ltd.
• For FY2018-19 :
  • Revenue = Rs.98,972 Cr
  • PBT = Rs.32,200 Cr
• After calculating the CAGR growth, the lowest PBT growth rate (Here, 19.99% ie. 20%) is taken for further calculations of PBT projections for FY2019-20.
• Thus, PBT Projection FY2019-20 = Rs.32,200 Cr * (1.2) = Rs.38,640 Cr
• Corporate tax rate of ITC Ltd was 35% earlier. Now, Considering the new reduced corporate tax rate for FY2019-20 ie. 25.17%,
• Profit After Tax (PAT) Projection FY2019-20 = Rs. 38,640 Cr (1 – 25.17%) = Rs.28,980 Cr
• PAT for 2018-19 was Rs.21,078 Cr, so year-on-year % growth in PAT for FY2019-20 would be almost 37% due tax rate cut effect.
• However, we should take into consideration one important thing that this 37% growth can not be achieved for FY2020-21 because of the same effective tax rates for FY19-20 and FY20-21.
• So, a drastic growth in PAT this year (FY2019-20) is a one-time effect of corporate tax rate cut. And thereafter, around 20-25% PAT growth is expected from the bank.

Market Capitalization Projections

• The historical average PE ratios for 3, 5 and 10 years are 26.57, 25.72 and 25.49 respectively.
• So we have calculated the future market cap projections of the bank by considering those PE ratios also.
• By considering the realistic expectations from the market, we are taking the current PE Ratio also for calculating its market cap projection.
• Thus, Current PE = 30.3 and PAT FY2019-20 projection = Rs.28,980 Cr
• Market Cap Projection of ITC Ltd stock = 30.3 * Rs.28,980 Cr = Rs.8,78,094 Cr
• While, the current market cap = Rs.6,73,807 Cr
• So, % Growth in the market cap with current PE ratio would be = 30.31%
• However, the current higher PE ratio (30.3) of the bank as compared with its 3 year, 5 year and 10 year average PE ratios is the effect of :
  • Rise in the stock price (Almost 9%) due to improved sentiments of the market and increased buying on account of
    1. Increased profitability of the bank post tax rate cuts
    2. Expectation of higher dividend payout to the shareholders
• So, while analyzing the market capitalization projections of the bank, we should consider its historical PE range. In this way, we can make the realistic projections and interpret the correct potential upside for the HDFC bank valuation.
• Thus, by considering the average historical PE, we expect the stock’s PE projections will come down to around 25. Thus, a healthy growth of almost 13-17% in the market capitalization can be achieved by the bank in coming quarters.

Summary

• In addition to the corporate tax rate cuts effects explained above, strong positioning, healthy balance sheet growth and superior asset quality & management, the bank is well poised to deliver consistently with margin leadership & robust returns.
• So the future growth rate of the company is also very positive over medium to longer term perspective