This bank is India’s largest credit-card issuer and has 15% market share in the Indian retail banking market. On the technical side, the shares have recently broken out from a slump, yet are still priced at an attractive level.
HDFC Bank (HDB)
from Cabot Emerging Markets Report
The Cabot Emerging Markets Timer has handed us a new buy signal, and that’s excellent news. The iShares MSCI Emerging Markets ETF (EEM) on which our timing indicator is based now has seven days of advances under its belt and has climbed well above both its 25- and 50-day moving averages and the lower (25-day) average has turned up.
We have our eye on a number of beaten-down Chinese stocks whose charts reflect recent buying swings, but when a buy signal is brand new, it’s a good idea to move slowly and let the market pull you back in rather than jumping in with both feet.
Today, we’re going to be buying HDFC Bank (HDB), one of India’s largest banks, and a company that is ideally positioned to benefit from the still-strong growth of the Indian economy.
While banks aren’t often huge movers, they are both sources of economic growth and beneficiaries. India’s GDP growth is estimated at 7% this year and 7.5% next year, so there’s plenty of strength to work with.
HDFC Bank (the name was originally Housing Development Finance Corporation) became an independent company when India liberalized its banking industry in 1994. In a nation of 1.3 billion people, the bank retains some official functions like collecting taxes for the Indian government and providing cash management services for public sector and semi-government projects.
The bank is also a major player in large development projects like brown field and green field loans and ranks in the top five for loan syndication for big projects.
But the real growth driver for HDFC is private loans (especially auto loans) and banking services. In March 2012, the bank had 2,544 branches and just over 8,900 ATMs in around 1,400 cities and towns. By March 2015, those numbers had risen to over 4,000 branches and nearly 12,000 ATMs in nearly 2,500 cities and towns. The bank enjoys a customer base of over 32 million customers and netted two million new customers in fiscal 2015 (which ended in March). All branches are online and linked in real time. HDFC is also leading the way in online banking, credit card issuance and banking access via mobile devices.
After a slip to 5% revenue growth in 2014, the bank has enjoyed quarterly revenue percentage growth in the high teens for four quarters, with after-tax profit margins also in the high teens. Earnings for the company’s fiscal year ending in March 2016 are forecast to dip 21%, but fiscal 2017 earnings are projected to gain 24%.
One reason for choosing HDFC Bank at this point is the scale of the Indian economic story. While Prime Minister Narendra Modi’s pro-business party hasn’t been able to push infrastructure and development projects through Parliament as quickly as investors hoped, progress is being made. Rate cuts from the Indian central bank have totaled 1.25% this year—including the unexpected half-point easing last week— and more stimulus is available if needed. The Indian economy’s insulation from the ailing Chinese economy is also considered a plus. As India grows, so will HDFC.
HDB made a long, profitable run from September 2013 through early 2015. But, like the U.S. stock market, the stock began a period of bumpy, up-and-down action in late January after topping out at 62. The stock went into a sideways move at that point, finding resistance in the low 60s, including a double top at 62 in July and August.
The August slide to support at 56 turned into a clear cup-shaped correction, and the stock pushed out to new highs earlier this week. Try to get in below 64. BUY.
Paul Goodwin, Cabot Emerging Markets Report, www.cabot.net, 978-745-5532,
October 8, 2015