Earnings momentum for HDFC Bank Ltd. (HDB) has advanced over the past 60 days based on this Indian bank's impressive fiscal second-quarter results. The company hit its 52 week high on November 21 and became a Zacks #1 Rank (Strong Buy) on October 16. With a year-to-date return of approximately 53.1% and a long-term expected earnings growth rate of 30.0%, the ADRs look like a solid aggressive pick.
Robust Q2 Results
On October 12, HDFC Bank reported fiscal second quarter earnings per share of INR6.50 (36 cents per ADR), topping the year-ago earnings by 27.5%. Moreover, the company reported notable growth in deposits and loans.
HDFC Bank's net revenue surged 22.2% year over year to INR50.77 billion ($0.96 billion). Net interest income improved 26.7% to INR37.32 billion ($0.70 billion), driven by strong loan growth and a stable net interest margin. Non-interest revenues of INR13.45 billion ($0.25 billion) grew 11.0%. Operating expenses totaled INR25.06 billion ($0.45 billion), increasing 23.4% from the prior-year quarter.
Asset quality continued to remain strong with gross nonperforming assets (NPAs) at 0.90% of gross advances, down 10 basis points year over year. Furthermore, net NPAs remained healthy at 0.20% of net advances, on par with the year-ago quarter. Moreover, provisions and contingencies plummeted 20.0% to INR2.93 billion ($0.09 billion).
Surge in Earnings Estimates
Over the last 60 days, the Zacks Consensus Estimate for fiscal 2013 rose 6.5% to $1.64 per ADR. For fiscal 2014, the Zacks Consensus Estimate advanced 6.1% to $2.09 within the same time frame.
The Zacks Consensus Estimate for fiscal 2013 reflects year-over-year growth of about 18.8%, while the expected growth rate for fiscal 2014 is 27.4%.
Reasonable Valuation
ADRs of HDFC Bank currently trade at 24.5x 12-month forward earnings, a 98% premium to the peer group average of 12.4x. Its price to book ratio of 5.2 is at a significant premium to the industry median of 1.6. Given its strong fundamentals, the premium valuation looks justified.
Moreover, given the long-term growth projection of 30.0%, the PEG ratio comes in at 0.82, an 18.0% discount to the benchmark of 1 for a fairly priced stock. Thus, the expected long-term earnings growth is currently priced at a discount.
The company has a trailing 12-month ROE of 17.4%, compared with the peer group average of 11.4%. This implies that the company reinvests its earnings more efficiently than its industry peers.
Chart Echoes Growth Potential
HDFC Bank has been continuously outperforming its 200-day moving average over the past three months, showing a steady growth trend. The year-to-date return for the stock came in at 53.1% compared with the S&P 500's return of 10.6%.