Bank on India: A Long-Term Story

05/06/2014 10:00 am EST

Focus: GLOBAL

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Our latest recommendation is the largest private-sector bank in India by market cap, and its fortunes are closely tied to the health of the Indian market, explains Mike Cintolo, editor of Cabot Top Ten Trader.

HDFC Bank (HDB) has a nice mix of retail banking, wholesale banking, and treasury operations.

The growth of the Indian economy is providing plenty of organic growth, with the company’s 2013 report in February revealing a 17% increase in revenue, the third straight year of double-digit revenue growth.

The company’s Q4 results showed a small increase in revenue, but a multi-year high of 18.3% in after-tax profit margin.

HDFC has had the benefit of stable leadership, with one man at the head of the company since its founding in 1994, when India first allowed private banks to do business.

The longer-term story is that India’s financial infrastructure has long lagged behind Western models, with limited access to credit cards, personal loans, auto loans, and other banking services.

HDFC Bank is leading the development of stronger banking services that both, benefit from, and support economic growth.

With a network of 3,336 branches and 11,473 ATMs in 2,100 Indian cities and towns, HDFC Bank is positioned to grow as India does. A small dividend (0.7% forward annual yield) is a nice addition.

After hitting a multi-year high at $44 in May 2013, HDB took a nearly four-month flop to $27.

A recovery to $37 at the end of October led to a four-month rebasing pattern under resistance at $36. So, when the stock broke out in early March, it had a good base to support its run, which topped $40 in early April.

HDB looks like it may need to rest for a while and any dip of a point, or so, looks buyable. Use a loose stop at the 200-day (now just over $34), as this stock is a long-term play on India’s strength.

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