HDFC Banks on the Indian Economy

10/29/2015 10:00 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Our Emerging Markets Timer has flashed a new buy signal, a sign the intermediate-term trend of emerging market stocks is turning up, explains Paul Goodwin, editor of Cabot Emerging Markets.

We’re going to buy 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 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.

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).

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.

The Indian economy’s insulation from the ailing Chinese economy is also considered a plus. As India grows, so will HDFC.

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