HDFC: Banking Bet on India

Focus: GLOBAL

Paul Goodwin Image Paul Goodwin Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

HDFC Bank (HDB) is a big Indian bank with a market cap of nearly $75 billion and total assets (as of Q1) of nearly $52 billion, notes global expert Paul Goodwin, editor of Cabot Emerging Markets Investor.

It’s now a full-service bank with 4,715 branches and 12,260 ATMs across India and major lines of business in insurance, asset management, retail banking, credit cards and personal loans.

HDFC Bank is a steady grower, with revenue growth in double digits in four of the last five years, including 22% in fiscal 2016 and 14% in fiscal 2017 (which ended in March). Earnings growth was 23% in the latest quarter and analysts foresee 16% growth this year and 21% next year.

There are two big stories that are supporting HDFC Bank right now. The first is the Indian market of 1.3 billion people. More than two-thirds of India’s population is below 35 years of age, which is prime home-buying age.

A little less than one-third of the country’s population now lives in cities, and that number is expected to rise to 40% by 2030. And only 9% of Indians have mortgages, so the potential for growth is substantial.

The second big story is a program called the Credit Linked Subsidy Scheme (CLSS), in which the government pays an upfront interest subsidy that reduces monthly mortgage payments. This program was extended in March to include middle- and lower-income groups.

Personal loans have been the dominant business line for HDFC Bank, but it’s still a mortgage giant that sources 82% of its home loans through itself or its affiliates. And the CLSS program is expected to grow the mortgage pool in India by a big margin.

We think this will be a steady addition to the portfolio, diversifying us beyond China and outside the tech sector. We recommend buying a full position, although a little patience should get you in on a dip of a point or two.

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