HDFC Bank: India’s Consumption Engine, With Mid-Teens ROE

Krish Mehta of Enam Holdings presented his investment thesis on HDFC Bank (India: HDFCB, US: HDB) at Best Ideas 2024.

Thesis summary:

HDFC Bank is the largest private sector bank in India and one of the top five most valuable banks globally, with a market capitalization of $150 billion.

HDFC Bank recently merged with HDFC Limited (its parent entity). The merger provides several synergies for the combined franchise given the 90% unpenetrated customer base of HDFC Bank for mortgages. Moreover, 65% of HDFC Limited’s existing borrowers were not banking with HDFC Bank, providing a major opportunity to garner deposits and to cross-sell and up-sell.

HDFC also has a unique business model built to weather cycles. The bank has a diverse loan book mix and best-in-class through cycle credit costs. Moreover, HDFC has built a formidable liability franchise, with the best productivity metrics in terms of deposits per branch. The bank has added the most incremental branches over the past five years and is well-positioned to galvanize incremental deposits and grow market share.

HDFC has consistently delivered ROAs near 2% for more than three decades, while growing assets and maintaining consistent ROEs along with adequate capital. The bank did not raise capital even during the covid crisis.

With 91+ million customers and a suite of product offerings, HDFC is a direct play on India’s growing consumption story. As India’s GDP per capita moves from $2,600 to $4,000 and beyond, credit will play a critical role in galvanizing the economy. HDFC stands to benefit from this strong growth tailwind.

HDFC Bank is available at 15x P/E (FY25E) and is trading near valuation levels last seen in the great financial crisis of 2008.

The following session updates Krish’s presentation from Best Ideas 2023.

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About the instructor:

Krish Mehta is a value investor from Mumbai, India. He is an Investment Analyst at Enam Holdings in Mumbai, a reputed family office. Enam runs a concentrated book and takes five- to ten-year views on businesses, practicing a long-term value-focused investment philosophy. Krish’s role at Enam is conducting bottom-up, fundamental research of Indian and global equities across sectors, portfolio management, and covering global macro. Krish graduated from the NYU Stern Undergraduate School of Business in 2019 with a BS in Finance and Accounting and interned at a long/short hedge fund in London, Theleme Partners, for two summers prior to joining Enam.