HDFC Bank Fundamental Analysis

Are you looking for how to do fundamental analysis of HDFC bank to discover whether it is really worth investing in when it is trading near lifetime high?

Then you are in the right place. By reading this detailed guide you will not only learn what fundamental analysis is but also how to do HDFC Bank fundamental analysis.

What is fundamental analysis?

Fundamental analysis helps an investor to find the underlying values of a business or a stock after analyzing a company’s Quantitative and Qualitative factors.

Simply put, Fundamental analysis gauges whether the company’s share is undervalued or overvalued after studying the balance sheet, income statement, profit and loss account, and various macroeconomic factors that can affect the share price of a company.

How to do Fundamental analysis of HDFC Bank?

Fundamental analysis tries to find if the stock is undervalued or overvalued. By calculating the true value of a stock, now you are free to compare the current market price to gauge if the stock is available at a premium or at a discount.

When you apply the bottom-to-top approach then the first thing you must consider is that study the company, then the sector, and finally, analyze what macroeconomic factors affect the overall economy.

To analyze a company properly do check a company by following parameters,

  • Debt to Equity Ratio,
  • Profit margin,
  • Earnings per Share,
  • Dividend Payout,
  • Return on Equity,
  • Return on Capital Employed,
  • Price to Earnings Ratio,
  • Price to Book Ratio,
  • Beta,
  • Current Ratio.

Parameter #1. Debt to Equity Ratio

D/E ratio gives a detailed snapshot of the outstanding debt liabilities a company has in comparison to its total shareholders’ capital.

How to Calculate the Debt to Equity Ratio

The debt to equity ratio varies from one sector to another. For instance, Banks and financials have a higher debt to equity ratio as compared to others. As a good rule of thumb, don’t invest in those companies that are with a high debt to equity ratio of 3 or above.

Parameter #2. Profit Margin

Profit margin reveals the company’s efficiency to earn and run its business operation by selling a product or service. Take a close eye at what profit margin the company is delivering. The profit margin shows the profit the company makes from the sales generated in a financial year. For example, when the company delivers a 12% profit margin, it’s a clear signal that the company makes a profit of 12 cents if the total sales generated is $1 for a specific period.

Parameter #3. Earnings per Share

Earnings per share give a snapshot of how much the company is profitable. By dividing the net profit generated by a company in a financial year by its total shares outstanding, you will get the Earnings per share.

How to calculate Earnings per Share

When a company delivers higher EPS, then it can be assumed that the investors are willing to pay a higher price. They are quite confident that the company is available at an attractive valuation in comparison to its current per-share value.

Parameter #4. Dividend Payout

Dividend payout can be referred to as what you can expect when you own a share of a company for a financial year. Invest in those companies that have a track record of paying dividends regularly and grow their dividend payments year on year.

Before start investing in dividend-paying stocks, do consider if the company has delivered a 2-digit not only revenue growth but also profit growth during the last 10 years.

Parameter #5. Return on Equity

Return on equity helps an investor to measure the performance of the company in respect of delivering a return to the shareholders. The Return on Equity can be calculated by dividing the net income generated in a financial year by its total shareholders’ equity.

How to calculate ROE

Invest in those companies that have delivered a double-digit return on equity during the past decade, and stay away of the companies that have failed to deliver a double-digit ROE.

Parameter #6. Return on Capital Employed

Return on Capital Employed is quite helpful to access the management’s efficiency to how they utilize not only the shareholders’ capital but also assets the company has to generate more profits.

How to calculate ROCE

The RoCE takes account of the assets, shareholders’ capital, and debt obligations. This ratio gives a clear picture of how efficiently the company manages its finances to generate higher profits.

Parameter #7. Price to Earnings Ratio

To compare the valuations between the two companies that belong to the same sector or industry, you will find the Price to Earnings ratio a key metric. The Price to Earnings Ratio can be calculated by dividing the current share price of a company by its earnings per share.

How to calculate Price to Earnings Ratio

The price-to-earnings ratio varies from sector to sector. A higher P/E doesn’t signal that the stock is overvalued. Instead, compare the stock’s P/E with the sector’s P/E ratio to find the best stocks that are available at an attractive valuation.

For example, if the P/E of a stock that is operating on 23 in the financial sector, then it can be assumed that it will take 23 years to earn back the investment in the scenario of unchanged profits.

Parameter #8. Price to Book Ratio

To check whether the company’s market capitalization is in line with the book value of a firm, the price to book ratio is a helpful metric.

The Price to Book ratio can be calculated once the market value of a company is divided by its book value per share.

How to calculate Price to Book Ratio

The market value of a company can be calculated once the share price of a company is multiplied with the shares outstanding. On the other hand, the book value of a company is what an investor will get after liquidating all the assets a company has and pays off the debts in the scenario of the company goes bankrupt.

how to calculate Book Value per Share

Don’t buy a company solely because the company’s P/B ratio is less than 1. Instead, investigate why the stock is trading at much lower levels. If you have found satisfactory answers, stay invested in the long run to get superior returns.

Parameter #9. Beta

A Beta is a metric that shows how much volatile a stock is in comparison to the overall market. If the Beta of a stock is 1.25 then it can be assumed that the stock is more volatile in comparison to the broader market. Simply put, when the beta of a company is 1.25 then the chances are higher that the company is 25% more volatile than the market. High beta stocks are more volatile and can deliver superior returns than stocks with low beta.

Parameter #10. Current Ratio

The current ratio reveals the ability of a stock to pay the short-term debt obligations by liquidating the current assets.

Once the current asset of the company is divided by its total liabilities in the short term, you will find the Current Ratio.

How to Calculate Current Ratio

As a good rule of thumb, start investing in those companies that have a current ratio higher than 1.

HDFC Bank Fundamental Analysis

Now, let’s deep dive into the HDFC Bank’s Fundamental Analysis.

We have made a detailed fundamental analysis of HDFC Bank on the above-mentioned parameters.

HDFC Bank is an Indian private bank that offers various banking products and services, credit cards, etc. HDFC bank serves the needs of 5.60 crores Indians with 5485 branches across 2866 cities and towns quite successfully. The bank has installed 14533 ATMs throughout the country. Needless to say, this is the largest bank in respect of assets and market capitalization as of March 2020. HDFC Bank is one of the leading private banks in respect of customer satisfaction and service quality.

When you take a look at the revenue, it stood at a whopping 31,852 crore as of December 2020. The HDFC Bank’s gross NPA ratio is stood at 0.81% which is much lower as compared to the SBI’s 5.88%. Apart from that, the Deposits Growth for FY 2020 is stood at 24.25%. That means that the management is quite efficient enough to not only raise the revenue growth but also cap the NPA’s.

The company has delivered a whopping 22% sales growth and a 25% rise in net profit over the last 10 years. Coming to the return on equity, HDFC Bank has delivered a two-digit ROE of 19% when compared to the Axis bank’s 6%.

Plus, HDFC bank has a track record of declaring the dividend to the shareholders regularly and increasing the dividend payout year on year.

On the valuation part, the HDFC bank is a lucrative option to start investing. HDFC Bank’s P/E stands at 28 in comparison to Axis bank’s P/E of 75.34.

On the volatility part, the beta of HDFC bank is 1.06. It means that the HDFC bank’s volatility is in line with the market. This feature makes it a lucrative stock to include in your stock portfolio.

When you take a look at its shareholder’s pattern you will find that the promoters’ stake is 26% in comparison to the FII’s and DII’s stake of 43% and 17%. Since the FII’s and DII’s have significant holding which is quite a convincing sign to deliver robust returns in the long run.

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Hope this article helps you to do the fundamental analysis of HDFC Bank. Still, have a doubt about the HDFC Bank Fundamental Analysis? Make a comment and I will assist you to clear all the doubts.

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