HDFC Bank: Solid on Earnings, But the High Valuation Just Doesn't Make Sense

| About: HDFC Bank (HDB)

I don't know how many more times I can write the same things... at what point will beating analysts expectations but being valued at some extreme level become a warning sign? Not yet. India's #2 bank, HDFC Bank (NYSE:HDB) reported (Saturday?) and the results are again good. But, as I've written in the last few pieces on this company, I don't know how to justify paying forward 35x+ earnings as a great entry point, especially with a central bank that has begun to increase interest rates. Yet as of last Thursday, as the stock broke over $150, the chart said "buy buy buy"... a new breakout after a short consolidation. And charts are apparently all that matter to HAL9000 and his merry band. The stock is now at an all time high. (Click to enlarge)

A quick look at earnings:

  • HDFC Bank reported a 32.6% rise in its quarterly profit, beating market estimates, bolstered by a pick-up in credit demand in Asia's third-largest economy. Profits were boosted by a 29% drop in interest expenses, which improved net interest income by 27%.
  • The results were marginally better than analysts expectations.
  • Within retail — auto loans, commercial vehicles and home loans were the growth engines, followed by business banking
  • Strong growth in the loan book and better margins boosted net interest income, said Mr Paresh Sukhtankar, Executive Director, HDFC Bank. The net interest margin was up marginally at 4.4% (against 4.3%). Other income was down as treasury earnings were hit due to rising bond yields.
  • In the quarter, net NPAs dropped to 0.31% (0.63%). "The impact of the non-performing loans acquired from Centurion Bank is wearing off. With the economy looking up, the asset quality of the retail portfolio is improving," said Mr Sukhtankar.
  • The corporate loan book grew 40% and retail 22%.

[Jan 15, 2010: HDFC Bank Earnings Rise 32% Year over Year]
[Oct 15, 2009: HDFC Bank's Earnings Propel Upward 30%]
[Jan 7, 2009: Bookkeeping - Starting HDFC Bank on Satyam Scandal]

Disclosure: Long HDFC Bank in fund; no personal position

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