Is HDFC Bank's Soaring Stock Too Hot to Handle?

Commercial Banking company HDFC Bank is standing out today, surging to $60.7 and marking a 4.9% change. In comparison the S&P 500 moved only -0.0%. HDB is -12.51% below its average analyst target price of $69.38, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, HDFC Bank has underperfomed the S&P 500 by 34.7%, moving -11.2%.

HDFC Bank Limited provides banking and financial services to individuals and businesses in India, Bahrain, Hong Kong, and Dubai. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.

HDFC Bank's trailing 12 month P/E ratio is 19.0, based on its trailing EPS of $3.19. The company has a forward P/E ratio of 18.6 according to its forward EPS of $3.26 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the finance sector has an average P/E ratio of 15.89, and the average for the S&P 500 is 27.65.

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

HDFC Bank's PEG ratio of 1.21 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From HDFC Bank's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 5,806,000 530,700 5,275,300 -27.84
2022 7,657,800 347,000 7,310,800 -40.85
2021 12,603,000 243,500 12,359,500 509.44
2020 2,270,700 242,700 2,028,000 -15.97
2019 2,650,000 236,500 2,413,500 84.67
2018 1,447,900 141,000 1,306,900
  • Average free cash flow: $5.12 Billion
  • Average free cash flown growth rate: 23.2 %
  • Coefficient of variability (the lower the better): 0.0 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in HDB have received an annualized dividend yield of 33.7% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

HDFC Bank's P/B ratio of 0.1 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Finance sector was 1.76 as of the second quarter of 2024.

With an average P/E ratio, an exceptionally low P/B ratio., and generally positive cash flows with an upwards trend, we can conclude that HDFC Bank is probably undervalued at current prices. The stock presents strong growth indicators because of its strong net margins with a stable trend, and an average PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.