HDFC and HDFC Bank combined should grow at 14-15% in near term: Phillip Capital

The National Company Law Tribunal (NCLT) on Friday approved the merger of HDFC with HDFC Bank. Other regulators, namely the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority have already given their approvals for this deal.

HDFC expects the merger process to be effective from the third quarter of the next financial year as the RBI approvals are a lengthy process.

Manish Agarwalla, Co-Head of Research at Phillip Capital, spoke about the post-merger growth prospects of HDFC and HDFC Bank. Agarwalla noted that while there can be moderation in growth, he still expects the combined entity to grow at a rate of 14-15 percent in the near term.

He said, “As a merged entity, obviously, because of the high pace, there can be some moderation in that growth going forward unlike the way HDFC Bank used to grow in the past. If you look between 2000 and 2009 the bank used to grow at a CAGR of 24-25 percent. Post-COVID the growth has come down to somewhere around 18 percent. We foresee this growth on a combined basis to be between 14 to 15 percent going ahead in the near term.”

However, he also cautioned that the premium valuations currently enjoyed by HDFC Bank may not carry over to the combined entity.

In terms of stock performance, Agarwalla acknowledged that the banking sector has not been performing in line with expectations. However, he remains positive about the HDFC Bank from a medium to long-term perspective and reiterated that there is a cap on the valuation of the merged entity.

He added, “We see around say 15-20 percent upside in the medium term and we have an official target price of Rs 1,900 for the stock.”

When asked about specific banks, Agarwalla has a positive view of ICICI Bank, Axis Bank, Bandhan Bank, and Federal Bank. He sees significant upside potential for ICICI Bank, with a projected 22-25 percent increase in value.

He said, “We see a similar upside between 22-25 percent for ICICI Bank as well, in the medium term, I think the growth trigger for a bank would be their ability to surpass the systemic credit growth that will help them to report a very strong top line.”

He also noted that ICICI Bank may be able to deliver better margins than its peers.