What do you think is the intrinsic value

[PJM]

We all agree that the true skill is in calculating the intrinsic value of a company disregarding the market value of the company. So i thought we can run an exercise to gauge the intrinsic value of a real company without disclosing the name of the company or its market value.

 

The company operates within the Banking and financial services sector  of one of the largest emerging market economy. It is one of the largest domestic bank of the country. Apart from retail banking (more than 3000 branches), it provides commercial banking, mortgages, credit card, debt and equity capital markets and other financial products.

 

Some important metrics

• 10 years (2004-2013) CAGR Net Income – 34%

• 5 years (2008-2013) CAGR Net Income – 18%

• ROE greater than 15% consistently for last 10 years

• NPA (Non-Performing assets) less than 1% of gross advances

• NIM (Net Interest Margin) greater than 4% consistently over the last 10 years

• Retail deposits and net interest income has increased consistently over the last 10 years

• CASA (Current and Savings Account) ratio greater than 40% consistently, meaning the company is able to get capital at a cheap rate

• A very strong and reliable management

 

Some Financials figures attached.

 

Please let me know if you need any other information. Some of you may already know/guess the company, to them I'd request not to mention the company as I'd like the exercise to be independent of any analyst recommendations, current market price etc

 

At this stage I'd also like to remind words of wisdom from Charlie Munger "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over forty years and you hold it for that forty years, you're not going to make much different than 6% return - even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result." To summarize, it pays to invest in companies which are able to

1. generate return on capital much higher than cost of capital

2. sustain and grow such above-cost-of-capital returns over a long period of time.

Company_H_-_Intrinsic_Value.xlsx

[rayfinkle]

Thanks for this. Any sense for its cost of deposits/the cost item in nim? It'd be great to understand if they are the low cost player....

[gary17]

1800 to 2500 bucks a share

 

 

Sorry I meant 400 to 500 a share.  Too early and using google calf on iPad

[Hielko]

Is the provided data adjusted for inflation?

[PJM]

Thanks for this. Any sense for its cost of deposits/the cost item in nim? It'd be great to understand if they are the low cost player....

 

The company has one of the highest NIM and CASA ratio within the industry, which suggests the company has lower cost of funding compared to its peers.

[PJM]

Is the provided data adjusted for inflation?

 

Very good qst. The data is not inflation adjusted. The company operates in an emerging market with a high rate of inflation, but also a high GDP growth rate.

[LC]

If we assume inflation and GDP growth are relatively lockstep, I'd say around 500/share. Otherwise, 350-400. Their numbers (ROA, growth in BV) are nice, but how much is attributed to net inflation is my question.

[jouni1]

so which company is it? i know i should be able to figure it out, being so big and all but i've had no luck.  ::)

[PJM]

HDFC Bank. Its the WFC of India.

[kmukul]

please correct me if I am wrong as I very well could be. From what I understand a lot of success of indian banks is due to the fact that they trade at multiples of book value and routinely raise capital at those prices. Now this in a bull market is vicious cycle. Any idea on how much of this growth can be attributed to that or if this is even worth thinking about?

[PJM]

please correct me if I am wrong as I very well could be. From what I understand a lot of success of indian banks is due to the fact that they trade at multiples of book value and routinely raise capital at those prices. Now this in a bull market is vicious cycle. Any idea on how much of this growth can be attributed to that or if this is even worth thinking about?

 

It may be true for other banks in India but definitely not true for HDFC bank. It is one of the best managed bank. As far as i know the last time they raised equity capital for in 2004.

[kmukul]

Thanks PJM for your insights in indian banking sector, HDFC seems to havent raised capital as i has been watching since we talked, yes bank icici and almost every other bank was raising capital recently, and now it seems hdfc has joined them i think its good for shareholders if the company raises money when valuation are high but i dont know its something very good

http://wap.business-standard.com/article/reuters/hdfc-bank-1-6-billion-share-sale-likely-this-week-sources-115020300260_1.html

 

[PJM]

HDFC bank is raising capital for reasons other than why traditionally banks raise capital. Given the interest rate situation in India, HDFC bank could very well go and raise money in debt market at the most competitive rates, but the only reason it is raising capital is to provide room to FIIs to raise their stake. HDFC (parent company) will not participate in the issue, so 74% of the capital will go to FIIs, possibly through ADR.

 

Traditionally whenever HDFC Bank or any other quality bank has raised capital at high PBV, the price of the stock has soared post the issue because market will quickly take the PBV back to historic levels. I'm expecting the same this year.

 

I reserve the right to be wrong, but I think HDFC and HDFC Bank will outperform the Indian markets this year. HDFC in particular is very undervalued at the current prices.

 

Disc: am long HDFC Bank