Price Earnings Ratio Analysis

A Study of HDFC Bank
Group 10: Aarti Jha – 11HR-001 Garvit Garg – 11IB-023 Harsh Vardhan Khandelwal – 11FN-040 Rohan Johri – 11IB- 048 Sreyon Chatterjee – 11DM-192

1. 5. 6. 7. 2 2 3 4 5 6 6 1|Page .Index Sl. No. 2 3 4. Contents Price Earnings Ratio HDFC Bank Company Profile HDFC Bank EPS Historical PE Ratio Peer Comparison Forward PE Ratio PEG Ratio Page No.

2|Page . The price-to-earnings ratio reflects the capital structure of the company in question. with its registered office in Mumbai. With its experience in the financial markets. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited'. India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC Bank The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector. ignoring inflation and time value of money. HDFC was ideally positioned to promote a bank in the Indian environment. Since its inception in 1977. as part of the RBI's liberalisation of the Indian Banking Industry in 1994. the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. large shareholder base and unique consumer franchise. The price-to-earnings ratio is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income. so the stock is more expensive compared to one with a lower P/E ratio. a strong market reputation. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities.Price Earnings Ratio Formula: (Market Price of Share/ Earnings per Share) PE Ratio is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. Its outstanding loan portfolio covers well over a million dwelling units. The P/E ratio can be seen as being expressed in years. in the sense that it shows the number of years of earnings which would be required to pay back purchase price.

This means a growth of 32% Year on Year.10 5. this figure does not seem to be abnormally high. Also.58 and 6.HDFC Bank Earnings per Share Year EPS Growth Mar-06 27 Mar-07 34 25.47 Mar-09 51 18. 3|Page . An EPS of 21. In an emerging economy which is towards a growth path. Quarter EPS Growth Actual Estimated Total FV(2) Total FV(10) Jun-11 Sep-11 Dec-11 Mar-12 4.93 Mar-08 43 26.11 which lead to a total EPS of 21. the company posted a decrease in the growth figures in 2009 due to the global recession that took place as a result of the sub-prime crisis. On 14-Jul-2011 the Face Value of the HDFC Bank shares were split from Rs.44 9. the projected figures for December 2011 and March 2012 quarters are 5.2.44 9.44 Assuming a growth rate of about 10% every quarter.25 9.65 Average Growth Rate of EPS = 24% Despite an increasing trend of the EPS Growth of HDFC Bank. share split does not affect the PE Ratio of the company.58 6. It helps in bringing liquidity in the shares in the stock exchanges.45.45 is quite achievable.57 Mar-11 81 30. All the further calculations have been done taking this into regard.60 Mar-10 62 21.66 5.11 21.10 to Rs.45 107.

95 19.95 51 62 EPS PE Ratio 81 Chart 1 As shown above. This also states the fact that HDFC Bank is way much overvalued than the other companies. The fall in PE Ratio in the year 2009 reflects the Indian Market sentiments regarding the sub-prime crisis wherein all stocks were battered down.67 27 34 28.Historical PE Ratio EPS & PE Ratio Comparison 90 80 70 60 50 40 30 20 10 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 28.18 28. the EPS of HDFC Bank has been increasing steadily while the PE Ratio has been constant around 27-30 levels.06 43 30. the PE Ratio of Nifty 50 is around 18. The PE Ratio of CNX Bank Nifty is around 14.08 31. 4|Page . Also. the bank posted good numbers and hence the EPS of the company increased. But even during those times. This means that investors are very optimistic about the earning potential of HDFC Bank because of which they value it so high.

the PE Ratio of HDFC Bank is much higher than its peers in the same sector.00 130.34 19.00 308.Peer Comparison Company HDFC Bank State Bank of India ICICI Bank Axis Bank Yes Bank EPS 17.00 1866.22 13.00 02-Jan-07 02-Jan-08 State Bank of India 02-Jan-09 Yes Bank 02-Jan-10 ICICI Bank 02-Jan-11 Axis Bank HDFC Bank Percentage Returns of HDFC Bank and its peers As shown above.00 PE Ratio 27.27 82.71 14. HDFC Bank has been maintaining its value in the market due to the optimism of the investors.16 45.00 1122. share prices of other banks have fallen almost 50% from their level earlier this year but HDFC Bank has more or less been hovering around those same peak levels.12 Market Price 471.00 200.95 21.00 300.00 0.00 02-Jan-06 -100.53 14. This is largely due to the fact that although most of the banks have lost a lot of value in the capital markets in the current year.00 400. As can be seen above.00 870.2011 500. 5|Page .58 Prices as on 26.00 100.10.

the P/E ratio is higher for a company with a higher growth rate. The PEG ratio is considered to be a convenient approximation.00 25.26 18.31 25.61 Mar-14 31. 6|Page . a fairly valued company will have its PEG equal to 1. PEG Ratio – A Brief Note The PEG ratio (Price/Earnings to Growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock. i. who wrote in his 1989 book One Up on Wall Street that "The P/E ratio of any company that's fairly priced will equal its growth rate".07 Keeping the growth rate constant at 25%. the earnings generated per share (EPS)..20 Expected Mar-12 Mar-13 20.00 PE Ratio 29. the above table shows the projected figures for the EPS for the years ended March 2012-14.89 29.64 25. PEG Ratio of HDFC Bank Annual EPS Growth Rate 25. It was popularized by Peter Lynch.00 23. the resulting ratio is better for comparing companies with different growth rates.Forward PE Ratio Year EPS Growth (%) Current Price PE Ratio Actual Mar-11 16.16.00 PEG Ratio 1.25 25.00 14.e.16 HDFC Bank has a PEG Ratio of 1. and the company's expected growth. It is assumed that by dividing the P/E ratio by the earnings growth rate. This suggests that the high PE Ratio is not because of higher valuation of the stock but because of promising growth prospects of the company. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. In general.00 471.

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