Remember the much-maligned apple, looking at which the Bard presumably remarked 'more sinned against than sinning' and against which puritans have fought crusades? Well, we may end up on the stake but this is one apple we implore you to taste, savor and pass on the pips as heirlooms. An apple called HDFC Bank.

What is the Business?
The bank strides forward on the four pillars of - retail banking, corporate banking, capital market operations and treasury. Of all the ingredients, retail banking remains its forte. The bank has 116 branches and a base of 118 ATM centers spread across the country. HDFC Bank's greatest strength is the management's ability to visualize how the industry was going to evolve. With an IT led revolution, catalyzed by a penetrative distribution network, defining future success in the banking industry, HDFC Bank is, arguably, the first bank to equip itself with strong IT credentials. Today, the Bank is involved with both B2B and B2C segments. Among others, it includes, supply chain management, payment gateways and a host of e-commerce transactions. This combined with the advantages of a clean slate and an impressive asset quality will ensure its success in new and emerging businesses like insurance. Well, this bank knows its business. Yes, it surely does.

Who is the Management?
From circa 1995 to date, HDFC and the Chase Manhattan Group (post NatWest era) have been the guiding forces. With a visionary and a highly regarded management at the helm, shareholder wealth creation has never been an issue. The sacrosanct barometers of EPS (average growth rate of 35% over the last three years) and ROANW (average of 10% over the last three years and 22% for FY2000) have continuously improved. The dividends of atleast 10% have been an annual common denominator, and the growing Reserves kitty (Rs 51mn for FY2000 compared to Rs13mn a year before) has ensured a ready buffer for the company's expansion plans. But a growing bank with huge plans will need much more than this and that is when the transparent, tech-friendly and visionary team led by Aditya Puri has the advantage. The ability to garner funds at low discounts from the market at regular intervals - perhaps the difference between life and death for any aggressive bank. Well, this management is certainly the jewel on the Bank's crown.

Whither Cash flows?
With a plethora of ventures on the anvil, it is imperative for the bank to have a very steady cash flow. HDFC Bank does not flatter to deceive. Cash flows have always been positive and the scorching pace of garnering deposits has ensured that the cash machine keeps tingling. Yes, there is a limit to which one can depend on deposits, and precisely that is where the bank's strength comes to the fore - its brand equity in the market. Its ability to raise capital from the market, cheap and fast, will fund the bank's expansion and e-commerce plans. And aided by the surging bottom-line, the rug will still stay firmly planted under the bank's feet.

Why should I Buy?
Well! Today if there is one bank, which a layman has on the top of the mind, HDFC Bank will breast the tape. That is its greatest strength, especially when one considers the credo of the bank - Go Retail. So much so that it has beautifully meshed in its IT capability with its wide distribution network to enter a broad bunch of segments (insurance and other e-commerce initiatives) that will clearly make paybacks in the future. Perhaps today, if we compare with granddaddy SBI, HDFC Bank is still a child. But we believe that in five years time it will be as big (if not bigger) than all. Starting on a clean slate, a small base and a terrific management and fueled by an impressive asset quality, manpower and technology, this bank will become one of the stories of which legends in corporate India are made of. Amass this khazana even as the market discounts it at a P/E of 55x for you may just end up making your grandchildren millionaires.

Where can I go Wrong?
Taking nothing away from the Bank, as the industry's knot is tied firmly with the economy, a slowdown can act as a dampner on its profitability. Notwithstanding the rocketing NPAs (part of the Times Bank baggage), the conservative and extremely prudent credit policies of HDFC Bank is sure to make NPAs a story about Paleolithic men. A high exposure to the capital market segment is, however, a trifle disconcerting, as this segment's performance is as predictable as the vagaries of nature.

Bala Gopal Menon

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