Bottom of pyramid businesses & SMEs are not highly leveraged, says Aditya Puri, HDFC Bank

Update on the Indian Equity Market:

On Tuesday, NIFTY ended up 190 pts up (+2.5%) at above 7,800 level amid Finance Minister Nirmala Sitharaman announcements to move tax deadlines and ease of rules to fight Coronavirus.

Among the sectoral indices, IT (6.1%), FMCG (3.2%) and PHARMA (2. 8%) were among the top gainers while REALTY (-2.0%) was the only sector to close lower. INFY (+14.0%), ADANIPORTS (+13.8%) and BRITANNIA (+11.8%) were the top gainers. M&M (-8.0%), GRASIM (-7.7%) and IndusInd Bank (-6.8%) were the top losers.

Bottom of pyramid businesses & SMEs are not highly leveraged, says Aditya Puri, HDFC Bank

Edited excerpts of an interview with Mr Aditya Puri, Managing Director & Chief Executive Officer of HDFC Bank; dated 23^rd March 2020:

• His views on COVID-19 – He is happy with the lockdown and suggested that we should control this situation and work towards decreasing the number of cases, this will be the best thing that can happen to everyone now.
• When asked about where he sees the financial market and economy going ahead, he commented that in such crisis financial backing is needed looking at the difficulty we will be going through. A non-schedule rate cut is necessary for both to keep the yields in check as well as to give a clear message to the market that we are willing to go to whatever stake necessary. A forbearance for the cash flow problem that the virus will create is needed as it is not that the companies are going bad, there could be cash flow mismatches and the more liquidity provided will make sure that life after the virus is better.
• While giving a picture about his bank he said that if the companies survive, the country will survive and the banks will also survive. HDFC Bank has been working on this. They are sitting on the liquidity of USD 5 bn and their total portfolio is rated AAA at an internal risk rating of 4.3. HDFC Bank has lent most of their wholesale to 80% to AAA companies. On the PL side, they have lent to the same fellows for salary and he expects salary cuts. 75-80% of personal loans and credit cards are to the same salaried employees there. It is difficult for the Bank to take a call before laying off starts but he expects salary cuts for sure before that.
• He stated that as far as SME portfolio is concerned compared to the others, 80% of the portfolio has got additional collateral and they have a self-funding ratio in SME of 85%. He also said that he is more concerned with the health aspect than being concerned about the bank.
• He further added that their bottom of the pyramid on the businesses is not highly leveraged, so when they went to the ground for the shopkeepers, they are not highly leveraged. A large part of SMEs also is not highly leveraged.
• Talking about rural India he said that it is functioning in its own world. The only thing we have to do is stop people going back there and spreading. People there have the money and the demand is coming from rural areas.
• With regards to earnings, he said that there will not be a flat quarter or a drop in profit and investors would be surprised with the numbers. He will also create a corona reserve and come out still okay.
• On the work from the home structure, he said that ~33% of their people are working from home now and he sees no reason why they shouldn’t continue after corona which gives a further drop in our costs. So, their cost to revenue ratio is going down. HDFC Bank has substantially increased their distribution, they have the technology and USD 5 bn of liquidity and it is still coming in.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price HDFC Bank was ₹ 774/- as of 23^rd March 2020. It traded at 2.5x/ 2.1x/ 1.8x the consensus book value estimate of ₹ 311/ 360/ 420 for FY20E/ FY21E/ FY22E respectively.
• Consensus target price of ₹ 1445/- implies a PBV multiple of 3.4x on FY22E EPS of ₹ 420/-