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Fundamental analysis of the top four private banks of

India
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Prepared By: Divyesh Chadotra
Institute: B.K School of Professional and Management Studies – Ahmedabad
Roll Number: 119021
 Table of content

Sr Particulars Pg.
. no
no
1 Declaration 3
2 Acknowledgment 4
3 Executive summary 5
4 Company Overview 5
5 Objective of the study 7
6 Methodology 7
7 Introduction to fundamental analysis 8
8 Economic analysis 9
9 Industry analysis 15
10 Company analysis 19
11 Company overview 19
12 Financial ratio analysis 21
13 Forward PE valuation 31
14 Findings and recommendations 35
15 Conclusion 37
16 Reference 38
 Declaration
I, hereby declare that this project submitted to B.K.School of Professional and
Management Studies, and to Prudent Corporate Advisory Services Pvt Ltd. is result of my
own work and my indebtedness to other work publication, references, if any have been
duly acknowledges.

This project report is entirely of my own efforts and has not been previously submitted to
any other university or institute for any other examination and for any other purpose by any
other person.
 Acknowledgment
I have undergone the project work on “Fundamental Analysis of the top four private
banks of India”. I have collected the information, which is included in this report. I take
the opportunity to express the feeling of grateful towards Prudent Corporate Advisory
Services Pvt Ltd for providing me an Internship opportunity.

I also thank to Parth Parekh Sir, my guide from Prudent Corporate Advisory Services
Pvt Ltd - Ahmedabad. For giving me an opportunity to work and learn under your
guidance.
Executive summary:
Fundamental analysis is one the methods of finding the good investment opportunity in the various stocks
and industries. There are various methods to determine the fair value of the stocks, considering various
parameters in the fundamental analysis we can derive the conclusion whether the selected industry has
growth potential or stock is undervalued or overvalued.
Valuing stock is very important while finding the right investment opportunity as we may have observed
that while investing in any stock if we buy that stock, after some days, it stars falling and investor has to
tolerate the losses, as they have not considered the fair value of a stock.
While buying a stock we always have concerned about the future performance and growth of a company,
whether this stock will fall or grow in the future, technical analysis do not have that capacity to determine
whether this stock will fall or grow in the long term as technical analysis is based on the previous trends
and some indicators, yes it can forecast for the short term but for the long term investment we always
have to rely on the fundamental analysis of a stock.
While doing the fundamental analysis we will consider the various financial ratios of the company, which
tell the real financial position of a company whether the company has enough liquidity to repay its short
term and long-term debts, other financial ratios to determine the financial health of the companies. In
addition, at the end using Forward P/E Valuation model to find the fair value of the stocks.
Based on fair value we can conclude whether a stock is undervalued or overvalues, and does it have
investment opportunity or not.

Company Overview:
Introduction:
Incorporated in 2004, Prudent Broking Services Pvt. Ltd is a Stock Broking and Depository Participant
service provider. Company is a member with Bombay Stock Exchange (BSE), National Stock Exchange
(NSE), Metropolitan Stock Exchange (MSEI), Multi Commodity Exchange of India Ltd. (MCX) and
National Commodity & Derivatives Exchange Limited (NCDEX) & Central Depository Services (India)
Limited (CDSL).

Products of the company:

1. PRUALPHA
PruAlpha is a long only strategy where

 Entry and exit will be purely based on technical analysis; (i.e. study of charts)
 It is a delivery-based product; (i.e. no derivative/leveraged position)
 The stock will be selected based on the predefined technical indicators. Broadly the stock which
are in overall uptrend and are breaking out are a consolidation phase, will be considered
  The stocks having average 20-day volume of 2 lac or more will be considered
 Typical holding period for a stock will be around 15-20 sessions. The holding period might
reduce / go up if the target is achieved / stop-loss is hit earlier / later.
 Typically, the stop-loss level would be in the region of 5-10% which will be considered on
closing basis while target would be in 7-15% range
 Each stock will be allocated 7.5% of total corpus

2. PRUGROW

 Pro-Growth-Money-Management
 An Investment Strategy That Gives The Best Of Both Worlds
 PRUGROW works on a unique strategy, which combines both fundamental and technical
analysis to generate superior return compared to index.
 The idea is to select a “fundamentally sound stock” which is also technically bullish i.e. looking
strong on chart. Better known as TECHNO FUNDA calls.

3. WISHBASKET

 WiseBasket is a pre-researched portfolio of stocks with weights assigned to each stock in the
portfolio. The basket could be based on an idea, theme or strategy.
 Wisebasket is conceptualized to solve two key problems of investors…
1. Which stock to buy?
2. What should be the weightage of that stock in the overall portfolio?
 Investors receive advice from different sources like Relationship Managers, Friends, Brokerage
Research Reports, Neighbors, and Television Anchors etc. This creates bigger confusion on what
to buy or not to buy.
 The research team at WiseBasket not only helps you to find the best quality stocks, they also
determine the appropriate weightages to be assigned to each stock. The combination of both these
factors helps investor to manage risks while generating returns.

4. PRUIDEA

PruIdea is a fundamental product recommending stocks with a long-term view.

Process to select Stocks in PruIdea.

 Reading Annual Reports.

 Listening to Conference Calls of Management post reporting of Quarterly Results.
 Doing Channel Checks by Inquiring through Dealers and Distributors.
 Analyzing Free Cash Flows & Performance over Different Cycles.
 Analyzing the Competitors & Threats.
 Referring to Industry Research Reports.
 Making Financial Models for Future Projections.
  Deriving at Target Price using Relevant Valuation Techniques.
 In addition to this, we look for red flags such as excessive managerial remuneration, promoter
pledging, related party transactions, negative free cash flows in order to avoid companies wherein
there could emerge corporate governance issues.

Objective of the study:

The main objective to carry out this fundamental analysis are as follows
1. To briefly understand the banking sector of India

2. To identify the fair value of the top four private banks’ share price

3. To carry out the fundamental analysis of the selected stocks

4. To identify the best stock among the selected stocks

5. To recommend whether to buy, hold or sell the stock based on the analysis

Methodology:
This study is purely carried out based on the secondary data, which are published on the various websites.
The sample size of the study is taken four as the research is based on the top four private banks of India
considering the market capitalization of each banks.
The data are used in this study are balance sheets, profit and loss account, cash flow statements and other
financial ratios.
Finding the intrinsic value of a company, I have taken the Forward PE valuation model.
Forward PE Multiple is an important valuation metric used for measuring the value of the company with
an objective of comparing its price with to earnings of a company.
Fundamental Analysis:
What Is Fundamental Analysis?

Fundamental analysis (FA) is a method of measuring a security's intrinsic value by examining related
economic and financial factors. Fundamental analysts study anything that can affect the security's value,
from macroeconomic factors such as the state of the economy and industry conditions to microeconomic
factors like the effectiveness of the company's management.

The end goal is to arrive at a number that an investor can compare with a security's current price in order
to see whether the security is undervalued or overvalued.

This method of stock analysis is considered to be in contrast to technical analysis, which forecasts the
direction of prices through an analysis of historical market data such as price and volume.

Understanding Fundamental Analysis

All stock analysis tries to determine whether a security is correctly valued within the broader market.
Fundamental analysis is usually done from a macro to micro perspective in order to identify securities
that are not correctly priced by the market.

Analysts typically study, in order, the overall state of the economy and then the strength of the specific
industry before concentrating on individual company performance to arrive at a fair market value for the
stock.

Fundamental analysis uses public data to evaluate the value of a stock or any other type of security. For
example, an investor can perform fundamental analysis on a bond's value by looking at economic factors
such as interest rates and the overall state of the economy, then
studying information about the bond issuer, such as potential changes in its credit rating.

For stocks, fundamental analysis uses revenues, earnings, future growth, return on equity,
profit margins, and other data to determine a company's underlying value and potential for future growth.
All of this data is available in a company's financial statements (more on that below).

Investing and Fundamental Analysis

An analyst uses works to create a model for determining the estimated value of a company's share price
based on publicly available data. This value is only an estimate, the analyst's educated opinion, of what
the company's share price should be worth compared to the currently trading market price. Some analysts
may refer to their estimated price as the company's intrinsic value.

If an analyst calculates that the stock's value should be significantly higher than the stock's current market
price, they may publish a buy or overweight rating for the stock. This acts as a recommendation to
investors who follow that analyst. If the analyst calculates a lower intrinsic value than the current market
price, the stock is considered overvalued and a sell or underweight recommendation is issued.

Investors who follow these recommendations will expect that they can buy stocks with favorable
recommendations because such stocks should have a higher probability of rising over time. Likewise,
stocks with unfavorable ratings are expected to have a higher probability of falling in price. Such stocks
are candidates for being removed from existing portfolios or added as "short positions.

This method of stock analysis is considered the opposite of technical analysis, which forecasts the
direction of prices through an analysis of historical market data such as price and volume.

Quantitative and Qualitative Fundamental Analysis

The problem with defining the word fundamentals is that it can cover anything related to the economic
well-being of a company. They obviously include numbers like revenue and profit, but they can also
include anything from a company's market share to the quality of its management.

The various fundamental factors can be grouped into two categories: quantitative and qualitative. The
financial meaning of these terms is not much different from their standard definitions. Here is how a
dictionary defines the terms:

 Quantitative – capable of being measured or expressed in numerical terms.

 Qualitative – related to or based on the quality or character of something, often as opposed to its
size or quantity.

In this context, quantitative fundamentals are hard numbers. They are the measurable characteristics of a
business. That is why the biggest source of quantitative data is financial statements. Revenue, profit,
assets, and more can be measured with great precision.

The qualitative fundamentals are less tangible. They might include the quality of a company's key
executives, its brand-name recognition, patents, and proprietary technology.

Neither qualitative nor quantitative analysis is inherently better. Many analysts consider them together.

Economic Analysis of India:

The purpose of analyzing the economic condition of the country in fundamental analysis is to assess the
general economic condition of both within the country and internationally. The economy is like tide and
the various industry group and companies are like boats. When economy expands most industry, group,
companies benefits, and grows. When the economy declines most of sectors of the economy suffers.

Therefore, following are some important factors, which should be taken into, account while doing
fundamental analysis.

 Economic growth

 Per capital income

 Industry production

 Inflation

 Interest rates
  Foreign exchange reserve

 Budgetary deficit

 Domestic savings and investment

 Tax rates infrastructure

 Political situation

Economic overview of India:

Introduction
India has emerged as the fastest growing major economy in the world and is expected to be one of the top
three economic powers of the world over the next 10-15 years, backed by its strong democracy and
partnerships.

Market size
India’s nominal GDP growth rate is estimated at 12 per cent in 2019-20. The estimate for 2018-19 was
11.5 per cent. During Q2 of 2019-20, GDP (at constant 2011-12 prices), GDP stood at Rs 33.16 lakh
crore (US$ 474.46 billion) showing a growth rate of 4.3 percent over the corresponding quarter of
previous year.
India has retained its position as the third largest startup base in the world with over 8,900-9,300
startups, with about 1,300 new start-ups being founded in 2019, according to a report by
NASSCOM. India also witnessed the addition of seven unicorns in 2019 until August, taking the total
tally up to 24.
India's labor force is expected to touch 160-170 million by 2020, based on rate of population growth,
increased labor force participation, and higher education enrolment, among other factors, according to a
study by ASSOCHAM and Thought Arbitrage Research Institute.
India's foreign exchange reserves were Rs 33.98 lakh crore (US$ 476.09 billion) in the week up to
February 14, 2020, according to data from the RBI.

Recent Developments                                                                                         

With the improvement in the economic scenario, there have been various investments in various sectors
of the economy. The M&A activity in India increased 53.3 per cent to US$ 77.6 billion in 2017 while
private equity (PE) deals reached US$ 24.4 billion. Some of the important recent developments in Indian
economy are as follows:

 Exports from India increased 2.13 per cent year-on-year to US$ 491.64 billion in April 2019-
February 2020.
 Nikkei India Manufacturing Purchasing Managers’ Index (PMI) stood at 54.5 in February 2020,
showing expansion in the sector.
 Mergers and Acquisitions (M&A) activity in the country has reached US$ 48 billion during Jan-
Sept 2019.
 The gross tax revenue stood at Rs 15.04 lakh crore (US$ 215.28 billion) out of which Income tax
collection contributed Rs 3.52 lakh crore (US$ 50.43 billion) between April 2019-January 2020.
  Companies in India have raised around US$ 114.1 billion through 768 Initial Public Offers (IPO)
first nine months of 2019.
 India's Foreign Direct Investment (FDI) equity inflows reached US$ 456.79 billion during April
2000 to December 2019, with maximum contribution from services, computer software and
hardware, telecommunications, construction, trading and automobiles.
 India’s Index of Industrial Production (IIP) for the month of January 2020 stood at 137.1. The
cumulative growth for the period April 2019-January 2020 over the corresponding period of the
previous year stood at 0.5 per cent.
 Consumer Price Index (CPI) – Combined inflation was 4.5 per cent in April 2019-January 2020
as compared to 3.6 per cent in April 2018-January 2019.
 Around 12 million jobs in a year were created in India during 2015-19.
 India improved its ranking in the World Bank's Doing Business Report by 14 spots over last year
and is ranked 63rd among 190 countries in 2020 edition of the report.
 India is expected to have 100,000 startups by 2025, which will create employment for 3.25
million people and US$ 500 billion in value, as per Mr. T V Mohan Das Pai, Chairman, and
Manipal Global Education.
 The World Bank has stated that private investments in India is expected to grow by 8.8 per cent
in FY 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby drive the
growth in India's gross domestic product (GDP) in FY 2018-19.
 India is expected to retain its position as the world’s leading recipient of remittances in 2018,
with total remittances touching US$ 80 billion, according to World Bank’s Migration and
Development Brief.

Government Initiatives

The first Union Budget of the third decade of 21st century was presented by the Minister for Finance &
Corporate Affairs, Ms. Nirmala Sitharaman in the Parliament on February 1, 2020.  The budget aimed at
energizing the Indian economy through a combination of short-term, medium-term, and long-term
measures.
Total expenditure for 2020-21 is budgeted at Rs 37.14 lakh crore (US$ 531.53 billion), an increase of 13
per cent from 2019-20 (revised budget estimates).
Numerous foreign companies are setting up their facilities in India because of various government
initiatives like Make in India and Digital India. Mr. Narendra Modi, Prime Minister of India, has
launched the Make in India initiative with an aim to boost the manufacturing sector of Indian economy, to
increase the purchasing power of an average Indian consumer, which would further boost demand, and
hence spur development, in addition to benefiting investors. The Government of India, under the Make in
India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to
take it up to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also come
up with Digital India initiative, which focuses on three core components: creation of digital infrastructure,
delivering services digitally and to increase the digital literacy.

Some of the recent initiatives and developments undertaken by the government are listed below:

 India is expected to attract investment of around US$ 100 billion in developing the oil and gas
infrastructure over the next five years.
  With the help of the new agriculture export policy, the agriculture exports from India is likely to
reach the export target of US$ 60 billion by the year 2022.

 In India, Atal Innovation Mission (AIM), flagship initiative of NITI Aayog, launched the Atal
Community Innovation Centre (ACIC) program in NITI Aayog, which aims at spurring
community Innovation in underserved and unserved areas of the country.
 National Institute for Transforming India (NITI) Aayog released a strategic document titled
'Strategy for New India @75' to help India become a US$ 4 trillion economy by FY23.
 The Government of India is going to increase public health spending to 2.5 per cent of GDP by
2025.
 For implementation of Agriculture Export Policy, government has approved an outlay Rs 206.8
crore (US$ 29.59 million) for 2019, aimed at doubling farmers income by 2022.
 Government is planning to launch Bharatcraft portal, an e-commerce marketing platform to
market and sell the products.
 Under the Pradhan Mantri Awas Yojana (Urban), government has sanctioned more than 96.50
Lakh houses under PMAY(U) and approved 606 proposals for the construction of 3,31,075
houses with an overall investment of Rs 15,125 crore (US$ 2.16 billion).
 The Cabinet Committee on Economic Affairs has approved to increase the authorized capital of
Food Corporation of India (FCI) from existing Rs 3,500 crore (US$ 500.79 million) to Rs 10,000
crore (US$ 1.43 billion).
 India has registered a 26.9 per cent reduction in Maternal Mortality Ratio (MMR) since 2013:
Sample Registration System Bulletin-2016.
 Around 26.02 million households have been electrified as on 31st March 2019 under the Pradhan
Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGYA).  
 Prime Minister's Employment Generation program (PMEGP) will be continued with an outlay of
Rs 5,500 crore (US$ 755.36 million) for three years from 2017-18 to 2019-20, according to the
Cabinet Committee on Economic Affairs (CCEA).
 As per the Union Budget 2019-20, public sector banks (PSBs) will be provided with a capital
infusion of Rs 70,000 crore (US$ 10.02 billion), allowing NBFCs to raise foreign debt.
 The mid-term review of India's Foreign Trade Policy (FTP) 2015-20 has been released by
Ministry of Commerce & Industry, Government of India, under which annual incentives for
labour intensive MSME sectors have been increased by 2 per cent.

 Under the scheme Pradhan Mantri Gram Sadak Yojana (PMGSY-III), government plans to spend
Rs 50,250 crore (US$ 7.19 billion) to build roads to boost rural connectivity

Road Ahead

India's gross domestic product (GDP) is expected to reach US$ 5 trillion by FY25 and achieve upper-
middle income status on the back of digitization, globalization, favorable demographics, and reforms.
India's revenue receipts are estimated to touch Rs 28-30 trillion (US$ 385-412 billion) by 2019, owing to
Government of India's measures to strengthen infrastructure and reforms like demonetization and Goods
and Services Tax (GST).
India is also focusing on renewable sources to generate energy. It is planning to achieve 40 per cent of its
energy from non-fossil sources by 2030, which is currently 30 per cent, and have plans to increase its
renewable energy capacity from to 175 GW by 2022.
India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion
by 2025, owing to shift in consumer behavior and expenditure pattern, according to a Boston Consulting
Group (BCG) report; and is estimated to surpass USA to become the second largest economy in terms of
purchasing power parity (PPP) by the year 2040, according to a report by PricewaterhouseCoopers.

Note: Conversion rate used as on January 2020, Re 1 = US$ 0.01402

Impact of Covid-19 on Indian economy:

FICCI has attempted to assess the immediate impact of coronavirus on businesses across the country
through conducting interactive sessions and survey amongst the industry members. The survey reveals
that besides the direct impact on demand and supply of goods and services, businesses are also facing
reduced cash flows due to slowing economic activity, which in turn is having an impact on all payments
including to those for employees, interest, loan repayments and taxes. According the survey results,

• A significant 53 per cent of Indian businesses indicate the marked impact of the
Coronavirus pandemic on business operations even at early stages.
• The pandemic has significantly affected the cash flow at organizations with almost 80 per
cent reporting a decrease in cash flow.
• The pandemic has had a major impact on the supply chains as more than 60 per cent
respondents indicate that their supply chains were affected. The companies also
highlighted that they are closely monitoring the situation and expect the impact of the
pandemic on supply chain to worsen further.
• Organizations have brought in a renewed focus on hygiene aspects concerning the
pandemic. Almost 40 per cent have put in place stringent checks on people entering their
offices and disinfection. Nearly 30 per cent organization have already put in place Work-
from-Home policies for their employees.
• Nearly 42 per cent of the respondents feel that it could take up to 3 months for normalcy
to return.

While for some of the sectors, the work from home proposition is posing implementation challenges as it
has a direct bearing on the business operations. This is particularly true for manufacturing units where
workers are required to be physically present at the production sites, and services sector like banking and
IT where lot of confidential data is used and remote working can enhance security threat. Hence,
companies operating in these sectors are finding it difficult to implement work from home facility without
compromising with their day-to-day operations.

The industry members have also shared suggestions on possible actions that the government and RBI can
take to contain the spread of coronavirus in India and mitigate the immediate concerns of the Indian
companies. The following section details out the challenges that members of Indian industry are facing
either due to decline in consumption demand or due to supply chain disruptions owing to closure of
factories in China, and the suggestions received from the industry to address their present concerns.
Positive Implication on the Indian Economy: 

Recent measures taken by the Government of India will benefit many sectors of Indian economy,
specifically MSME. Following are some of the positive implications on the Indian economy.

 The government will offer ₹3 lakh crore as collateral-free automatic loan to MSMEs with
outstanding loan of ₹25 crore or annual turnover of ₹100 crore.
 An additional amount of ₹20,000 crore has further been earmarked to be used for stressed
MSMEs. This is going to benefit many industries, including the automobile sector, as most auto
component makers are MSMEs.
 The government has also finished the distinction between manufacturing and service related
MSMEs and have widened the scope of micro, small and medium category enterprises
 All enterprises with investment less than ₹1 crore or turnover of less than ₹5 crore will be
qualified for a micro enterprise. The same for small enterprises have been set to ₹10 crore and
₹50 crore, respectively. In addition, companies with investment less than ₹20 crore and turnover
less than ₹100 crore fall under the category of medium enterprises.
 All these initiatives are likely to help Indian auto component manufacturers resume business and
fortify the supply chain.
 The government has also announced number of measures to increase the liquidity in the market;
equity infusion of ₹50,000 in the market and 25 per cent reduction in tax rates till March 2021
 Subordinate debt worth Rs 20,000 crore introduced for stressed MSMEs.
 Global tenders will be disallowed in government procurement for tenders under Rs 200 crore.
This will make MSMEs run their business with much more confidence.
  In May 2020, the Government increased FDI in Defense manufacturing under the automatic
route from 49 per cent to 74 percent.
 India's total foreign exchange (Forex) reserves stand at around US$538.191 Billion on 07 August
2020, the highest ever. 
 RBI has decided to transfer surplus of Rupees 1.76 lakh crore to the government of India, this
would help the government to start new projects, which will help to generate employment.

Negative Implications on the Indian Economy

Coronavirus hit many sectors of the Indian and world economy, Most multilateral agencies and credit
rating agencies have therefore revised their 2020 and 2021 growth projections for India keeping in view
the negative impact of coronavirus-induced travel restrictions, supply chain disruptions, subdued
consumption and investment levels on the growth of both global and the Indian economy. The following
are the implications on the Indian economy.

 ADB has estimated that Covid-19 outbreak could cost the Indian economy alone between US$
387 million and US$ 29.9 billion in personal consumption losses. 
 OECD has revised down India’s growth forecast by 110 basis points to 5.1% for 2020-21 and by
80 bps to 5.6% for 2021-22. 
  Fitch has also cut its forecast for India’s economic growth to 4.9% for 2019-20 from 5.1%
projected earlier
 Moody's Investors Service has revised down its growth forecast for India to 5.3% for 2020 from
its earlier estimate of 5.4% made in February.
 S&P has lowered India's economic growth forecast to 5.2% for 2020 as against 5.7% projected
earlier.
 India's overall unemployment rate was recorded at 9.1 percent on the week ending August 16,
2020
 GDP growth in the financial year 2019-20 was at 4.2 percent and decreased by 1.9% YoY.
 Estimated GDP growth for 2020-21 is -3.2%, which indicates that GDP would contrast in double
digit for the year 2020-21.
 Covid-19 has affected many sectors of the economy like tourism, hospitality and transportation
has been severely affected. Banking sector has also been in a stressed situation due to liquidity
crunch in the economy.
 Inflation is increasing since October 2019; in July 2020, inflation rate was at 6.93 percent, which
RBI has to make it stable.

Industry analysis:

Introduction:

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized and well
regulated. The financial and economic conditions in the country are far superior to any other country in
the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and
have withstood the global downturn well.
Indian banking industry has recently witnessed the roll out of innovative banking models like payments
and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the
domestic banking industry.
The digital payments system in India has evolved the most among 25 countries with India’s Immediate
Payment Service (IMPS) being the only system at level five in the Faster Payments Innovation Index
(FPII).

Market Size

The Indian banking system consists of 18 public sector banks, 22 private sector banks, 46 foreign banks,
53 regional rural banks, 1,542 urban cooperative banks and 94,384 rural cooperative banks as of
September 2019. During FY07–19, deposits grew at a CAGR of 11.11 per cent and reached US$ 1.86
trillion by FY19. Deposits as of Feb 2020, stood at Rs 132.35 lakh crore (US$ 1,893.77 billion).
The total equity funding of microfinance sector grew at the rate of 42 year-on-year to Rs 14,206 crore
(US$ 2.03 billion) in 2018-19.

Investments/developments

Key investments and developments in India’s banking industry include:

 In February 2020, The Cabinet Committee on Economic Affairs has given its approval for
continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing
 minimum regulatory capital to RRBs for another year beyond 2019-20, that is, up to 2020-21 for
those RRBs which are unable to maintain minimum Capital to Risk weighted Assets Ratio
(CRAR) of 9 per cent, as per the regulatory norms prescribed by the Reserve Bank of India.

 In October 2019, the Department of Post launched the mobile banking facility for all post office
savings account holders of the CBS (core banking solutions) post office.
 Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) stood at Rs 1.06 lakh crore (US$
15.17 billion
 In October 2019, Government e-Marketplace (GeM) signed a Memorandum of Understanding
(MoU) with Union Bank of India to facilitate a cashless, paperless and transparent payment
system for an array of services.
 Transactions through Unified Payments Interface (UPI) stood at 1.32 billion in February 2020
worth Rs 2, 21,995 crore (US$ 31.76 billion).
 In August 2019, the government announced the major mergers of public sector banks, which
included United Bank of India, and Oriental Bank of Commerce to be merged with Punjab
National Bank, Allahabad Bank will be amalgamated with Indian Bank and Andhra Bank and
Corporation Bank will be consolidated with Union Bank of India.
 The NPAs (Non-Performing Assets) of commercial banks has recorded a recovery of Rs 400,000
crore (US$ 57.23 billion) in last four years including record recovery of Rs 156,746 crore (US$
22.42 billion) in FY19.
 The board of Allahabad bank approved the merger with Indian bank for the consolidation of 10
state-run banks into the large-scale lenders.
 As of September 2018, the Government of India launched India Post Payments Bank (IPPB) and
has opened branches across 650 districts to achieve the objective of financial inclusion.
 The total value of mergers and acquisition during 2017 in NBFC diversified financial services
and banking was US$ 2,564 billion, US$ 103 million and US$ 79 million respectively.
 The total equity funding's of microfinance sector grew at the rate of 42 year-on-year to Rs 14,206
crore (US$ 2.03 billion) in 2018-19.

Government Initiatives

 As per Union Budget 2019-20, the government has proposed fully automated GST refund module
and an electronic invoice system that will eliminate the need for a separate e-way bill.
 Under the Budget 2019-20, government has proposed Rs 70,000 crore (US$ 10.2 billion) to the
public sector bank.
 Government has smoothly carried out consolidation, reducing the number of Public Sector Banks
by eight.

 As of September 2018, the Government of India has made the Pradhan Mantri Jan Dhan Yojana
(PMJDY) scheme an open-ended scheme and has added more incentives.
  The Government of India is planning to inject Rs 42,000 crore (US$ 5.99 billion) in the public
sector banks by March 2019 and will infuse the next tranche of recapitalization by mid-December
2018.

The Impact of Covid-19 on banking industry:

Banks in the country are likely to witness a spike in their non-performing assets ratio by 1.9 per cent and
credit cost ratios by 130 basis point in 2020, following the economic slowdown because of COVID-19
crisis, says a report. In its report titled "For Asia-Pacific Banks, COVID-19 Crisis Could Add USD 300
Billion To Credit Costs" S&P Global Ratings said, it expects the non-performing assets (NPA) ratio for
the Chinese banking sector to increase by about 2 per cent in 2020, and credit losses, to increase by about
100 basis points.
On India, the report said "the NPA ratio in India is likely to fare similarly to China's (1.9 per cent 2 per
cent) but the credit costs ratios could be worse, increasing by about 130 basis points," the rating agency's
credit analyst Gavin Gunning said in the report. Gunning said there are concerns that the coronavirus will
spread faster, further, and for longer.

"This will deepen the economic pain we already anticipate for 2020. Financing conditions may likewise
sour, as investors become risk averse. This would hit bank credit," he said. The report noted that an
additional USD 300 billion spike in lenders' credit costs and a USD 600 billion increase in (NPAs) would
occur in 2020 due to the adverse impact of coronavirus pandemic.

While banks are not as exposed as the corporate sector during the initial stage of the pandemic, the strain
on lenders could ultimately be profound. Banks face a second-order hit compared with the corporate and
household sectors. The report said the economic storm created by COVID-19 would test the ratings
resilience of the region's 20 banking sectors.
"The resilience of banks' asset quality in 2020 hinges in part on the success of governments' and
regulators' policy responses. These measures are in early stages. Some have started, some are in planning,
and we suspect many more may be in the wings," Gunning said.
Asia-Pacific governments, central banks, and supervisory authorities have rolled out diverse measures to
address COVID-19. These include liquidity injections, targeted loans to affected industries and regions,
and policy rate cuts. It also includes support for banks to provide forbearance to otherwise economically
viable households and businesses sideswiped by COVID-19.
The RBI in its seventh bi-monthly monetary policy announced on March 27, reduced the repo rate by 75
basis points to 4.40 per cent. It announced to provide Rs 3.74 lakh crore liquidity to banks through
reduction in cash reserve ratio, by conducting targeted long term repos operations (TLTRO) and by
increasing the limit for marginal standing facility (MSF) to 3 per cent.
RBI also allowed a repayment moratorium for three months on all term loans outstanding as on March 1,
2020, to borrowers of all commercial banks, including regional rural banks, small finance banks and local
area banks, co-operative banks, and NBFCs, including housing finance companies and micro-finance
institutions.
"The equation underpinning policy responses is simple in theory but difficult in practice, and always
comes at a significant fiscal cost," Gunning noted.

Positive Implications on the Indian Banking Industry.

Coronavirus pandemic has emerged as a “Black Swan” event, which will require extraordinary measures
to curb the impact on the financial or banking sector. The government and the regulators have responded
by providing an economic stimulus package with several measures to shore up liquidity and provide
forbearance on several financial and compliance commitments. Financial institutions have taken
responsive measures to the pandemic and aim to reduce in-person interactions, downsize operations while
providing financial support to retail and institutional customers. 

 Reduction will be made in the Cash Reserve Ratio (CRR) which will result in liquidity
enhancement of INR 1,37,000 crores
 Targeted Long Term Repo Operations (“TLTRO’s”) of INR 1, 00,050 crores will be provided for
fresh deployment in investment grade corporate bonds, commercial paper, and non-convertible
debentures.
 Banks’ limit for borrowing overnight, under the marginal standing facility (“MSF”), will be
increased to allow the banking system to avail an additional INR 1, 37,000 crores of liquidity at
the reduced MSF rate.
 Special refinance facilities to be provided for NABARD, SIDBI and the NHB for a total amount
of INR 50,000 crores at the policy repo rate.

Negative Implications on the Indian Banking Industry.

 Standard & Poor's, in its June 30 2020 report, had estimated that bank gross NPAs could rise to as
high as 13-14%
 The results of the RBI stress tests show that public sector banks could see their gross NPAs rise
to 15.2% by March 2021 from 11.3% a year earlier in the baseline scenario. In the "very severe
stress" scenario, this could go as high as 16.3%.
 Public sector banks are in more stress comparing with other private, foreign banks and scheduled
commercial banks as per the hypothetical stress test done by RBI for FY21
 The gross domestic product could contract 4.4% under the baseline scenario. In the “very severe
stressed” case, the contraction could be as high as 8.9%.
 Under the baseline scenario, system-level capital adequacy ratio could drop to 13.3% by March
2021 from 14.6% at the end of financial year 2019-20.
 The common equity tier I or CET 1 capital ratio of the banking system may decline from 11.7%
in March 2020 to 10.7% under the baseline scenario, and to 9.4% under the worst case by March
2021.
  The sectors with the highest share of “good quality loans”, which might get affected, include
general-purpose loans by non-banking finance companies, generation of electricity, NBFCs in the
housing sector and development financial institutions.

Company Analysis:

Here we have taken the top four private banks of India, based on the market capitalization. Company
analysis is being done based on various parameters while doing the fundamental analysis, which includes,
various financial ratio analysis, Profit and loss statement analysis, Balance sheet and cash flow statement
analysis and finally the valuation part.
There are various valuation methods, but here I have taken the Forward PE valuation method to value a
stock that is undervalued or overvalued.
Following are top private banks considering the market capitalization (As on 7 thJune, 2020)

Table – 1 Name and Market capitalization of selected Banks

Sr. No Name of the Banks Market Capitalization(in Rs Lakhs)

1 HDFC Bank 5,70,05,621.05

2 Kotak Mahindra Bank 2,66,71,314.80

3 ICICI Bank 2,32,97,749.32

4 Axis Bank 1,15,22,084.36

Source: NSE India

Overview of the Companies

HDFC Bank

HDFC Bank Limited is a holding company. The bank offers a range of banking services covering
commercial and investment banking on the wholesale side and transactional/branch relying on the retail
side. It also offers financial services. The bank's segments include treasury, retail banking, wholesale
banking and other banking business. The treasury segment primarily consists of net interest earnings from
the Bank's investment portfolio, money market borrowing and lending, gains or losses on investment
operations and because of trading in foreign exchange and derivative contracts. The retail-banking
segment serves retail customers through a branch network and other delivery channels, as well as through
alternative delivery channels. The bank provides its corporate and institutional clients a range of
commercial and transactional banking products. The other banking business segment include income
from para banking activities.

Currently HDFC has around 5345 branches and 14533 ATM in 2787 Cities and towns.

Kotak Mahindra bank

Kotak Mahindra Bank is the flagship company of Kotak Group. It is one of the fastest growing banks and
the most admired financial institution of India. The Bank offers transaction banking, operates lending,
manages IPOs and provides working capital loans. The Principle business activities of the bank are
organized into consumer banking, commercial banking, corporate banking, treasury and other financial
services. As of 31 March 2019, the bank had 1500 branches and 2352 ATMs, covering 744 locations. As
at 31 March 2019, the bank has 19 subsidiaries.

The Bank along with its subsidiaries offers a comprehensive range of financial products and services to
its customers. The key businesses are commercial banking, investment banking, stock broking, vehicle
financing, advisory service, asset management, life insurance and general insurance. The Bank offers
complete financial solution for infinite needs of all individual and non-individual customers depending on
the customer’s need-delivered through a state of the art technology platform. They also offer investment
products like mutual funds, life insurance, retailing of goal coins and bars. Apart from phone banking and
internet banking, they offer convenient banking facility though mobile banking, SMS service, Netc@rd,
Home banking and Billpay facility among others.

ICICI Bank
ICICI Bank Limited is a banking sector company. The bank is engaged in providing a range of banking
and financial services, including commercial banking, retail banking, project and corporate finance,
working capital finance, insurance, venture capital and private equity, investment banking, broking and
treasury products and services. The bank's business segments are retail banking, wholesale banking,
treasury, other banking, life insurance, general insurance and others. Its international banking is focused
on providing solutions for the international banking requirements of its Indian corporate clients and
leveraging economic corridors between India and the rest of the world. The bank caters to the financial
needs of women entrepreneurs through its Self-Help Group (SHG) program as a part of its microfinance
initiatives.

As at 31 March 2020, ICICI Bank has 5275 branches, 15589 ATM in India

Axis Bank

Axis Bank is the third largest private sector bank of India. The Bank operates in four segments
namely treasury, retail banking, corporate banking and other banking business. The treasury
operation include investment in sovereign and corporate debt, equity and mutual funds, trading
operations, derivative trading and foreign exchange operations on the account, and for customer
and central funding.

Retail banking includes lending to small business and individual subject to the orientation,
product and granularity criterion. It also includes liability products, card services, internet
banking, ATM service, depository, financial advisory services, and NRI services.

The corporate banking segment includes corporate relationship not included under banking,
corporate advisory services, placements and syndication, management of public issue, project
appraisals, capital market services, and cash management services.

Financial Ratio Analysis:

Table – 2 Financial Ratios and indicators for analyzing the banks

Financial Indicator Indicates

Net Profit Margin Profitability Position
Earnings Per Share
Return on Equity
Liquidity Coverage Ratio Liquidity Position
Capital Adequacy Ratio Solvency Position
 Gross NPAs and Net NPAs Asset Quality of the Bank
Price to Earnings Ratio (P/E) Stock Valuation
Price to Book Value Ratio (P/B)

Above are the financial indicators, which will help to understand the financial position of a company. Net
Profit Margin, Earnings per Share and Return on Equity help to identify the profitability position of the
company.
Liquidity coverage ratio helps to identify the liquidity position of the company. Capital Adequacy ratio
and Gross NPAs and Net NPAs help to understand the solvency position of a company and the asset
quality of the Banks respectively.

Table – 3 Net Profit Margin

Net Profit Margin (In %)

Sr.no Banks 2016 2017 2018 2019 2020

1 HDFC Bank 20.29 20.86 21.76 21.34 22.33
Kotak Mahindra
2 Bank 16.81 22.17 24.46 23.78 25.71
3 ICICI Bank 18.42 18.6 14.63 7.9 13.23
4 Axis Bank 20.18 8.78 0.99 9 2.94
Source: Moneycontrol.com

Net Profit Margin (In %)

30
25.71
25 24.46 23.78
22.17 21.76 22.33
20.86 21.34
20.29 20.18
20 18.42 18.6
16.81
14.63
15 13.23

10 8.78 9
7.9

5 2.94
0.99
0

HDFC Bank Kotak Mahindra Bank ICICI Bank Axis Bank

Interpretation: The Net profit margin is the percentage of net income generated with respect to the total
revenues. The above table shows the different net profit margins of selected banks for the year starting
from 2016 to 2020.
 From the above data, we can see that the net profit margin of HDFC Bank and Kotak Bank has been
increasing since 2016 to 2020. Whereas ICICI Bank and Axis Bank shows the decrease trend in the Net
Profit Margin since 2016, which is not a good sign for any company.

Table – 4 Earnings per Share

EPS Rs
Sr. No Banks
2016 2017 2018 2019 2020
1 HDFC Bank 50.85 59.95 71.73 83.33 49.8
Kotak Mahindra
2 Bank 18.91 26.89 32.7 37.78 44.73
3 ICICI Bank 17.53 15.91 12.02 6.61 14.81
4 Axis Bank 35.12 16.54 1.86 19.61 6.83
Source: Moneycontrol.com

EPS (In Rs)

90
83.33
80
71.73
70
59.95
60
50.85 49.8
50 44.73
40 37.78
35.12 32.7
30 26.89
18.91
17.53 19.61
20 16.54
15.91 14.81
12.02
10 6.61 6.83
1.86
0

HDFC Bank Kotak Mahindra Bank ICICI Bank Axis Bank

Interpretation: Earnings per share (EPS) is calculated as a company's profit divided by the outstanding
shares of its common stock. The resulting number serves as an indicator of a company's profitability.
Higher the EPS, more profitable it is considered.
From the above EPS data of the companies, we can see that HDFC Bank and Kotak Mahindra Bank
shows the continuous increase in the EPS since 2016, whereas for the same period ICICI Bank shows
decrease in EPS until 2019 but in 2020 it shows increase in the EPS.
Axis Bank has had very fluctuating EPS since 2016, which is not a good sign for any company.

Table – 5 Return on Equity

ROE in %
Sr. No Banks 2016 2017 2018 2019 2020
1 HDFC Bank 17.22 16.61 16.88 14.53 15.40
Kotak Mahindra
2 Bank 10.36 12.83 12.28 12.46 12.89
3 ICICI Bank 11.15 10.03 7.16 3.82 7.78
4 Axis Bank 15.58 7.01 0.7 7.43 2.18
Source: Moneycontrol.com

ROE (In %)
20
18 17.22 16.88
16.61
16 15.58 15.4
14.53
14 12.83 12.89
12.28 12.46
12 11.15
10.36 10.03
10
7.43 7.78
8 7.01 7.16
6
3.82
4
2.18
2 0.7
0

HDFC Bank Kotak Mahindra Bank ICICI Bank Axis Bank

Interpretation: Return on Equity is one the important measures to identify the profitability and
performance of any company, Return on Equity tells how much after tax profit a company has earned in
comparison to the total equity share capital of the company’s balance sheet.
Higher the Return on Equity higher the chance that the company would earn the income from their
investment.
Above data of Return on equity (ROE) shows, HDFC Bank and Kotak Mahindra Bank has very good
ROE in comparison to ICICI Bank and Axis Bank, whereas ICICI Bank shows continuous decrease in the
ROE since 2016, but there is spike in the ROE in 2020 which is good sign for ICICI Bank. Axis Bank has
very fluctuating ROE and worst ROE compared to its competitors.

Table – 6 Liquidity Coverage Ratio

Liquidity Coverage Ratio

%
Sr. No Banks 31st March 2020
1 HDFC Bank 132.43
Kotak Mahindra
2 Bank 121.01
3 ICICI Bank 121.86
4 Axis Bank 113.03
Source: Basel III Discloser of Banks

Liquidity Coverage Ratio

Axis Bank 113.03

ICICI Bank 121.86

Kotak Mahindra Bank 121.01

HDFC Bank 132.43

100 105 110 115 120 125 130 135

Interpretation: Liquidity Coverage Ratio (LCR) refers to the portion of highly liquid assets held by the
banks, to ensure their ongoing ability to meet the short-term obligations.
The LCR is calculated by dividing the bank’s high liquid assets by the total net cash flow, over a 30 days
stress period.
 Banks have to maintain the required LCR directed by the RBI, so as on 31st march 2020 all the banks
were able to maintain the required LCR that is a good sign for the banks.

Table – 7 Capital Adequacy Ratio

Capital Adequacy Ratio

Banks
Sr. No 2016 2017 2018 2019 2020
1 HDFC Bank 15.45 14.53 14.72 16.77 18.26
Kotak Mahindra
17 17.2 18.4 17.9 19.8
2 Bank
3 ICICI Bank 16.6 17.26 17.9 16.47 15.81
4 Axis Bank 15.41 15.01 16.58 15.9 17.57
Source: Annual Report of Banks

Capital Adequacy Ratio

25

19.8
20 18.417.9 18.26
17.9 17.57
17 16.6 17.217.26 16.58 16.77 16.47
15.45 15.41 15.9 15.81
14.53 15.01 14.72
15

10

HDFC Bank Kotak Mahindra Bank ICICI Bank Axis Bank

Interpretation: Capital Adequacy ratio (CAR) is the ratio of a bank’s capital in relation to its risk
weighted assets and current liabilities. It is decided by the central bank and regulators of any country to
prevent commercial banks from taking excess leverage and become insolvent.
 The capital adequacy ratio is calculated by adding total tier - 1, tier - 2, and tier - 3 capital and divided by
risk-weighted assets.

As per RBI, every scheduled commercial bank has to maintain at least 9% CAR.

From the above CAR data of the selected banks, we can infer that all the banks have maintained the
required CAR, in which Kotak Mahindra Bank the highest CAR has compared to competitor banks.

Table – 8 Gross Non-Performing Asset (in %)

Gross NPA (In %)

Sr. No Banks
2016 2017 2018 2019 2020
1 HDFC Bank 0.96 1.08 1.32 1.39 1.43
Kotak Mahindra
2 2.06 2.25 1.95 1.94 2.16
Bank
3 ICICI Bank 5.21 7.89 8.84 6.7 5.53
4 Axis Bank 1.75 5.42 7.38 5.7 5.07
Source: Moneycontrol.com and Basel III Discloser

Gross NPA
10
8.84
9
7.89
8 7.38
7 6.7

6 5.7 5.53
5.21 5.42
5.07
5
4
3
2.06 2.25 2.16
1.75 1.95 1.94
2 1.32 1.39 1.43
0.96 1.08
1
0

HDFC Bank Kotak Mahindra Bank ICICI Bank Axis Bank

Interpretation: NPA is the unrecovered loans of the banks, higher the NPA percentage, bad the quality
of the asset of the bank. NPA is a good measure while doing the Fundamental analysis of a bank; this
measure helps to identify whether the bank is giving loans to secured customers or just distributing loans
 to show the loan growth. NPA can lead a bank to bankruptcy if banks are not able to recover the loans. It
is good practice to see how much percentage of total loan has been given to top 20 borrowers. If the
percentage is higher than we should avoid investing in that bank, as the bank will have less chance of
recovery if the corporate defaults.

From the above gross NPA data, we can see that HDFC Bank and Kotak Mahindra Bank has lowest gross
NPA compared to ICICI Bank and Axis Bank. ICICI bank and Axis Bank has the highest gross NPA,
which is not a good sign for a bank.

Table – 9 Net Non-Performing Asset

Net NPA in (in %)

Sr. No Banks
2016 2017 2018 2019 2020
1 HDFC Bank 0.31 0.36 0.43 0.44 0.5
Kotak Mahindra
2 Bank 0.93 1.09 0.86 0.7 0.7
3 ICICI Bank 2.67 4.89 4.77 2.06 1.41
4 Axis Bank 0.73 2.26 3.69 2.23 1.63
Source: Basel III Discloser and Moneycontrol.com

Net NPA
6

5 4.89 4.77

4 3.69

3 2.67
2.26 2.23
2.06
2 1.63
1.41
0.93 1.09
1 0.73 0.86 0.7 0.7
0.36 0.43 0.44 0.5
0.31
0

HDFC Bank Kotak Mahindra Bank ICICI Bank Axis Bank

Interpretation: Net NPA refers to the Gross NPA minus the provisions for the advances. Net NPA of the
HDFC Bank and Kotak Mahindra Bank is very good as the Gross NPA is low and they have made
significant provisions against the advances. ICICI Bank and Axis Bank has made large provisions to take
the Net NPA ratio down.

Table – 10 Price to earnings Ratio (X)

Price to
Sr. No Banks
Earnings
1 HDFC Bank 21.59
Kotak Mahindra
2 29.26
Bank
3 ICICI Bank 28.21
4 Axis Bank 29.68
Source: Moneycontrol.com

Price to Earnings

Axis Bank 29.68

ICICI Bank 28.21

Kotak Mahindra Bank 29.26

HDFC Bank 21.59

0 5 10 15 20 25 30 35

Interpretation: Price to Earnings (PE) Ratio is a valuation ratio. Which compares the current market
price to the earnings of a company. PE ratio is a good measure to identify whether the stock is
 undervalued or overvalued. However PE alone cannot tell the true value of a stock, there are other various
methods of valuation that we need to consider. 

PE Ratio of HDFC bank and ICICI Bank is very good compared to the industry average of 26.43.
Whereas Kotak Mahindra Bank is moderately valued and Axis banks seems overvalued from its PE of
95.12 which is extremely higher than the industrial PE.

Table – 11 Price to Book value

Price to Book value

Sr. No Banks
2016 2017 2018 2019 2020
1 HDFC Bank 3.64 4.03 4.48 4.11 2.67
Kotak Mahindra
2 Bank 5.21 5.81 5.33 6.01 5.11
3 ICICI Bank 1.51 1.59 1.66 2.31 1.71
4 Axis Bank 1.98 2.08 2.04 2.94 1.26
Source: Moneycontrol.com

P/B
7
6.01
6 5.81
5.21 5.33
5.11
5
4.48
4.03 4.11
4 3.64
2.94
3 2.67
2.31
1.98 2.08 2.04
2 1.59 1.66 1.71
1.51
1.26
1

HDFC Bank Kotak Mahindra Bank ICICI Bank Axis Bank

Interpretation: Price to Book Value Compares the current market price of a stock to its book value. PB
ratio helps to identify whether the stock is undervalued or overvalued. The general standard P/B for
undervalued stock is three.
From the above data, we could identify that HDFC Bank, ICICI Bank and Axis banks have less than the
standard P/B ratio, which is good for any company, whereas Kotak Mahindra Bank has a higher P/B ratio,
which is not a good sign.

Valuation of the selected bank stocks:

1. Forward PE Valuation Method

 HDFC Bank

Fo rwa rd PE Ra tio
Re po rt Da te Ma r-11 Ma r-12 Ma r-13 Ma r-14 Ma r-15 Ma r-16 Ma r-17 Ma r-18 Ma r-19 Ma r-20

Pric e 235 260 313 374 511 536 721 943 1159 862
EPS 8.58 11.18 14.44 18.22 21.32 25.32 29.81 35.66 41.00 49.70
PE Ra tio 27.34 23.25 21.66 20.55 23.98 21.15 24.19 26.44 28.28 17.34
EPS Gro wth Ra te 30% 29% 26% 17% 19% 18% 20% 15% 21%

Ja n-00 Jun-18 Se p -18 De c -18 Ma r-19 Jun-19 Se p -19 De c -19 Ma r-20 Jun-20

EPS Qua rte rly - 8.74 9.68 10.73 11.46 10.32 12.07 13.93 13.24 12.60
Gro wth Ra te % 11% 11% 7% -10% 17% 15% -5% -5%

Avg .Gro wth Ra te Estimate s 1 Ye a r Forwa rd ( Ye arly ) 1 Ye a r Forwa rd ( Quarte rly )

EPS Gro wth % Ye a rly 18% EPS Forwa rd 58.85 54.76
EPS Gro wth % Qua rte rly 6%

TTM Curre nt Pric e

EPS 51.8 HDFC BANK LTD 1059.0
PE Ra tio 20.4

Fo rwa rd PE Sc o re Fina l Fo rw a rd PE

Yo Y 18.00 18.67

TTM 19.34 Curre nt PE

20.4
Interpretation: From above forward PE valuation, we can infer that HDFC Bank is valued at
the fair price comparing with the current PE and we can advise to hold the stock for the better
returns.

 Kotak Mahindra Bank

Fo rwa rd PE Ra tio
Re po rt Da te Ma r-11 Ma r-12 Ma r-13 Ma r-14 Ma r-15 Ma r-16 Ma r-17 Ma r-18 Ma r-19 Ma r-20

Pric e 229 273 327 391 657 681 872 1048 1335 1296
EPS 10.63 12.37 14.66 16.00 19.72 18.86 26.84 32.54 37.74 44.92
PE Ra tio 21.53 22.05 22.28 24.41 33.31 36.10 32.50 32.20 35.36 28.85
EPS Gro wth Ra te 16% 18% 9% 23% -4% 42% 21% 16% 19%

Ma r-18 Jun-18 Se p-18 De c -18 Ma r-19 Jun-19 Se p-19 De c -19 Ma r-20 Jun-20

EPS Qua rte rly 9.04 7.96 8.83 9.32 10.30 9.76 12.16 11.87 9.63 9.36
Gro wth Ra te % -12% 11% 6% 11% -5% 25% -2% -19% -3%

Avg .Gro wth Ra te Estima te s 1 Ye a r Fo rw a rd ( Ye a 1rlyYe) a r Fo rwa rd ( Qua rte rly )

EPS Gro wth % Ye a rly 25% EPS Fo rw a rd 55.99 43.08
EPS Gro w th % Qua rte rly 0%

TTM Curre nt Pric e

EPS 43.0 KOTAK MAHINDRA BANK LTD 1339.4
PE Ra tio 31.1

Fo rw a rd PE Sc o re Fina l Fo rw a rd PE

Yo Y 23.92 27.51

TTM 31.09 Curre nt PE

31.1
Interpretation: From above forward PE valuation, we can infer that Kotak Mahindra Bank is
valued at the fair price comparing with the current PE and we can advise to hold the stock for the
better returns or can buy considering short-term time horizon.

 ICICI Bank

Re po rt Da te Ma r-11 Ma r-12 Ma r-13 Ma r-14 Ma r-15 Ma r-16 Ma r-17 Ma r-18 Ma r-19 Ma r-20

Pric e 203 162 190 226 287 215 252 278 401 324
EPS 9.62 12.06 15.14 17.38 19.20 15.92 15.90 12.00 6.60 14.78
PE Ra tio 21.10 13.43 12.55 13.02 14.93 13.52 15.83 23.20 60.69 21.91
EPS Gro wth Ra te 25% 26% 15% 10% -17% 0% -25% -45% 124%

Ma r-18 Jun-18 Se p-18 De c -18 Ma r-19 Jun-19 Se p -19 De c -19 Ma r-20 Jun-20

EPS Qua rte rly 1.66 0.01 1.75 2.72 1.70 3.65 1.64 6.77 1.81 4.52
Gro wth Ra te % -100% 24334% 56% -38% 115% -55% 313% -73% 149%

Avg .Gro wth Ra te Estimate s 1 Ye a r Fo rwa rd ( Ye arly ) 1 Ye ar Fo rwa rd ( Quarte rly )

EPS Gro wth % Ye a rly 14% EPS Fo rwa rd 16.79 27.06
EPS Growth % Qua rte rly 83%

TTM Curre nt Pric e

EPS 14.7 ICICI BANK LTD 371.2
PE Ra tio 25.2

Fo rw a rd PE Sc o re Fina l Fo rw a rd PE

Yo Y 22.11 17.91

TTM 13.72 Curre nt PE

25.2
Interpretation: From above forward PE valuation, we can infer that ICICI Bank is undervalued,
as the forward PE is less than the current PE so, we can give buy call for the ICICI Bank.

 Axis Bank

Fo rwa rd PE Ra tio
Re po rt Da te Ma r-11 Ma r-12 Ma r-13 Ma r-14 Ma r-15 Ma r-16 Ma r-17 Ma r-18 Ma r-19 Ma r-20

Pric e 281 229 260 292 560 444 491 511 777 379
EPS 16.27 20.42 22.37 26.86 31.42 35.04 16.51 1.78 19.59 6.57
PE Ra tio 17.26 11.22 11.63 10.87 17.83 12.67 29.74 287.44 39.67 57.71
EPS Gro wth Ra te 26% 10% 20% 17% 12% -53% -89% 1003% -66%

Ja n-00 Jun-18 Se p -18 De c -18 Ma r-19 Jun-19 Se p -19 De c -19 Ma r-20 Jun-20

EPS Qua rte rly - 2.36 2.87 5.78 5.46 4.12 (0.07) 6.13 (4.13) 3.59
Gro wth Ra te % 22% 101% -5% -25% -102% -8792% -167% -187%

Avg .Gro wth Ra te Estima te s 1 Ye a r Fo rwa rd ( Ye a rly ) 1 Ye a r Fo rwa rd ( Qua rte rly )
EPS Gro wth % Ye a rly 30% EPS Fo rw a rd 8.54 122.25
EPS Gro wth % Qua rte rly -2312%

TTM Curre nt Pric e

EPS 5.5 AXIS BANK LTD 440.5
PE Ra tio 79.7

Fo rw a rd PE Sc o re Fina l Fo rw a rd PE

Yo Y 51.59 23.99

TTM -3.60 Curre nt PE

79.7
Interpretation: From the above forward PE valuation, we can see that the final forward PE of
Axis Bank is less than the current PE therefore we can say that the Axis bank is undervalued and
we give buy call on Axis bank.

Findings and Recommendations

Findings:

In this report, I have done the fundamental analysis using the top down method, starting from the
economy analysis, Industry analysis and at the end company analysis.

Company analysis has been done using the various important ratio analysis and finding whether the stock
is undervalued, fair valued or overvalued. From the above calculations, we get the following findings
from our research.

 Net Profit margin is one of the essential parameters to look into, we cannot ignore NPM ratio as it
shows the profitability position of any company. Moreover, from our calculation we have found
that, profitability ratio of Kotak Mahindra bank is higher than other peer banks and Axis Bank
has very low and fluctuating Net Profit Margin ratio, which is not good for any company.
 Earnings per share (EPS) is also a significant ratio, which we should look into to find whether
company is generating capital appreciation for their shareholders or not. From the calculation we
can infer that HDFC bank and Kotak Mahindra Bank has generated very good EPS over the last
five years, ICICI Bank and Axis bank has also generated good EPS but the EPS of Axis bank has
been fluctuating in the last five years.
 Return on equity is calculated to know that how much return has company has generated from its
equity. We should consider this ratio as the ratio gives an idea about the profitability of the
company. All the banks except axis bank has generated a good ROE.
  Liquidity Coverage Ratio (LCR) has been maintained by all the banks as per the RBI direction
 As per the RBI, every scheduled bank has to maintain at least nine percent capital adequacy ratio,
all the banks have maintained significantly higher CAR than the directed by the RBI and it is a
good sign for a bank.
 While analyzing the banks we have found that HDFC bank and Kotak Mahindra Bank has
maintained a significantly good gross NPA than ICICI Bank and Axis Bank, every bank should
maintain as low gross NPA it can maintain, as it can affect their profitability.
 Net NPA is a good measure to assess the asset quality of any bank, from the above calculations of
NPA of all banks; we can conclude that HDFC bank and Kotak Mahindra Bank has maintained
very good Net NPA. ICICI bank and Axis Bank is improving their Net NPA since last two years.
 Price to Earnings (P/E) and Price to Book value (P/B) are valuation ratios; we can identify that
which stock is trading at higher, lower or fair value. From the above P/E and P/B ratios of banks
Axis bank is trading at higher price to earnings multiple than other peer group banks, despite of
having very good profits in the HDFC bank, it is trading at a very good P/E ratio.
 P/B ratio shows Axis Bank and ICICI bank has very good P/B ratio, which gives the buying sign
in the bank.

Recommendation:

Research consisted of many stages, from economy analysis to the company valuation and we can give
below recommendations for the selected stocks.

 Considering the current situation of Covid-19, all the banks have a pressure on their loans but
considering the provisions made by these selected banks, our view on these banks is positive for
the future.
 HDFC bank is trading at almost the same current PE and we can give a hold call on this stock as
this stock has lower price to book value and current PE is low as compared to the peer banks.
Moreover, in the all the important ratios, HDFC Bank is ahead of all the selected banks.
 Kotak Mahindra Bank has been giving same return as HDFC bank, as per the valuation we can
give hold or sell call on this, as the current PE is higher than the forward PE.
 ICICI bank shown mediocre performance compared to the other banks and as per the forward PE
valuation, we can give buy call for ICICI Bank.
 As per the Forward PE valuation, Axis bank has been trading at a very good discount, and
considering the other parameters like, Net NPA, Return on Equity, capital adequacy ratio and
 other ratios and the current provisions made by the banks, making huge loss making higher
provisions. The chances of good results in the future are higher and we can give “BUY” call on
this stock.

Conclusion:

Fundamental analysis has very good significance while making any short-term or long-term investment,
fundamental analysis gives the internal and external information of the company as the fundamental
analysis is done considering the current and future situation of overall economy, industry and at the end a
company.

Due to Covid-19, banking system has been widely affected and it would take some time to revive, but
these selected stocks have the potential to go up in the near future, considering the historical data and the
future assumptions.

Whether it is banking industry or any industry, every short-term and long-term investor should do
fundamental analysis to be saved from the potential losses.
References:

1. https://economictimes.indiatimes.com/industry/banking/finance/banking/covid-19-
impact-banks-to-witness-spike-in-credit-costs-non-performing-assets-in-
2020/articleshow/75004720.cms?from=mdr
2. https://www.ibef.org/industry/banking-india.aspx
3. http://ficci.in/spdocument/23195/Impact-of-COVID-19-on-Indian-Economy-FICCI-
2003.pdf
4. https://www.ibef.org/economy/indian-economy-overview
5. Moneycontol.com
6. https://www.screener.in/
7. KPMG report on the Impact of Covid-19 on the Indian economy