HDFC BANK: CAMELS Analysis and Discounted Cash Flow Valuation
(7 pages of text)
Case (Pub Mat)
On September 24, 2018, two analysts were asked by the pension fund they worked for to evaluate the prospects of long-term investing in India’s banking sector. They set off to identify and select a bank stock that was fundamentally strong and should be included in an equity portfolio. For their research, the two analysts used the CAMELS analysis framework, a model that examined six factors—capital adequacy, asset quality, management quality, earning ability, liquidity, and sensitivity to market risk. The two analysts narrowed their research down to HDFC Bank Ltd. stock for valuation and tried to determine the intrinsic price of the bank shares. The objective of the HDFC Bank Ltd. stock valuation was to identify a banking stock that would make a strong potential long-term investment for the pension fund’s equity portfolio.
This case can be used for discussion in a business valuations course in a graduate or undergraduate program. The case includes an accompanying Microsoft Excel instructor spreadsheet that details the calculations of the CAMELS analysis on various banks. After completion of this case, students will be able to
- understand the concept of the CAMELS analysis framework to valuate bank stocks;
- assess the key reasons to identify valuation tools for analysis;
- understand the key assumptions and mechanics of the discounted cash flow methodology; and
- compare valuations done using the discounted cash flow technique against the market price and evaluate the stock as undervalued or overvalued, and its potential as a long-term investment.
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