Investing in India 2022 Part 2

Published on 08/29/22 | Saurav Sen | 2,312 Words

The BuyGist:

  • Last week we did a deep dive into HDFC Bank - one of our direct India bets since 2019.
  • This week we dig into the scrappier competitor: ICICI Bank
  • We’ve been holders of IBN since late 2019; in this analysis we determine whether we should keep holding it.
  • We figure out “what we need to believe” to hold the stock. Then we figure out whether that scenario is believable.
  • Finally, we decide whether to hold, buy more, or sell.

Second fiddle?

We’ve been investors in ICICI Bank - India’s second largest private sector bank – for 2.5 years. It’s been a topsy turvy ride but so far…all’s well that ends well. We’ve garnered more than 50% in cumulative returns, which is not a multibagger but certainly exceeds our minimum return requirement of 10% annualized.

We’re digging into ICICI Bank for 3 reasons:

  1. India recently celebrated its 75th Independence Day on August 15th. That’s as good an excuse as any to dig into our direct India bets.
  2. ICICI Bank’s stock price has appreciated significantly over the last couple of years.
  3. We recently did a deep dive into HDFC Bank, ICICI’s main rival. How does ICICI compare?

We’ve kept this analysis as short and succinct as possible. We allowed ourselves to do that because we can use HDFC Bank as a benchmark. If ICICI Bank exceeds that benchmark, we’ll keep holding it. If not, we’ll sell our position. This analysis ends with a definitive call to action – that’s always a core value at The Buylyst. We don’t like to ruminate; we like actionable insights.

We’ve measured up ICICI Bank against HDFC Bank using one major variable above all: The Buycast. We’ll explain this concept in the next section, but the idea is this: Does ICICI Bank’s stock (NYSE: IBN) have a more BELIEVABLE upside from this point on compared to HDFC Bank (NYSE: HDB)? That’s what this analysis is about.

We’ve split up our analysis into 6 sections. Here’s what’s coming up:

  1. The ICICI BuyCast
  2. Story: Competitive Advantage & Moat
  3. BuyCast Sanity Check: Revenue Growth
  4. BuyCast Sanity Check: Costs
  5. BuyCast Sanity Check: Profitability
  6. Historical Cash Flow & BuyCast Details

The ICICI Buycast

We’ve recently coined a new term: BuyCast. As with any word, we suspect someone has already used it somewhere. But until we find a better one, we’ll stick with this. So, the big idea is that we don’t forecast, we BuyCast.

BuyCasting basically means back-solving from our desired return scenario – which, for us, is 50% in less than 5 years. We back solve to something simple and tangible – annualized revenue growth we need to believe. To back solve into this rather simple measure – from Free Cash Flow we need to believe – we make some reasonable cost-structure assumptions based on a company’s historical financials.

Here’s the ICICI Bank Buycast in terms of “cash flows we need to believe…”:


From these “cash flows we need to believe…”, we can get to our revenue growth Buycast with some elementary math. Here’s how it looks, along with some historical context:


Is this believable? Maybe ICICI Bank has the story to back it up.  

Story: Competitive Advantage & Moat

Our original IBN thesis was largely hinged on 3 factors:

  1. The India macro story
  2. The clean-up turnaround story
  3. The ready-made blueprint

We’ve repeated the macro story several times, including our recent HDFC Bank thesis. So, we won’t bore you with it here. You’ll see in the sections below how this macro tailwind has helped ICICI’s numbers over the last few years.

ICICI needed housecleaning because it fell into the bad lending trap that plagued the Indian banking system for a decade. Banks – both private and public sector – made boneheaded lending decisions to risky businesses and infrastructure projects. With little to no recourse, the recovery on these loans was woefully inadequate. Banks lost money. ICICI lost money. But ICICI, led by (the now-beleaguered) CEO Chanda Kochar, decided to clean things up and simplify its loan book. She took a page from rival HDFC Bank: focus on plain-vanilla Retail Loans. To ICICI’s credit, they followed through on their plans – Retail Loans as a percent of their total loan book kept rising even after Kochar’s exit. Since March 2018, under new CEO Sandeep Bakshi, Retail Loans as a % of Total Loans increased from 45% to 53%.

This deliberate move towards Retail Loans reduced ICICI Bank’s risk profile and significantly improved its profitability. One popular measure of bank risk is the NPL (non-performing loan) ratio. It’s a useful measure of a bank’s credit risk management quality. Check out the progression of ICICI Bank’s NPL ratio:


In terms of competitive advantage, however, it’s hard to put a finger on ICICI’s secret sauce. As we’ve mentioned in our original thesis, the advantage is Scale and Reach, and the economic moat is the Tech. In our recent HDFC thesis update, we made the argument that in Indian Banking, bigger is better. Size begets size, and reputation begets reputation. It’s been a virtuous cycle for HDFC Bank to the extent that they were able to acquire their parent company: HDFC Limited.

ICICI has grown both in size and reputation as well. And that has allowed them to reinvest in technology – one app for all possible banking needs. One could argue that ICICI’s app has a leg up on HDFC Bank’s. But this is a transient advantage, if at all. For both rivals, the point of one app to rule them all is to access customer is far flung villages in India – get them in early and see them be lifelong customers with rising incomes and a penchant for debt-fueled consumption (no judgements here).

We still see ICICI as a smaller HDFC Bank. ICICI has followed HDFC’s blueprint in cleaning up its act and has succeeded at that. But with this new HDFC Bank + HDFC Limited merger the HDFCombined investment argument is stronger in our opinion. ICICI Bank used to have a higher proportion of home mortgages in its loan book; home loans are stickier, long-term products, and less susceptible to prepayment risks. HDFC Bank has now filled that gap by merging with its parent HDFC Limited, which is the big daddy in Indian home loans. So, in the private sector banking arena, HDFC has a big scale advantage in both Retail and Home Loans.

The case for remaining invested in ICICI Bank would be this: they’ll keep the momentum going in their clean up act. But how much upside is there to this story, we wonder. We expect ICICI Bank to catch up to HDFC Bank in certain metrics like Net Interest Margin and maybe even in Return on Equity (the north star). But...

Do we really need to invest in the second-best if we’re already invested in the best? What a tongue-twister!

Let’s run through some numbers.

Sanity Check: Revenue Growth

We have already revealed our ICICI Buycast – revenue growth we need to believe to consider buying the stock. Do we find it believable? There are 2 ways we can assess its believability:

  1. Against historical performance
  2. Against its main competitor: HDFC Bank

For this sanity check (and all the rest that follow), we use these 2 barometers. Here is the Buycast for revenue growth:


21% is a little bit too much for us to swallow. As a second fiddle to HDFC Bank, we would have accepted 15% - our buycast for HDFC Bank. But believing in this 21% annualized revenue growth number for the next 5 years means believing that ICICI will take market share from the newly created, post-merger HDFC behemoth. It can happen, but we won’t hang our hats on it.

If ICICI does pull it off, Loan Growth rather than Spread Growth will be the driver. We expect revenue growth to mirror loan growth. So far, the track record for loan growth is good. But even considering that impressive performance so far, it’s hard to be confident that ICICI Bank can clock in more than 20% loan growth in the next 5 years.


Sanity Check: Costs

When we wrote our original ICICI thesis, we imagined that its cost ratios would converge to HDFC’s. It’s now been 2.5 years. How does it look? Improving, but still higher than their bigger rival.


Sanity Check: Profitability

There are 2 bank profitability measures we track:

  1. Net Interest Margin – a bank’s net interest income divided by its “earnable” assets.
  2. Return on Equity – a measure of how well a bank used its assets and liabilities to generate net income.

Let’s see how well ICICI tracks against its bigger rival.


It turns out that ICICI has covered some ground, but they still have some way to go to catch up to its bigger rival on profitability. Maybe the turnaround story still has some legs. But at this point we find HDFC’s buycast more believable than ICICI’s. We expect ICICI’s numbers to keep improving. But we can’t be confident that they will outdo HDFC Bank over the next few years.

Let’s peel the onion completely.

Historical Cash Flow & BuyCast Details

Here’s an important point about the numbers below: Banks report financials differently because their business is peculiar. Essentially, they make money by borrowing money at lower interest rates and lending at higher rates. So, they report numbers differently compared to most companies that sell tangible products or services. But to keep things consistent with our other investment theses, we’ve rearranged HDB’s numbers. We’ve made 2 main alterations:

  1. Convert HDB’s numbers to our usual cash flow waterfall as much as possible – from revenue to free cash flow.
  2. Used a fixed exchange rate of 88 INR/USD – retroactively – to put things on a level playing field. Currently, the exchange rate is about 80 INR/USD. So, we added 10%.

The last column – The Buycast – is not a forecast. It is a BUYCAST. It’s “what needs to happen” in the underlying business for us to consider buying the stock. For all the reasons mentioned in the sections above, this ICICI Buycast looks less believable than HDFC’s. ICICI may pull this off to justify their current stock price. But while the attempt that, we won’t be sleeping well at night.

Here are the cash flow historicals and assumptions:



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