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A man uses his mobile phone outside a Housing Development Finance Corp. (HDFC) bank branch in Jaipur, Rajasthan, India, on Oct. 3.

Sanjit Das/Bloomberg

It's hard to overstate just how much global investors are captivated by HDFC Bank Ltd., India's biggest lender by market value.

Not only does the stock trade at the highest valuation among the world's largest banks, but international funds are so bullish that they're willing to pay a record 20-per-cent premium over HDFC's local stock price to get their hands on the limited number of shares available to foreigners. Brokerage analysts, meanwhile, have more buy ratings on the company than at any other time in 14 years.

While skeptics say the stock has become too expensive, IDBI Capital Market Services Ltd., the most accurate forecaster of HDFC shares in the past year, predicts valuations have even further to climb. The bank has reported annual profit growth of at least 20 per cent every year since 1998, a feat unmatched by any of the world's 200 biggest lenders, and analysts say the firm will maintain that pace through at least March 2017. HDFC also stands to benefit if Prime Minister Narendra Modi succeeds in his efforts to revive Asia's third-largest economy.

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"Foreigners want the very best and they don't get too hung up on valuations if the book is attractive," Jignesh Shial, a Mumbai-based analyst at IDBI who has a buy rating on the stock, said by phone. "A 30- to 35-per-cent annual growth in earnings over the next three years is possible. If profit rises at that pace, there's room for valuations to go higher."

Middle Class

Led by Managing Director Aditya Puri, a 20-year veteran of Citigroup Inc. before he joined the Indian lender in 1994, HDFC has maintained such consistent profitability by limiting exposure to heavily indebted Indian corporations and lending to the country's growing middle class. The bank, which has the third-biggest weighting in the benchmark S&P BSE Sensex, has climbed 9 per cent this year after a 43-per-cent surge in 2014.

Foreign investors, who plowed more money into Indian stocks this year than any other Asian nation, can't buy the lender's shares from the open market because overseas holdings have reached the country's 49-per-cent ownership limit. That's causing the stock to trade at a premium in India's foreign segment, where global investors go after holdings reach the cap. The gap widened to a record 20.7 per cent on April 8.

"Stocks that offer compelling growth profiles and good corporate governance trade at a premium, and HDFC Bank fits that bill," Jonathan Schiessl, the head of equities at Channel Islands-based Ashburton Investments Ltd., which oversees $12-billion, said in an e-mail. The firm owns shares in Housing Development Finance Corp., India's largest mortgage lender and HDFC Bank's parent, he said.

Relative Value

Gains in HDFC Bank's shares will probably level out after valuations increased, according to Supreeth Shankarghal, a director at QF Assets Ltd., a hedge fund in Bengaluru.

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The stock is valued at 5.6 times net assets, within 5 per cent of the highest level since 2008, data compiled by Bloomberg show. The bank is more than four times more expensive than the Bloomberg World Banks Index, near the widest gap on record, and has a higher price-to-book ratio than all 50 of the world's largest lenders by market value.

"Don't buy HDFC Bank unless you are in it for the long haul," said Mr. Shankarghal, whose firm oversees about $100-million in options. "The stock is expensive. It may consolidate for a while."

Bullish Analysts

Neeraj Jha, a spokesman for HDFC Bank, declined to comment on the shares.

Rising valuations aren't deterring analysts. HDFC has a consensus rating of 4.48 on a scale where 5 denotes a unanimous buy recommendation, the highest since 2005, according to data compiled by Bloomberg.

HDFC had a capital adequacy ratio of 15.7 per cent at the end of September and a gross bad-loan ratio of 1 per cent. That compares with 12.8 per cent and 4.5 per cent, respectively, for India's banking system as a whole.

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The firm's loans rose 17 per cent in the year to December, versus 10.5 per cent for the industry. Loan growth will accelerate to 24 per cent annually through March 2017 as India's economic expansion picks up, according to IDBI Capital's Shial. HDFC's net income has increased at an average annual rate of 33 per cent during the past decade, outpacing India's 5.6-per-cent mean wholesale inflation rate over that period.

International investors' favourite stocks have delivered market-beating gains over the long term. The average annualized return for 10 shares in the foreign segment with at least six years of trading history is about 30 per cent, versus 21 per cent for the Sensex, data compiled by Bloomberg show.

"Foreigners have a never-ending appetite for stocks like HDFC Bank, which deliver sustainable long-term growth and own a clean set of books," U.R. Bhat, a director at the Indian unit of U.K.-based Dalton Strategic Partnership LLP, which oversees $2-billion, said by phone from Mumbai. The lender is "the perfect proxy for India's growth," he said.

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