HDFC Ltd - Consistent performer; continues to trade at premium valuation - K R Choksey

HDFC delivered consistent operating performance with PAT of Rs1326 crore growing by 16.1% y-o-y & 35.1% q-o-q in line with our expectation. Core PAT (excluding capital gains) increased 21.5% y-o-y & 38.5% q-o-q. NII grew 27.2% y-o-y & 41.0% q-o-q to Rs 1,743 crore led by healthy loan (including loan sold) growth 24.1% y-o-y. Lending spreads have been stable ~ 2.27% reflecting healthy pricing power. Loan book excluding loan sold grew by 6.2% q-o-q led strong growth in retail loan book. On Full year basis, Approvals and disbursements growth were 19.9% & 18.3% respectively reflecting improvement in housing loan demand. Unrealized gains increased 27.6% q-o-q to Rs166per share owing to strong rally in equity market.

Strong NII growth led by healthy loan growth & stable spreads: NII grew strongly 27.2% y-o-y & 41.0% q-o-q to Rs 1,743 crore driven by healthy loan book growth & stable spreads. Lending spreads have been stable at 2.27% during the quarter. Loan book incl. sell- downs grew by 24.1% y-o-y to Rs 1,45,400 crore. We believe HDFC continues to maintain spread in the range of 2.2% -2.3%, going forward. We model in 19.4% CAGR in loan book over FY12-14 driven by retail and wholesale business.

Steady trading gains sequentially: Trading gains were Rs79 crore due to favorable market condition. Unrealized gains increased 27.6% q-o-q to Rs 24,464 crore. Loan growth led by retail loans: Loan book adjusting for sell downs grew by 24.1% y-oy to Rs 1,45,400 crore while growth excl. sold loans pegged at 19.9% y-o-y to Rs 1,40,422 crore. HDFC has sold Rs4,978 crore in the last year; off balance sheet book stood at Rs14,556 crore. Retail loan largely contributed to loan book growth during the quarter. Retail loans mix has been stable at 64% Q4FY12. Corporate loan mix stood at 36% at end of Q4FY12.

Asset quality remained strong: Broadly asset quality continued to be strong despite tough macro environment. Gross NPAs (90 days) stood at 74bps vs. 82bps in Q3FY12.The company has contingent provision of Rs 1218 crore required under the prudential norms. The management has indicated that large portion of teaser loan portfolio would convert into normal housing loans in FY13 which will create additional cushion to loan provisions.

Valuation & Outlook

HDFC delivered strong core performance in challenging quarter. Business growth continued to be ~ 20% y-o-y while asset quality remains best in class. We expect HDFC to deliver 17.6% CAGR in core earnings on the back of strong loan growth, stable margin and steady credit cost over FY12-FY14. Market leadership in housing finance sector, superior underwriting standards, stable spreads, well diversified borrowing profile and unlocking value of subsidiaries are key value drivers for the stock. At Rs 650, the stock is trading at 4.2x FY13 book value and 19.5x FY13 earnings. RoA and RoE continue to remain at superior levels ~ 2.7% and 23.6% respectively in FY13.We have maintained our FY13 earnings estimates & introduced FY14 earnings estimate. We believe wholesale funded entities would see cyclical gains in term of lower cost of funds, better growth prospects and re-rating in valuation multiple in rate easing cycle. The stock has outperformed the market by 2% in last three months, reflecting resilient earning's performance in uncertain macro environment. Hence, we maintain BUY rating on the stock with revised target price of Rs770.

Source : Equity Bulls

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