HDFC Ltd - Strong retail business led to steady core performance - K R Choksey

HDFC delivered another consistent operating performance with PAT of Rs1002 crore growing by 18.6% y-o-y & down 24.4% q-o-q in line with our expectation. Core PAT (excluding capital gains) increased 18.5% y-o-y & down 22.2% q-o-q. NII grew 19.1% y-o-y & down 25.2% q-o-q to Rs 1304 crore led by healthy loan (including loan sold) growth 23.4% y-o-y. Lending spreads have been stable ~ 2.27% reflecting healthy pricing power. Loan book excluding loan sold grew by 5.2% q-o-q supported by strong growth in retail loan book (7.5% Q-o-Q). Approvals and disbursements growth were 17% & 20% respectively reflecting improvement in housing loan demand. Unrealized gains increased 9.0% q-o-q to Rs181per share owing to interim rally in bond and equity market.

Healthy NII growth led by steady loan growth & stable spreads: NII grew impressively 19.1% Y-o-Y to Rs 1,304 crore driven by steady loan book growth (19.4% y-oy) & stable spreads. Lending spreads have been stable at 2.27% during the quarter. Loan book incl. sell- downs grew by 23.4% y-o-y to Rs 1,53,240 crore. We believe HDFC continues to maintain spread in the range of 2.2% -2.3%, going forward. We model in 20.7% CAGR in loan book over FY12-14 driven by retail and wholesale business.

Sharp decline in trading gains sequentially: Trading gains were Rs20 crore vs Rs79 crore in Q4FY12, dented profitability. Unrealized gains increased 9% q-o-q to Rs 27,000 crore. Strong growth in retail loans supported loan book growth: Loan book adjusting for sell downs grew by 23.4% y-o-y to Rs 1,53,240 crore while growth excl. sold loans pegged at 19.4% y-o-y to Rs 1,48,262 crore. HDFC has sold Rs4,978 crore in the last year; off balance sheet book stood at Rs13872crore. Retail loan largely contributed to loan book growth during the quarter. Retail loans mix has increased 100bps Q-o-Q to 64%. Corporate loan mix stood at 35% at end of Q1FY13.

Asset quality remained best in class: Broadly asset quality continued to be fairly strong despite of tough macro environment. Gross NPAs (90 days) stood at 79bps vs. 74bps in Q4FY12.The company has provisions to the tune of ~1.15% of total loan book, largely in line with regulatory requirements. 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 another consistent healthy core performance in the challenging quarter. Business growth continued to be ~ 20% y-o-y while asset quality remains pristine. We expect HDFC to deliver 20.0% CAGR in core earnings on the back of strong loan growth, stable spreads 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 in medium term. At Rs 678, the stock is trading at 4.2x FY14 book value and 17.1x FY14 earnings, closer to fair valuation. RoA and RoE continue to remain at superior levels ~ 2.7% and 24.4% respectively in FY14.We have fine tuned our FY13 & FY14 earnings estimates factoring lower trading gains. 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 falling interest rate environment. Hence, we maintain ACCUMULATE rating on the stock with target price of Rs741.

Source : Equity Bulls

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