HDFC - Valuation catch up done, Downgrade to ACCUMULATE - Prabhudas Lilladher

HDFC reported in-line Q2FY13 PAT with higher-than-expected dividend income making up for higher-than-expected opex. Growth trends remain robust and flexibility in funding is aiding margins. Since our July-12 upgrade, HDFC has moved up ~17% despite higher competitive intensity. Implied valuations on the mortgage business has inched up from 2.8x to ~3.2x FY14 book, providing only ~10% upside to our Sep-13 PT of Rs825/share and hence, we downgrade HDFC to 'Accumulate'.

- Positives - Growth trends robust; margins stable: Loan growth at 24% YoY was robust, driven by ~27% YoY growth in individual AUMs. Margins were stable QoQ and the key highlight was the flexibility in funding mix with share of bank funding coming off from 26% to 13% with a proportional increase in deposits and bonds. Possible margin pressure due to competition and loan mix will be netted off by sharp drop in wholesale rates and high flexibility in funding.

- Other Q2FY13 highlights: (1) Opex has inched up ~30% over the last three quarters and part of the jump is explained by new corporate office leased but not moved in and thus opex growth is expected to normalize in 2-3 quarters (2) Tax rate was lower largely due to lower tax rate on investment gains and dividends received (3) Dividend income jumped substantially in Q2FY13 as dividends from HDFC Bank was accounted for in Q2 in FY13 v/s Q1 in FY12.

- Valuation catch-up largely done: Accounting concerns, sluggish book growth and technical supply factors led to a HDFC trading at ~20-25% discount to its historic average valuations (in Jun-July 2012) but with ~20% move up in the last three months, HDFC now trades closer to fair valuations with just 10% potential upside and hence our downgrade. The mortgage business will continue to generate ~24-25% core ROEs with ~20% growth and hence premium valuations will be sustained.

Source : Equity Bulls

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