HDFC - Except valuation, Faultless - Antique

We met with the management of HDFC Limited and below are the key highlights:

Growth outlook to remain steady; competition picking up

HDFC Ltd. (HDFC) management highlighted that business growth in the current quarter so far continues to remain steady with disbursement across regions like NCR, Chennai, Delhi, and Poona doing reasonably well. Management also highlighted that pace of loan approvals have been faster than that of disbursements. While competition from PSU banks have inched up marginally (especially State bank of India), HDFC does not foresee any adverse situation and expects buoyancy in retail disbursements to continue at +20% YoY levels (excluding sell down). Further, management continued to reiterate its view that the NHB circular allowing prepayments in case of floating rate loans irrespective of the source has had no impact and operational hassle will prevent the dual rate customers to switch over to new financier.

Spreads to remain stable at current levels, negligible impact on revised securitisation guidelines

With CP & CD rates having declined by about 50-80bps over the past half year due to improved liquidity, we believe that HDFC is likely to be the key beneficiaries of an easing wholesale rate in the system. Re-pricing of high-cost term deposits coupled with benign wholesale deposit rates will lead to lower cost of funds and expanding margins. Incremental funding for HDFC is coming from money market issuances i.e., Bonds, debentures, FRN, and CPs, which are 100-150bps cheaper. However, going forward, with banks reducing their base rate, HDFC may look at increasing its dependence on terms loans from banks. Due to change in securitisation guidelines, incremental spreads for securitised business for HDFC is likely to decline by 30bps to 0.95%. However, management highlighted that decline in spreads are likely to be offset by release of capital as it doesn't have to provide for credit enhancements. Going forward, management expects spreads to remain flat within its historical band of 2.15-2.35%.

Valuation and outlook

At the CMP of INR875, HDFC is trading at 4.5x FY14e P/BV and 24.2x FY14e P/E which continues to remain a tad expensive. While we believe that HDFC is like to be a key beneficiary of easing wholesale rates, higher competition from banks given tepid credit growth could pressure on near-term stock price performance. We upgrade our target price to INR840 (based on 4.4x FY14e P/BV and 23.3x FY14e P/E) to reflect easing wholesale rate environment, thereby maintaining a HOLD recommendation.

Source : Equity Bulls

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