HDFC Limited - Strong core business performance; Upside capped by expensive valuation - Antique

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

Mortgage buoyancy continues; HDFC gaining market share

Despite adverse macro environment and modest mortgage growth for the system (13% YoY), business growth for HDFC Limited continues to remain robust with strong disbursements across NCR region, Tamil Nadu, Gujarat and other regions like Chennai, Bangalore and Delhi. While corporate loan book is likely to grow at 14-15%, Retail loan growth is likely to accelerate at 30% YoY levels (excluding sell down) during 4Q.HDFC Management also highlighted, that despite the heightened competition from PSU banks, HDFC Limited increase its market share in mortgage business during the current quarter. However going forward for FY14e, management expects loan book to clock a growth of 18-20%.

Spreads to remain stable at 2.15-2.35%

With CP & CD rates having declined by about 175-225bps over the past one year due to improved liquidity, we believe that HDFC limited is likely to be 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 limited is coming from money market issuances i.e. Bonds, debentures, FRN and CPs which are 100-125bps cheaper. Recently HDFC has raised 2-3 year money at 9.20%. However, going forward, with liquidity situation improving and banks reducing their base rate, HDFC may look at increasing its dependence on terms loans from banks. Going forward, management expects spreads to remain flat within its historical band of 2.15-2.35%.

Asset quality continues to remain stable

Management highlighted that despite a lot of investor pessimism, current health of real estate companies is far better than during the credit crisis given that these companies have relatively lower leverage. Further, they are not facing any asset quality issues related to their retail loan portfolio. Hence asset quality is likely to remain stable during 4QFY13.

Valuation and outlook

At the CMP of INR 753, HDFC is trading at 4.0 FY14E P/BV and 20.9 FY14E P/E which continues to remain a tad expensive given the near term challenges. Hence, we maintain a HOLD recommendation on the stock with a TP of INR840/share.

Source : Equity Bulls

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