HDFC - In-line net profit; spreads remain under pressure - Ambit

HDFC's FY13 standalone adjusted PAT (adjusted for interest expense on ZCBs) increased by 21% YoY, 2% ahead of our estimates. However, net interest spreads were under pressure in FY13 vs FY12 with 14bps decline despite ~13% of the company's fixed-rate portfolio being repriced at ~250bps higher rates in FY13. The impact of this spread contraction was not visible in the company's FY13 profitability due to higher contribution of interest-free equity funding and better balance sheet management during the year.

We expect the company's net interest spreads to further decline over the next two years due to: (i) increased competitive intensity in mortgages; (ii) Higher prepayments in it's higher yield portfolio in a declining rate environment; and (iii) lower profitability on loans assigned to HDFC Bank (spreads of ~1% vs 1.5% a year ago) due to a change in securitisation guidelines. This, we believe, would lead RoAs in HDFC's core lending business to decline to 1.6% over the next two years, with EPS CAGR of only 10% over FY13-15. Given that the stock is trading at ~20.0x oneyear forward earnings and at 4.5x one-year forward P/B, a 10% EPS growth is still not enough to justify these valuations.

We retain our SELL stance and our target price of Rs520/share.

Source : Equity Bulls

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